1 Chapter 14 Intergovernmental Relations Structural and Fiscal Features of the Intergovernmental System Patterns of Interaction among Levels of Government Types of Fiscal Assistance Restructuring Patterns of Intergovernmental Relations Summary

2 Structural and Fiscal Features Areal and Functional Relations Governments around the world create an intricate web of interjurisdictional relations The United States and some other countries use a federal system Such systems have a national government and quasi-independent states or provinces

3 Structural and Fiscal Features Areal and Functional Relations (continued) Local governments, created by the states, include counties, cities, townships, school districts, and special districts The U.S. also has Native American tribes that have special legal status

4 Structural and Fiscal Features Areal and Functional Relations (continued) Unitary governments, as distinguished from federal governments, are based on centralized power But unitary systems can operate on a decentralized basis through subunits of government

5 Structural and Fiscal Features Areal and Functional Relations (continued) What are the advantages of having numerous governments? Having multiple governments results in coordination problems Use of city-county consolidations, councils of government, service contracting (Lakewood Plan)

6 Structural and Fiscal Features Areal and Functional Relations (continued) Coordination Problems (continued) Attempts at functional integration across government boundaries. See Figure 14-1 September 11, 2001 as an example of coordination problems The Katrina-Rita Disaster as another example

7 Structural and Fiscal Features Fiscal Considerations Vertical Fiscal Imbalance or Fiscal Non- correspondence The level of government best suited to provide a service is not necessarily capable of financing the service

8 Structural and Fiscal Features Fiscal Considerations (continued) Horizontal Fiscal Differences Not all governments, such as states, have the same needs for services and the same abilities to pay for services Total Taxable Resources Index of the U.S. Department of Treasury Representative Tax System

9 Structural and Fiscal Features Fiscal Considerations (continued) Fiscal Responsibilities The federal government should deal with national problems and the states with state problems But what is a national problem versus a problem common to all or most states and therefore blanketing the country?

10 Structural and Fiscal Features Fiscal Considerations (continued) Fiscal Responsibilities (continued) What are external costs and external benefits? Spillover effects? Economic Competition among states and among local governments Overlapping Taxes and the ability of governments to raise needed revenue

11 Patterns of Interaction Direct Expenditures and Taxes Direct expenditures, as distinguished from grants, have major intergovernmental effects Location of military installations and their closing Loans and grants to individuals and corporations, such as Social Security and Medicare

12 Patterns of Interaction Direct Expenditures and Taxes (continued) Geographic impact of defense spending on personnel Defense Department employees and employees of defense contractors Tax Collections Table 14-1 shows states with highest and lowest ratios of federal spending per dollar of taxes. Also see Figure 14-2

13 Patterns of Interaction Intergovernmental Assistance State Aid State aid to local governments is greater than federal aid to state and local governments Figure 14-3 shows state and local aid to the various forms of local government

14 Patterns of Interaction Intergovernmental Assistance (continued) State Aid to Education Figure 14-4 shows federal, state, and local support for education Education is the biggest beneficiary of state aid States use a foundation plan based on formulas These formulas have been challenged in the courts

15 Patterns of Interaction Intergovernmental Assistance (continued) Federal Aid What is the fiscal illusion hypothesis? Matching requirements are standard in grant programs Fungibility—the ability to replace local or state money for a program with federal grant money

16 Patterns of Interaction Intergovernmental Assistance (continued) Federal Aid (continued) Flypaper effect—does the money “stick” to the grant area as planned or are state or local dollars pulled out for use in other program areas? Federal aid varies considerably among functional areas. See Table 14-2

17 Patterns of Interaction Intergovernmental Assistance (continued) Federal Aid (continued) Federal aid varies considerably among federal agencies. See Table 14-3 Federal aid varies considerably by geographic regions State enabling legislation often is required before a local government may receive funds directly from the federal government

18 Patterns of Interaction Intergovernmental Assistance (continued) Devolution and Future Trends Federal aid as a percentage of state and local expenditures has been declined and is expected to continue to decline Devolution is a shift in responsibility for policy, programs, and financing away from the federal government.

19 Patterns of Interaction Intergovernmental Assistance (continued) Devolution and Future Trends (continued) Figure shows trends in federal grants Figure 14-6 discusses welfare reform as an example of devolution.

