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8 State-Local Partnership: Problems and Possibilities John M. DeGrove and Barbara C. Brumback Some political analysts in the 1930s tolled the death knell for the states when only the central government seemed able to respond to the problems of the Great Depression. Over the past 20 years in particular, the states have outgrown their image as the weak link in the federal system. States have improved their capability to respond to problems through constitutional reform, increasing professionalization, governmental reorganiza- tion, and enhanced revenue systems (Warren, 1980). In- deed, the states have improved their capabilities to the extent that the U.S. Advisory Commission on Intergovern- mental Relations, hereinafter ACIR (USACIR, 1982:52; hereinafter USACIR) noted that it is the states that prop up the operations of American government. and predicted that the 1980s would see the states become increasingly important as intergovernmental bankers, regulators, and administrators. Over the past two decades, the distinctions among the functions of the local, state, and national governments have become blurred. Federal grant-in-aid programs increased state and local dependence on federal funds and made these governments partners in such programs as Aid to Families With Dependent Children (AFDC), Medi- caid, or aid to the educationally disadvantaged, in which the costs were shared with the federal government, the program administered by the state or local unit, and the program goals and acceptable operations determined largely by the national government. It can be assumed, then, that the problems those programs were designed to address were largely perceived as national issues re- quiring action by the national government in partnership with state and local governments. 202
203 President Reagan's national urban policy makes it clear that this perception has changed. One of the principles of this policy is That the states and cit- ies, properly unfettered, can manage themselves more wisely than the federal government can. (U.S. Department of Housing and Urban Development, 1982:1; hereinafter USHUD). The President's New Federalism is an attempt to realign the federal system, to return to state and local governments those programs that the administration views as having local or state, not national, benefit. The merging of 57 categorical grants into 9 block grants passed through the states is but the first step in the planned reordering of the functions of the federal sys- tem (USHUD, 1982). The states play a role of increasing importance as managers of intergovernmental aid programs in the nation's revised domestic policy, and in this new role the states can be seen as the fulcrum of the New Federalism. This paper sets forth the view from the states and discusses their evolution in the federal system and the prospects for a continued strengthening of the state- local partnership. The paper focuses on the experiences of eight states chosen from the ongoing studies of Princeton University's Urban and Regional Research Center, which has been monitoring the responses to the New Federalism in a sample of 14 states and cities. The paper explores the experiences and initiatives of eight states in attempting to forge a new partnership with local governments. (The next paper in this volume examines the same subject from the perspectives of a large city in each of these eight states.) Much of the information for this paper was generated through telephone interviews with, and the 1982 field reports of, the field associates responsible for the data on the states' responses to the New Federalism for the Princeton study. We wish to thank Richard Nathan and Fred Doolittle for their assistance and for making the data available as well as for providing us with the 1982 field reports. We are also indebted to the field associates of the 1984 study- Charles Orlebeke (Illi- nois), John Kirlin (California), Lane Rawling (Washing- ton), Steve Steib (Oklahoma), Richard Roper (New Jer- sey), Susan MacManus (Texas), and Ed Montanaro (Flor- ida), Lance deHaven-Smith (Florida), and Allen Imershein (Florida)--for their assistance. Responses to the New Federalism can be expected to
204 vary among states. But the states are now in a better condition to manage their expanded role due to the enhanced capability of all three branches of state gov- ernment that has been achieved over the past 25 years. State legislatures, both more professionalized and representative than ever before, have increased their oversight responsibilities through such measures as the appropriation of federal funds coming into the states and sunset legislation. State court reforms, which focused on streamlining court structures, bettering management and administration, and improving the quality of judges, have resulted in enhanced state court sys- tems. Reorganization of the executive branch, an effort nearly all states have made to some degree, shows the states are willing to break with the past in efforts to modernize the workings of state government (USACIR, 1982). In addition, state responses to the needs of local government, including increased financial assis- tance to local units, the development of urban strat- egies in some states, and the establishment of a variety of programs that are targeted to distressed areas, indi- cate