Whether states should transfer money on down to local governments is a debatable question. The aim of such transfers is to make our society more equitable, not necessarily more efficient.
But if citizens have decided that state revenue transfers to counties, cities and school districts is the right thing to do, as they have in most states, then forcing them to take a disproportionate part of state spending cuts is dishonest and harms efficient government.
From California to New Jersey the question of how much money schools and cities should get from state treasuries is fueling controversy. States are under enormous fiscal pressure and nowhere do voters show much sympathy for tax increases. But neither are cutbacks in state or local services popular.
Such local government aid is largely a post-World War II phenomenon. Historically, local government provided public safety, infrastructure and education. This largely was funded with taxes on real estate and in some areas personal property.
The level of taxable property relative to population varied greatly from one unit to another. That meant that either levels of services varied or residents in property-poor jurisdictions had to pay higher property tax rates to fund equal levels of service.
In many areas, legislatures eventually decided, with broad voter support, that a state, which usually has a broader and more equitable revenue base than local government, should pick up a major share of K-12 education funding and send substantial amounts to cities deemed financially disadvantaged by some formula.
They saw this as a way of providing equal education for all, as mandated in some state constitutions, and of making the overall ratio of taxes paid relative to services received more fair statewide.
There were problems, however. Distributing funds based on some formula that takes into account variables like “fiscal capacity” and need engenders a perennial tussle over the exact coefficients to use. Individual cities and school districts all want formulas tweaked to increase the specific amounts they are due.
Local governments come to depend on such revenue transfers. The expenses of school districts, in particular, are hard to change on short notice, as are county expenditures for general assistance welfare outlays
But when the state gets into fiscal straits, governors and legislators are tempted by the option of letting budgetary doodoo roll downhill by cutting transfers to local government. State officials then can turn around and say, “Well, we balanced our budget, local government needs to do the same.” But local governments are at the bottom of the drainpipe and cannot pass the gunk any further.
That might mean outright cuts or some form of budgetary manipulation, such as delaying payments from one fiscal year to another. If fiscal problems continue, as they do during severe economic downturns, these year-to-year shuffles can become compounded.
This has the effect of forcing borrowing to a lower level. States and cities are forced to go to banks to borrow against promised revenue that, in theory, is in the pipeline. The state is off the going-in-debt hook, but school districts and cities have to take up the strain.
Many states have established patterns of making promises to local government when times are good and only to renege when times are bad. Then, when things get better, there are renewed versions of the original promises.
In defense of the states, just as local government is hampered by a narrow revenue base, most states face sales and income tax revenues that are highly affected by the business cycle. Revenue flows are highly variable, and any “rainy-day funds” that exist are nowhere near the size needed to stabilize spending over the long term.
Local officials can tell you about having to cut important, long-established programs because of state payment cuts and delays and the practical difficulty of raising local taxes during a recession. Yes, many of these cuts will be reversed when we get to more prosperous times but reduce government efficiency even if they solve short-run budget problems.
Conservatives are right that we have to decide what levels of government we are willing to pay for over the long term. But we have to do so in the context of our collective beliefs about what constitutes a fair society.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.