The impact of functional responsibility and state legal constraints on the “revenue-debt” packages of U.S. Central cities

References

• I The U.S. Bureau of the Census defines acentral city as the core city, or largest city, in a Standard Metropolitan Statistical Area. In 1970 there were 243 SMSAs .
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• The property tax reform movement has spread rapidly throughout the country as a result of the passage of Proposition 13 (the Jarvis-Gann amendment) in California (June 6, 1978). Proposition 13 limits property taxes to 1.25 percent of the market value of the property and requires a 2/3 vote of the state legislature to increase state taxes to offset the loss of property tax revenue at the local level. In addition, Proposition 13 dictates that no new taxes at the local level can be levied without the approval of 2/3 of the registered voters.
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• Feinberg , Mordecai S. 1964 . The Implications of Core-City Decline for the Fiscal Structure of the Core City . National Tax Journal , 7 September : 213 – 231 . Examples of studies examining the impact of suburbanization on central city finances include A . G . Holtmann, “Migration to the Suburbs, Human Capital, and City Income Losses: A Case Study,” National Tax Journal 21 (September 1968): 326-331; M. Haskell and S. Leshinski, “Fiscal Influence on Residential Choice: A Study of the New York Region,” Quarterly Review of Economics and Business 9 (Winter 1969): 47-56; William B. Neenan, “Suburban-Central City Exploitation Thesis: One City's Tale, ” National Tas Journal 23 (June 1970): 117-139; W.Z. Hirscg et al., eds., Fiscal Pressures on the Central City: The Impact of Commutes, Nonwhites, and Overlapping Governments (New York: Praeger, 1971); J.D. Kasarda, “The Impact of Suburban Population Growth on Central City Service Functions,” American Journal of H. Kelejian, “An Econometric Model of the Flight to the Suburbs,” Journal of Political Economy 81 (May/June 1973): 566-589; K.V. Greene, W.B. Neenan, and C. Scott, Fiscal Interaction in a Metropolitan Area, Lexington, Mass.: Lexington Books, 1974; and Richard P. Nathan and Charles Adams, “Understanding Central City Hardship,” Political Science Quarterly 91 (Spring 1976): 47-62
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• The results reported here largely focus on the FY 1976 data to meet space requirements. Where the FY 1974 and FY 1975 results are significantly different than the FY 1976 results , they are reported.
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• The Property Tax Constraint index was constructed by determining: (a) the sources of legal constraints (O=None; l=Statutory; 2=Constitutional; 3=Both); (b) the millage rate limitations (O=No Limits; l=Over 10 Mills; 2=1−10 Mills); and (c) ability to exceed rate limits (O=No Constraints; l=Few Constraints; 2= Several Cons traints; 3= Severe Constraints).(Very Restrictive=6-8 points; Moderately Restrictive=5 points; Mildly Restrictive=3−4 points; Non restrictive=O−2 points). Source of data was Advisory Commission on Inter govern-- mental Relations, Federal-state-local Finances: Significant Features of Fiscal Federalism, 1973-74, Washington, D.C.: Government Printing Office, 1974, Table 129.
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• The Nonproperty Tax Constraint index was constructed by cumulating state constraints on municipal usage of nonproperty tax sources: (a) local income tax (l=Constraints; 0=No Constraints); (b) local general sales taxes (l=Constraints ; O=No Constraints);and (c)locals elective sales taxes (l=Constraints; 0=No Constraints).(Heavy Constraints=3 points; Moderate Constraints=2 points; Minimal Constraints=1 point; and No Constraints=0 points). Source of data was Advisory Commissionon Inter governmental Relations, Federal-State-Local Finances: Significant Features of Fiscal Federalism, 1973-74 (Washington, D. C.: Government Printing Office, l974), Table 129.