that the states are now in a better position to respond to the needs of local government. S TATELOCAL PARTNERSHI P The Finances of the Partnership In their role as intergovernmental bankers, the states provide the greater share of aid to local govern- ments. Between 1971 and 1977, a time of rapid growth in federal-to-local aid, net state aid to local governments rose 72~4 percent. During this period, federal aid to local governments rose 143.4 percent, nearly twice the growth rate of state aid. Yet despite the increase in federal aid to local governments, in terms of actual dollars, state aid to local governments, excluding passed-through federal aid, topped federal aid by over $19 billion (USACIR, 1982). Some of the ~traditional. state functions, such as education, highways, welfare, and health and hospitals, have received the bulk of state aid to local govern- ments. Although these functions respond to statewide needs, some of the functions, notably welfare and educa- tion, are among those that Wolman (1984) has termed ~im- plicit~ urban programs in that they are not confined to
205 urban areas but are seen as having an ~urban. orienta- tion. In addition to being the primary financier of these services, states have also increased the amount of funds passed on to local units for general support, and the ACIR has identified 23 states as having some form of state-local revenue sharing (USACIR, 1981, 1982). State fiscal systems have undergone dramatic rever- sals over the past decade. In the mid-1970s, many states enjoyed large cash reserves. ~ ~ ~ - _ od (Gold, no date). _ ~ _ Particularly after the approval of California's Proposition 13, movements to control future growth were initiated, and legislative or constitutional curbs on increases in state spending or taxation were developed in 19 states. Between 1978 and 1982, taxes as a proportion of income dropped in 44 states as a result of changes in the states' effective tax rates. Severance taxes alone rose during this peri- Even during this spate of tax cut- ting, state aid to local governments was the greatest element in state budgets. A strong state fiscal system is necessary for the continuation of any meaningful aid to local governments, but the tax reductions of the late 1970s reduced the fiscal resilience of the states. When these tax cuts were combined with the poor economic conditions that stretched from 1981 to 1983 and with the cuts in federal aid, in January 1983, 47 states found themselves short of the estimates that had formed the bases of their bud- gets. These shortfalls totalled nearly $8 billion. After three years of tax cutting, states moved to reduce expenditures and raise taxes (Matheson, 1983 ) . Only three states have not passed a significant tax increase over the past three years (USACIR, 1984 ) . In 1981 and 1982, state legislatures enacted measures designed to garner at least $8 billion annually in tax yields. Tax Foundation ( 1984) surveys indicate that in 1983 the states enacted measures that would add an additional $8 billion a year. It is not surprising, then, that the growth in state aid to local governments has been uneven over the past few years. The Joint Economic Committee surveys (U.S. Congress' Joint Economic Committee, 1982, 1983) found that in 1981, reversing the previous year's trend, state aid had increased over 10 percent, making it one of the fastest growing portions of city revenues. In 1982, state aid was up only 2 percent on the average, but in 1983 state aid to cities was expected to have risen more than 7 percent overall.
206 Whether the states' recent moves to raise taxes sig- nal an end to the tax-reduction movement is not clear, however. Florida voters were to decide on a constitu- tional amendment that would have limited all government revenues to the 1980 level while restricting any revenue increases to two-thirds of the change in the Consumer Price Index. But the state supreme court struck the amendment from the November 1984 ballot, declaring it to be unconstitutionally broad. A poll by Florida's larg- est newspaper found most voters disapproved of the revenue-limitation measure. In fact, 67 percent of those polled indicated a willingness to pay more taxes to improve public schools (Miami Herald, 1984). None- theless, the political mood is justifiably cautious, and in April 1984 the governor's estate of the state. ad- dress proposed no new taxes but also offered no new tax reductions. State Community Assistance Aside from state financial aid to local governments to help fund certain ~traditional. services and the in- stitution of state-local revenue sharing in some states, states may undertake other initiatives that can be cru- cial to the continued strengthening of the state-local partnership. These initiatives include the formulation of an urban policy, the development and implementation of policies and programs that target assistance to areas of need, the lifting of restrictions that inhibit the local government's capability for self-government or taxation and taking steps that improve local government capability. One step in the state-local partnership that several states have taken in recent years is the development of a policy or strategy to address urban problems. The National Academy of Public Administration undertook a series of 10 case studies of state urban strategies. Strategies were defined as stemming from an articulated framework with expressed goals and policies that were implementation oriented and designed to deal with the issues of community growth, development, or decline (Warren, 1980). Eight of the states were found to have or to be developing an urban strategy that met this def- inition. The formulation of an urban policy is a fairly recent innovation, with the oldest effort studied dating back to 1973, when the Oregon legislature formally