20 Patterns of Interaction Other Elements Affecting Intergovernmental Patterns Features Associated with Financial Assistance Regulations, such as those implementing Medicaid Figure 14-7 discusses the basic features of the Medicaid program

21 Patterns of Interaction Other Elements (continued) Features Not Directly Associated with Financial Assistance Federal preemption of state and local action and state preemption of local action Example of water quality standards imposed by the federal government

22 Patterns of Interaction Other Elements (continued) Features Not Directly Associated with Financial Assistance Courts have not consistent ruled in favor of federal preemption State Control of Local Governments

23 Types of Fiscal Assistance Grant Characteristics Purpose of the award The recipient—who is eligible? Entitlement The amount—grant size range Total amount may be open ended, depending on number of eligible applicants—Women, Infants, and Children (WIC) Method of distribution

24 Types of Fiscal Assistance Categorical Aid Grant money is targeted for expenditure in specified areas According to Catalog of Federal Domestic Assistance, there are three categorical types: Project Grants Direct Payment for Specified Use Direct Payment with Unrestricted Use See Table 14-4

25 Types of Fiscal Assistance Categorical Aid (continued) Also, the Catalog includes: Sale, Exchange or Donation of Property and Goods Use of Property, Facilities, and Equipment Provision of Specialized Services Categorical grants typically require would-be recipients to apply for money What are the pros and cons of categoricals?

26 Types of Fiscal Assistance Revenue Sharing General Revenue Sharing (GRS), which expired in 1986, had three characteristics: Pre-established amounts of aid Use of formulas for distributing the aid Considerable latitude to spend funds in terms of local priorities What are the pros and cons of GRS?

27 Revenue Sharing Revenue Sharing (continued) States use revenue sharing Governments in other countries use revenue sharing extensively

28 Types of Fiscal Assistance Block Grants A compromise between categorical grants and revenue sharing Funds are restricted to program areas, such as state block grants for education At the federal level, some categorical grants have been consolidated into block grants

29 Types of Fiscal Assistance Block Grants (continued) Formula grants commonly use population as a factor OMB establishes what constitutes metropolitan areas, which is the basis for some grants

30 Types of Fiscal Assistance Block Grants (continued) Cuts in funding of block grants force local governments to make apples-and-oranges decisions on cutting local programs Figure 14-8 documents a decline in federal aid as a percent of state and local revenue

31 Revenue Sharing Homeland Security—A Case Study Organization of Homeland Security and Inter- governmental Relations See Tables 14-5 and 14-6 for Homeland Security’s components and grant programs Controversy in the awarding of grants— criteria used?

32 Restructuring Patterns Tax Laws Tax Deduction and Exemptions Possible to increase the taxing power of local governments Federal deductions for state and local taxes on sales, income, and property

33 Restructuring Patterns Tax Laws (continued) Tax Credits What is the difference between a tax deduction and a tax credit? Unemployment Insurance Previously, benefits were not taxed—a tax expenditure

34 Restructuring Patterns Tax Laws (continued) Tax Exemption on Bonds Shared Taxes Proposed value-added tax to be shared among governments

35 Restructuring Patterns Grant Requirements Strings Official and informal requirements of a grant Mandates Cross-cutting, such as prohibitions against disabilities discrimination

36 Restructuring Patterns Grant Requirements (continued) Unfunded Mandates Court orders setting standards for state prisons Federal environmental laws requiring local governments to install wastewater treatment systems

37 Restructuring Patterns Grant Requirements (continued) Unfunded Mandates (continued) Unfunded Mandates Reform Act (UMRA) of 1995 Threshold cost for application of law New conditions are excluded Many topics are excluded, such as national security

38 Restructuring Patterns Grant Requirements (continued) Mandates since Passage of UMRA Congress has passed some laws that exceed the threshold Does the No Child Left Behind Act of 2001 include unfunded mandates? The states say “yes.” See Figure 14-9

39 Restructuring Patterns Grant Requirements (continued) Mandates since Passage of UMRA The Real ID Act of 2005 is forcing states to redesign their driver’s licenses and reissue all of them

40 Restructuring Patterns Grant Requirements (continued) The Courts and Civil Rights Title IX of the Education Amendments of 1972 as an example, particularly regarding men and women’s sports

41 Restructuring Patterns Grant Requirements (continued) Streamlining and Paperwork Reduction OMB control over federal agencies that solicit information from state and local governments Paperwork Reduction Act of 1980/1995

42 Restructuring Patterns Grant Requirements (continued) Streamlining and Paperwork Reduction (continued) Regulatory Flexibility Act of 1980 Helps smaller governments Single Audit Act of 1984 Reduces requirements to a single audit

43 Restructuring Patterns Grant Requirements (continued) Streamlining and Paperwork Reduction (continued) Cash Management Improve Act of 1990 Prompt payment requirements Federal Financial Assistance Management Improvement Act of 1999—simplifies grant applications and reporting

44 Restructuring Patterns Grant Requirements (continued) Awarding Grants and Grants Administration Bias possible—the Reading First program Improving Management Capacity

45 Summary