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• The Borrowing Constraint index was constructed using three indicators of state constraints on municipal usage of long term debt: (a) existence of rate limits (l=Yes; 0=No); (b) legal constraints (l=Constitutional; 0=No); (b) legal constraints (l=Constitutional; 0=Statutory); and (c) Powers to exceed debt limits (2=None; l= Moderate ;0=Unlimited). (Heavy Constraints= 4 points ; Moderate Constraints=3 points; Minimal Cons traints=0-2 points). Source of data was Advisory Commission on Inter governmental Relations, Understanding the Market for State and Local Debt (Washington, U.C.: Government Printing Office, 1976): 46-53.
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• The Functional Responsibility Index was created on the basis of the number of least common functions for which a municipality had primary legal and financial responsibility: None (noresponsibility for education, welfare, or hospitals); Moderate (responsibility for one least common function); Heavy (responsibility for two least common functions); or Very Heavy (responsibility for all three least common functions). The precedent for such analysis was set by Woo Sik Xee(“State and Local Fiscal Systems and Municipal Expenditures,” Public Administration Review 27 (March 1976): 39-41). Kee divided cities into mutually exclusive classes by the presence or absence of the responsibility or providing education and/or public welfare. Kee also suggested that hospitals be studied in this way.
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• The Urban conditions index originally developed by The Brookings Institution to comparatively measure distress conditions in the 615 Community Development Block Grant jurisdictions. The formula used (by Brookings) to create the index is: Percentages of poverty and pre-1940 housing are based on the 1970 Census. The index mean is standardized at 100; jurisdictions ranking above the level have greater problems of urban distress than those lower on the scale. For this study, cities were categorized as follows: Severely Distressed=index over 300; Moderately Distressed=index 201-300; Mildly Distressed=index 151-200; Fair=index 101-150; Good=index 51-100; and Excellent=index 0-50. The data were compiled from Paul R. Dommel et al., Decentralizing Community Development: Report to the Department of Housing and Urban Development on the Second Program Year of the Community Development Block Grant, Appendix 11, Washington, D.C.: The Brookings Institution, January, 1978.
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• Nathan , Richard P. and Dommel , Paul R. 1977 . “ The Cities ” . In Setting National Priorities: The 1978 , Edited by: Pechman , Joseph A. 286 – 287 . Washington, DC : The Brookings Institution .
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• Intergovernmental revenues (sometimes called intergovernmental transfers) are of three types: those from the federal government, those fromt he state government, and those from other local governments. Intergovernmental revenues from the federal government are of two types: federal grants-in-aid and Gnues haring. Grants-in-aid are generally categorical in nature; they are specifically-designed and give the local government very little discretion in how to spend the monies. They are generally conditional (with strings attached), however, participation in grant programs is a voluntary decision on the part of the individual municipality. They also tend to be competitive, with the allocation of funds being determined on a project-by-project basis. Revenue sharing monies are funds distributed by the federal government to municipalities under the State and Local Fiscal Assistance Act of 1972. Revenue sharing monies can be likened to an unconditional transfer of funds because “the donor government (federal) does not manifest an interest in specific functions of the recipient government (municipality); rather, it provides grants that the recipients may use as they choose." Source: James A. Maxwell and J. Richard Aronson, Financing State and Local Government, 3rd ed. (Washington, D.C.: The Brookings-Institution, 1977): 71. Revenue sharing funds are distributed by a formula--alleligible governments receive monies. Intergovernmental revenue received by cities from state government (state aid) comes in two forms: grants-in-aid or shared taxes. (The reporting scheme used by the City Finances publication does not permit one to determine the breakdown between the two forms.) Grant monies can either be apropriations made directly by the state legislature or they can be federal funds that are "passed through" the state government; they are very categorical in nature. Shared taxes are monies collected by the state and returned to municipalities either on the basis of need or on the basis of origin. They are some times called piggyback taxes and typically come from taxes on sales, gas, cigarettes and alcoholic beverages. Intergovernmental revenue received from other local governmentsare "reimbursements for performance of general government functions and specific services for the paying government, or in lieu of taxes. “Examples would be sale of water or fire protection to smaller municipalities or unincorporated county areas surrounding a large central city. Source: U.S. Bureau of the Census, city Finances in 1974-75, Washinton, D.C.: Government Printing Office, October, 1976, 116.