207 adopted that state's growth management initiative (Warren, 1980). A 1981 review of these initiatives found them to be, by and large, still in force, with some states passing new measures. In both Florida and Massachusetts, the strategies that had been developed continued under the leadership of newly elected gover- nors. In California, however, state revenue reductions and legislative balking at funding urban improvements slowed the implementation of many of the elements of the state's strategy (USACIR, 1981). State-funded programs that address urban problems exist in many states in the absence of an overall policy framework. The ACIR identified 19 ~targeted. programs in 5 policy areas in which states can aid their dis- tressed communities. All states had adopted at least 1 of those programs as of 1981, but no state had adopted more than 15. Of course, states and urban areas vary in their need for these targeted programs and in their willingness to adopt them, and the programs themselves vary greatly from state to state. Nonetheless, the record shows that some states are moving to address the problems of distressed communities on their own. In the housing area, as of 1981, 47 states had estab- lished housing finance agencies, and 31 states had hous- ing rehabilitation programs that utilized grants, loans, or tax incentives. In economic development, 16 states direct state aid for industrial or commercial develop- ment; 11, for the development of small businesses; and 11 states target industrial revenue bonds. Sixteen states focus capital improvement programs on distressed areas, and 14 states operate neighborhood improvement programs. In the area of fiscal and financial manage- ment and assistance, 14 states instituted mandate reim- bursement; 35 states had made moves to improve local access to credit markets through such measures as vali- dating municipal bonds, guaranteeing municipal debt, or establishing bond banks; and 36 states had authorized local governments to levy either sales or income taxes (USACIR, 1981). Despite these innovations there are many deficiencies in state aid programs. The Joint Economic Committee's survey (U.S. Congress, Joint Economic Committee, 1983) found that state aid to the nation's largest cities had declined over 3 percent in 1982. The states' housing programs have focused on single-family housing, leaving the development of multifamily housing largely dependent on declining federal dollars. The economic development
208 activities of most states are not targeted to areas of need. In the community-development policy area, there were only two types of programs, capital improvement and neighborhood improvement (USACIR, 1981). States can do much to improve local capability to address urban problems. In this area, the states' record has been strongest in programs that neither re- quire the dedication of substantial state revenues nor constitute the total freeing of restrictions on local governments. For example, 24 states have permitted tax- increment financing, a tool most used by larger cities to help pay for the capital projects associated with large urban development. In addition, while many states have some restrictions on the investment of local reve- nues, approximately 20 have local investment pools that enable local governments to reduce idle cash balances. These pools tend to be most beneficial to smaller governmental units, but they represent an important step in allowing-local governments to find new revenues (Roberts, 1983). One of the frequent criticisms of the states in their role in the partnership has been that they unduly re- strict the authority of local governments. This crit- icism is justified to a great extent. As of 1981 cities in nearly half of the states did not have home rule. States have also taken measures to restrict local revenue-raising potential. Local property taxes have been limited by some state measure in 36 states, and, while most states authorize local governments to levy either a sales or an income tax, only 6 states authorize the levying of both taxes (USACIR, 1981). The New Federalism provides new opportunities for determining if states have loosened their hold on local governments or are taking other measures critical to the establishment of a strong, effective partnership. First, in their new role as the initial recipient of block grants, states have the opportunity to pass along increased flexibility in reporting and application re- quirements to the recipient local governments. Second, in response to the cuts in federal funding levels, states may respond by replacing lost federal dollars or by allowing local governments greater flexibility to raise revenue in order to replace those cuts. Finally, states may develop or revise other policies and programs in an effort to forge improved state-local relations. Eight states' responses to these opportunities are ex- plored in the next section.
209 THE NEW FEDERALISM: EIGHT STATES' RESPONSES The eight states chosen for this analysis provide a range of experiences in the level of replacement of fed- eral funding cuts, political culture, fiscal capacity, and geographic location. Of the eight states, two are located in the Northeast, one in the North Central re- gion, three in the South, and two in the West. Elazar (1972) has identified three types of political cultures, which represent an aggregate view of govern- ment and politics: individualistic, moralistic, and traditionalistic. The individualistic political culture views government as being established solely for utili- tarian purposes. The concept of the market place domi- nates the individualistic political culture in that gov- ernment is seen as fulfilling the demands of the people with the least possible intervention in the private In the moralistic political cul- ture, government is seen as a means for achieving public betterment, and government activities can be initiated for the public good even in the absence of broad public demand. The chief goal of the traditionalistic polit- ical culture is the maintenance of the status quo, with political power concentrated in the hands of established elites. Permutations of political cultures, for example a blending of individualistic and moralistic, occur more often than do ~pure. cases; apparently in politics, as in nature, things occur most often in combined form. Of the eight states, only two have a ~pure. political cul- ture. There was great variation in the level of replacement of federal funds; one of the eight states replaced 25 percent of the federal funding cuts with state dollars. Other states experienced a net savings of state funds as a result of the federal cuts (Nathan and Doolittle, 1983). The three traditionalistic-individualistic states, all in the South, run the gamut on the replace- ment of lost federal funds. The eight states, their political cultures, and their level of replacement of federal funds are shown in Table 8-1. The eight states' fiscal capacities and willingness to raise revenue vary greatly. According to the ACIR's study (USACIR, 1983) of the states' tax capacity, the two northeastern states in our study, Massachusetts and New Jersey, have tax efforts that exceed their capac- ity. For Massachusetts, this has been a historical pattern that has held since 1967, and perhaps it sphere of interest.
210 TABLE 8-1 Political Cultures and Levels of Replacement of Federal Funds in the Eight States. LEVEL OF REPLACEMENT POLITICAL CULTURE High Some Savings Moralistic/ California Individualistic Washington Individualistic & Massachusetts Individualistic/ New Jersey Moralistic Illinois Traditionalistic/ Oklahoma Individualistic Florida Texas reflects the state's moralistic overtones in its polit- ical culture. New Jersey's tax efforts began to exceed its tax capacity, as defined by the ACIR, in 1977, but the trend has held through 1981. For the first time in almost 15 years, the ACIR found Illinois' tax effort of 105 had exceeded its capacity, but that capacity, which had remained fairly steady, between 114 and 112, had dwindled to 104. (The ACIR's index of tax capacity is a fiscal yardstick that measures a state's capability to raise revenues, so that one state's tax base can be com- pared with that of another, regardless of the actual types of taxes levied. The tax effort indicates the actual burden of the total tax base, with 100 being the national average.) Thus, Illinois' tax effort of 105 is 5 percent above the national average. California had taxes that exceeded its capacity in 1975 and 1977. In the wake of 1978's Proposition 13, the state's tax ef- fort declined. Although the state's tax effort remains below its capacity, the effort has clearly increased between 1979 and 1981. Washington State, with a tax effort of 97 and a capacity of 103, was close to capac- ity. The lag between effort and capacity is greatest among the three southern states. The institution of new programs may be restrained by these states' tradition- alistic-individualistic political cultures, which may explain the gap between tax effort and capacity. The economic conditions of these states have under-
211 gone great changes in recent years, to the extent that a medievalist could easily conceive of the states' econo- mies as strapped to Fortune's wheel. in that those that were up have been cast down. Oil-rich Oklahoma experi- enced little fiscal pressure in 1981, but the petroleum industry that had helped boost that state's economy, sagged. By the beginning of fiscal year 1983, Oklahoma was in trouble e Revenues from sales and severance taxes and interest dropped to the extent that the state's Omnibus Budget Bill cut appropriations by $152 million (Kerr Foundation, 1983). Texas is also now suffering economic woes, and its sales and severance tax revenues have dwindled. In New Jersey, Massachusetts, and Illi- nois the picture is brighter than it has been in recent years--unemployment is down and state revenues are up. In New Jersey, the big controversy now facing the gover- nor and legislature is how large the state revenue sur- plus will be. The improved economy and increase in state revenues is largely explained by the ending of the recession. Washington State has been slow to recover from the effects of the recession, since increases in construction activity have yet to fully