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• There are two broad categories of tax revenue: property and nonproperty. Property taxes at the municipal level apply to both real property (landand improvements, including structures,thereon)and personal property(tangible or intangible). Non property taxes are taxes on sales, income, and privileges.
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• Nontax revenues are generally classified by the Census Bureau under the groupings of "current charges" and "miscellaneous general revenues. Current charges are amounts received from the public for performance of specific services benefiting the person charged from sales of commodities and services. Miscellaneous general revenues include three types of locally-generated revenues: (1) interest earnings (earnins-on deposits and securities other than the earnings of Insurance trust funds or employee retirement systems); (2) sale of property (receipts from the sale of real property and improvements thereon); and (3) special assessments (compulsory contributions collected from the owners of property benefited by specific public improvements to defray the costs of such improvements, and they are apportioned according to the assumed benefits to the property affected.) Source: L. L. Moakand A. M. Hillhouse, Concepts and Practices in Local Government Finances, Chicago: Municipal Finance Officers Association, 1975, 162.
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• Long-term debt is debt payable more than one year after the date of issue. Long-term debt can take two forms: full faith and credit debt or nonguaranteed debt. Full faith and credit debt is "long-term debt for which the credit of the city, implying the power of taxation, is unconditionally pledged. (It) includes debt payable initially from specific taxes or nontax sources, but represent(s) a liability payable from any other available resources if the pledged sources are insufficient. "Nonguaranteed debt is "long-term debt payable solely from pledged specific sources--e.g. from earnings of revenue producing activities (utilities, sewage disposal plants, toll bridges, etc.), from special assessments, or from specific nonproperty taxes. (It) includes only debt that does not constitute an obligation against any other resources of the city if the pledged sources are insufficient. "Source: U.S. Bureau of the Census, City Finances in 1974-75 Washington, D.C.: Government Printing Office, 1975, 116-117.
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• Short-term debt, payable within one year from date of issue, is financed by: tax anticipation notes (TANS) revenue anticipation notes (RAiGs), bond anticipation notes (BANS) or bank loans. Interest rates on short-term debt are substantially above those on long term debt.
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• Borrowing is a politically-popular gap-plugging device because it shifts the costs forward in time. This “remedy” is easily swallowable by the general public which tends to be ignorant and unaware of the consequences of using debt to “plugthegap.”
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• Peter Jensen , Jens . 1931 . Property Taxation in the United States , 19 – 47 . Chicago : University of Chicago Press . Dick Netzer, Economics of the Property Tax, Wahington, D.C.: The Brookings Institution 1975
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• Advisory Commission on Intergovernmental Relations . 1974 . Federal-State-Lcal Finances: Significant Features of Fiscal Federalism, 1973-74 , 219 – 235 . Washington, DC : Government Printing Office .
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• Moak , L.L. and Hillhouse , A.M. 1975 . Concepts and Practices in Local Government Finance , 149 Chicago : Municipal Finance Officers Association . Sales and gross receipts taxes are “taxes, including ‘licenses’ at more than nominal rates, based on volume or value of transfers of goods or services, upon gross receipts there from, or upon gross income, and related taxes based upon use, storage, production(ot her than sever age of natural resouces), importation, or consumption of goods.” Source: U.S. Bureau of the Census, City Finances in 1974-75, Washington, D.C. Government Printing Office , October, 1976, 116, They can be of ageneral nature (applicable to all types of goods and services, or all gross income) or of a selective nature (on sales of specific commodities or ser- - vices such as publicutilities, tobacco products, amusements, and motor fuels)
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• Advisory Commission on Intergovernmental Relations . Significant Features of Fiscal Federalism 291 Alabama, Delware, Kentucky, Maryland, Michigan, New York, Missouri, Ohio, an Pennsylyania
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• ACIR . Significant Features of Fiscal Federalism 252 Alabama, Alaska, Arkansas, Arizona, California, Colorado, Georgia, Illinois, Kansas, Louisiana, Minnesota, Missouri, Nebraska, New York, Oklahoma, South Dakota, Tennessee, Texas, Utah, Virginia, and Washington
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• ACIR . Significant Features of Fiscal Federalism 257 Alabama, Alaska, Arkansas, Arizona, California, Colorado, Georgia, Illinois, Kansas, Louisiana, Minnesota, Missouri, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oklahoma, South Dakota, Texas, Utah, Virginia, and Washington
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• Advisory Commission on Intergovernmental Relation . 1976 . Understanding the Market for State and Local Debt , 46 – 53 . Washington, DC : Governemnt Printing Office .