boost its wood products industry, and the state's agricultural sector has not been strong of late. Temporary tax increases have improved state revenues, however. Florida's im- proved fiscal condition came about largely as a result of increases in the sales, motor fuels, alcoholic bever- age and corporate income taxes. The sales tax increase alone brought in more than 10 times the revenues the state lost through the cuts in federal spending. The combination of the federal cuts and the recession forced state leaders to make hard decisions. In both Illinois and Washington State, the focus was more on the effects of the recession on the states' economies than on the federal cuts. , ~ , Many state leaders seemed to see themselves in a crisis situation, and many state poli- cies reflect this perception. Massachusetts reacted to the devastating effects of Proposition 2 1/2 by increas- ing state aid to local governments at the expense of instituting additional policies in response to the fed- eral cuts. New Jersey instituted state aid to 28 cities to enable the cities to avoid the layoff of police and firemen. Block Grants and the States In regard to federal block grants, most states have
212 assumed most of the available block grants. The Primary Care Block Grant was the least likely to be assumed by the states; since federal funds were unavailable for state administration, there was little incentive to assume this grant. The pattern of assumption provides an interesting window into state politics, for political motivations naturally affected the state posture. For example, I1- linois' Governor Thompson, a strong Reagan supporter, moved for the assumption of all block grants to put the state in the forefront in responding to the New Federal- ism. In 1981 the Governor of Texas was also a firm Reagan supporter, but unlike Illinois, Texas did not move to assume all available block grants as a show of support. Texas has generally favored the President's policies and the concept of limited government. There is also the sentiment, however, that the state has not fared well under federal grant distribution, a feeling affirmed by studies showing that Texas citizens pay more federal taxes but receive less grants than any state. As a result, many Texans felt the state should restrict its participation in federal programs. This sentiment was reflected in appropriations language passed by the legislature in 1981, affecting fiscal years 1982 and 1983, which did not permit the state to operate a pro- gram that had not already been authorized or appropri- ated. This language, in effect, prohibited Texas from assuming the Community Services, Small Cities Community Development, and Primary Care block grants (MacManus, 1982). Since that time, Texas has picked up both the Small Cities Community Development Block Grant (Small Cities CDBG) and the Community Services Block Grant (CSBG). In California, party politics played an important role in that state's decision to phase in the assumption of block grants. A legislative block grant advisory committee was established to recommend a block grant strategy, and their recommendations in 1981-1982 were included in the conservative strategy passed by the legislature. That strategy included the initial assump- tion of two block grants, Social Services and Low Income Energy Assistance Program (LIEAP), and the deferred assumption of all remaining block grants but Primary Care, which was not picked up by the state. This decision to wait was based on fiscal and political con- siderations. On the fiscal side, the estimated $500 million that would have flowed into California from the
213 block grants was not sufficiently enticing when compared with the state's $25 billion budget. The political pos- sibilities of deferring the block grant assumption proved more attractive. For California, with its budget under stress, taking over these block grants included assuming most of the cuts in funding. The Democratic governor and largely Democratic legislature preferred having these programs and their funding reductions under federal control, channeling any public outcry to Wash- ington, D.C. The Florida decision not to assume the CSBG as soon as it became available was also partly based on politi- cal considerations. There, legislative appropriations committees felt additional study was needed, since the state had little programmatic experience in the areas included in the CSBG. This cautious viewpoint dove- tailed with the feelings of many state officials who did not care to be associated with the budget and service reductions under the block grant in an election year. The states have made allocation, programmatic, and regulatory changes in the block grants they have as- sumed. Three of the eight states have modified the al. location of CSBG funds in such a way that major metro- politan areas receive fewer dollars than before. Wash- ington State is attempting to alter CSBG's Turban biases and while this change may be viewed by some as more equitable, Seattle and Tacoma have experienced even greater reductions in programs as a result. Illinois and Massachusetts have also modified the CSBG grant- allocation formula, and in both states the formula change has resulted in less community services funds being made available to their largest cities. Chicago had received 70 percent of the community services funds in Illinois, but under the revised formula, which is keyed strictly to poverty population, Chicago now re- ceives 40 percent of the state's CSBG funds. Despite the reduced funding levels, some areas in downstate Illinois now receive more CSBG dollars than ever before due to the state's changed formula. Boston's major Community Action Agency lost $1 million as a result of Massachusetts' revised allocation formula. Texas, in contrast, recently modified its allocation of funds to target distressed areas. In terms of programmatic changes, Illinois is at- tempting to increase the impact of CSBG funds by em- phasizing programs that have proven effective, particu- larly in refunding decisions, and by putting a priority
214 on housing and job-creation programs for low-income people. New Jersey has changed the focus of the Small Cities CDBG to emphasize economic development rather than housing rehabilitation, its previous focus (New York Times, 1984). Massachusetts instituted management reviews of agencies that had administered the fuel- assistance program in 1981 before deciding who would administer LIEAP in 1982. Florida approached its health and social services block grants and their funding re- ductions by attempting to maintain programs that had been successful and that met recognized needs, such as care for emotionally disturbed adolescents. In Cali- fornia and Oklahoma the block grants remain unchanged in any significant way except, of course, for the reduced funding levels. Some states have passed along some of the increased flexibility associated with the block grants to the recipient local governments. Where it exists, the increased flexibility is related to decreased reporting requirements or eased application processes, but the record in this area is mixed indeed. California eased SSBG regulations in the first year only to tighten them in the second year. Many recipient organizations are maintaining old reporting activities in case they will be needed later. Florida decreased some of the report- ing requirements under the health care block grants and provided for the consolidation of budgets, but a statute passed in the last legislative session increased both state and county control over local (county) health units. Chapter 83-177, Laws of Florida, requires that local health units enter into contracts that are nego- tiated and approved by the county commissions and the district office of the state Department of Health and Rehabilitative Services. The contracts must include all funding sources and the services to be provided. With- out justification, the health unit cannot deviate more than $5,000 or 15 percent from the planned expendi- tures. A similar contracting requirement was instituted under the state administration of the CSBG. The result of these contracting requirements is to place greater importance on local planning capabilities and data bases. Manv reciDient organizations are In assuming the block grants, the states had the option of replacing lost federal dollars with state dollars. Since 1982 the trends in replacement have changed somewhat, but the overriding factors that seem to affect state replacement are the availability of
215 state revenues and the political climate. Oklahoma and Texas provide interesting counterpoints for exploring this argument. In the first year, Oklahoma replaced over $16 million of the budget cuts, and Texas experienced a net sav- ings. Both states had sufficient cash balances to ab- sorb all the federal cuts. The state economies, with strong petroleum industries, were healthy. Both states have traditionalistic-individua~istic political cultures and fairly conservative spending philosophies. But Texas was essentially prohibited from replacing the fed- eral funding reductions due to language in the appropri- ations bill it passed in 1981, which required that fed- eral funds be used to replace state funds whenever pos- sible and that the federal-state match be kept con- stant. In short, federal shortfalls in Texas were not to be made up due to a specific legislative prohibition (MacManus, 1982). Essentially, both states had the dol- lars with which to replace the cuts, but Texas, given the restrictive language in the 1981 appropriations bill, was unable to use them. Declining activity in the petroleum industries and rising state unemployment hurt both Texas and Oklahoma in 1984, but the states' responses to these changes show that they were attempting to address their own problems more than they were attempting to replace lost federal funds. Oklahoma's replacement is not likely to recur, but the governor is proposing tax increases, mostly for increased funding in health care and education. The leadership in Texas has changed greatly since the last election. Reapportionment resulted in one-third of the state legislature being replaced with new members. Both the newly elected Democratic governor and the new legis- lators are responding to constituencies of minorities, women, and low-income groups. Welfare payments have been increased at a time when the state was under great fiscal pressure, and a two-year, $3 million relief fund was established that, at least in its first year, is targeted to the high-unemployment valley near the Mexi- can border. Recent State Initiatives Since 1981, nearly all the states have taken actions that affected the state-local partnership. Most often, this action took the form of some sort of fiscal relief