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• Collins , Robert A. 1977 . Optimality in Municipal Debt . Public Finance Quarterly , 5 January : 117 – 126 . There are two general types of studies that examine the relationship between revenues and debt. One type treats taxation and borrowing as mutuallly exclusive alternatives to funding increased expenditures (Albert Breton, “The Theory of Local Government Finance and the Debt Regulation of Local Governments,” Public Finance 32 (1977): 16-28.) The other type examines the relationship between tax receipts and debt service costs in an attempt to determine the optimal level of debt regulation
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• Liebert , Roland J. 1976 . Disingtegration and Political Action: The Changing Functions of City Governments in America , Vol. 22 , New York : Acaemic Press . For a cumuilative distribution of services provided by local governments, Susan A. MacManus, Revernue Patterns in U.S. Cities and Suburbs: A Comparative Analysis, New York: Praeger, 1978, 45
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• MacManus . 1976 . op. cit , : 109
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• Advisory Commission on Intergovernmental Relation . July 1976 . Pragmatic Federalism: The Reassignment of Fundtional Responsibility , July , 2 Washington, D.C : ACIR .
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• 1976 . Pragmatic Federalism , July : 4
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• Pettengill , Robert B. and Uppal , Jogindar S. 1974 . Can Cities Survive? The Fiscal Plight of American Cities , New York : St. Martin' Press . Advisory Commission on Intergovernmental Relations, City Financial Emerfencies: The Intergovernmental Dimension, Washigton, D.C.: Government Printing Office, 1973, and S.A. Macmanus, op. cit
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• The funding available for grant programs changes as the economy changes. In other words, Congressional authorization and appropriation of monies for grants-in-aid fluctuates from one fiscal year to another. The revenue sharing program, incontrast, was created so as not be be affected by changes in the economy. A lump sum was set aside and the funds were to be expended in equal proportions during each year of the life of the program.Consequently, the effects of inflation are reflected in the decreasing reliance upon revenue sharing between FY 1974 and FY 1976.
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• In a nation wide survey authorized by the Advisory Commission on Intergovernmental Relations, the local property tax was rated the "worst tax" of all federal, state, and local taxes. See ACIR, Changing Public Attitudes on Governments and Taxes, 1977, Washington, U.C.: XIR, October, 1977, 11.
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• Advisory Commission on Intergovernmental Relations, Local Revenue Diversification: Income, Sales Taxes, &User Charges, Washington, U.C.: ALT, October, 1974.
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• MacManus , Susan A. 1977 . The Relationship Between Revenue Structures and Debt Structures of U.S. Central Cities . paper presented at the annual meeting of the Southern Political Science Association . November 1977 , New Orleans, Louisiana.
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• Snyder , James C. 1977 . Fiscal Management and Planning in Local Government , 176 Lexington, Mass : D.C. Heath .
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• ACIR . 1973 . City Financial Emergencies: The Intergovernmental Dimension , Washington, DC : Government Printing Office . A study which identifies short-term borrowing as a predictor of the existence of a fiscal crisis (a revenue-expenditure gap)
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• Such policies are not the only cause of fiscal distress but they are one cause. Others include economic and demographic shifts, rising service demands and expenditures, annexation constraints, government fragmentation, and the socioeconomic make-up of the central city population.
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• Fiscal Issues Highlight Commission Agenda, Intergovernmental Perspective 3 (Fall, 1977), p. 18.
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