216 to local units, and when the fiscal relief entailed a lifting of revenue restrictions, it was most often spe- cific rather than broad based. In Massachusetts, Cali- fornia, and Florida the state's provision of increased financial aid to local governments represents a shift from the politically unpopular property tax to state- generated revenue. In 1982 Massachusetts provided an additional $265 million in state funds to local govern- ments, hurt by Proposition 2 1/2's effect on property taxes (Bradbury, 1983). California, in addition to assisting local units whose tax revenues shrank in the wake of Proposition 13, has assumed a larger share of education financing for kindergarten through grade 12 and, through an initiative on June's ballot, is consid- ering using its bonding authority to aid counties on specific projects. Other uses of the state's bonding authority have been recently proposed in California, and the success of the June initiative will help determine if they will be pursued. Florida shared half of the proceeds of its additional 1-cent sales tax with cities and counties, with the provision that a portion of those funds be used to reduce property taxes in the first year and that growth in property taxes be restricted over the next two years. Some states have also granted local governments the ability to generate additional own-source revenues. Massachusetts, Florida, and Texas have taken this initi- ative. In 1983 Massachusetts would have been unable to duplicate the assistance to local governments it had provided in 1982. The state then examined mechanisms-- short of increased taxing authority--that would grant local governments greater latitude in raising revenue and loosened some restrictions relating to local fees and charges (Logalbo, 1982). Florida modified and increased its motor fuel tax and, at the same time, granted counties the option of increasing that tax. Texas granted counties the authority to add $5 to the cost of motor vehicle registrations and transit author- ities the ability to add 1 cent to the local sales tax. In 1982, 59 percent of New Jersey's budget went to aid local governments, and in that year the Community Development Bond Act was approved. That act had three parts: $45 million for local community development projects, $30 million for public works projects (such as cultural centers), and $10 million for industrial parks (New York Times, 1984). These funds, when the bonds have been sold, will be available to 46 identified dis-
217 tressed or potentially distressed cities. Other state initiatives affecting the partnership represent responses to specific problems or areas of state or local concern. New Jersey, the nation's most urbanized state, has taken other actions with respect to its cities. The state instituted an urban enterprise zone program, and Governor Kean has proposed the estab- lishment of a state transportation finance fund and an Urban Development Corporation, which would coordinate state agency actions in an effort to rebuild cities. Oklahoma became more active in funding water projects for local units. Illinois has provided a $75 million operating subsidy for the transit authority that serves the Chicago region, an action arising from one of the mayor's few attempts to lobby for state assistance. POLI TI CS OF TH E PARTNERS HI P A certain amount of tension characterizes state-local relations in many areas in the 1980s. This tension cen- ters on the distribution of funds, the ability to raise own-source revenue, and the mandating of programs. Sev- eral major cities in the eight states perceive them- selves as hurt by the states' block grant policies. In Washington State, for example, larger urban areas have viewed certain basic services as the responsibility of the state, since the state limits their revenue-raising power. The trend in three states to spread block grant funds, particularly CSBG funds, has contributed to this perception. Texas provides a notable exception to this pattern. Texas cities feel the state, not the national government, is better able to respond to their needs. Several cities, including Los Angeles, Newark, Tulsa, and Seattle, have attempted to increase their own-source revenues, but when these initiatives require state ap- proval, they are often denied. In order to meet fixed expenses, such as pensions, local governments in New Jersey have attempted to be freed from property-tax re- strictions that were imposed when the state instituted its income tax in 1975. Some cities have initiated law suits against the states concerning the distribution of funds and the ability to raise revenue (Wood and Klimkowsky, in this volume). Many cities are turning to user fees wherever possible. Orlando provides an inter- esting example. Fees for certain health services were instituted, thereby enabling health care to the medical-
218 ly indigent to be increased, and sewer connection and service fees were raised dramatically to help fund the city's growing need for that service and to meet the increased local match requirement, which Florida insti- tuted one year earlier than required by the federal gov- ernment. Where mandates and state preemption are not accom- panied by sufficient funds to carry out the function, the new partnership comes under severe strain. Several questions have yet to be resolved under the New Federal- ism, and their resolution will help to determine how well the new partnership fares. Perhaps the key ques- tion is that of assuming responsibility for low-income groups. Most states ratified cuts in entitlement pro- grams (Nathan and Doolittle, 1983). Some states have taken actions that suggest they no longer view the poor as their responsibility, particularly in times when state revenues are short and the costs of service are rising. Washington State, which did away with noncon- tinuing general assistance, is one example. Califor- nia's transferring responsibility for medically indigent adults to the counties is another example of this. California, with its long tradition of human services spending, had used the state general fund to finance health care to medically indigent adults. Care was pro- vided by the counties, the state's administrative arm for the provision of human services. In 1981-1982, the legislature required counties to provide health care to this group with 70 percent state funding. Although Cal- ifornia's action in this instance mirrored the action of the federal government in that a program was shifted to a lower level of government with a reduced level of funding, taking this action had nothing to do with the President's domestic policy. The transfer, instead, was the result of the effects of increasing health care costs on the state's budget. States have initiated many actions that concentrate on economic development or job creation. Insofar as the responsibility for low-income groups is concerned, the focus seems to be to improve the state and local econo- mies, and the benefits of the improved economies will be felt by all, including low-income groups. The interest in economic development and job creation can be found in both block grant policies and other state initiatives. The CSBG and Small Cities CDBG efforts, in particular, now include these emphases in many states. Other, entrepreneurial, approaches have also emerged.
219 These entrepreneurial approaches are often evident in relations between the state and local executive offi- cers. In Texas, Governor Mark White, and the mayor of San Antonio, Henry Cisneros, came together with business leaders to raise funds for a public-private partnership to attract high tech industries, by enhancing the state's education and research base (Washington Post, 1984). Florida's Governor Bob Graham Joined efforts initiated by Miami area businesses to establish a pri- vate revitalization fund geared to assisting black busi- nessmen and creating jobs in Liberty City, a depressed section of Miami that was hit by riots in 1980. Gover- nor Graham is attempting to raise $2 million to add to the $8.5 million pledged by Miami's participating busi- nesses. (Billitteri, 1984). The field associates for the Princeton study report that in New Jersey, Texas, and California local execu- tives tend to turn to the state legislature rather than to the governor for assistance. In both New Jersey and California, the mayors of large cities and the state legislators tend to share party affiliation. In other words, the mayors of big cities and state legislators in those states are usually Democrats. The governors are Republicans, and the Democratic mayors turn to the Democrat-controlled legislatures for assistance. In Texas, the powers of the governor are strictly limited, and local executive officers lobby the more powerful legislature for assistance. Relationships under the new partnership are under- going change, and an apparent trend is increased legis- lative involvement. Since 1981, more state legislatures have taken or received greater appropriations author- ity. After three vetoed oversight bills in 1982, for example, the New Jersey legislature gained appropria- tions authority over federal funds through language included in the appropriations bill. The Oklahoma legislature attempted to gain greater oversight responsibility over federal funds and in- creased appropriations authority over state funds with mixed success. The Legislature Is 1982 effort to gain increased control over federal funds failed when the attorney general ruled it unconstitutional, declaring that if the procedure was a legislative function, it could not be executed by a committee, as the legislature had designed the process. Efforts to gain appropria- tions authority over state funds were more successful. In fiscal year 1983, the legislature brought state funds
220 for the Department of Human Services, which since 1936 had the receipts of Oklahoma's 2-cent sales tax ear- marked for its use, into the appropriations process. The 1983 recession found the governor, after maintaining a fairly passive role in response to the initial federal cuts, taking the lead in reassessing the state budget with respect to the state's worsening fiscal condition and strengthening his hold over federal funds (Rittenoure et al., in press). EM ERG ING MECHAN ISMS The mechanisms that are emerging for increased state- local cooperation, coordination, or communication include state management initiatives and a variety of categorical responses to pressing problems. A great deal of activity has focused on economic development, especially on the attraction of high tech industries. New Jersey provides examples of all three types of initiatives. New Jersey's governor established a science and technology commission, designed to attract industries through labor-pool devel- opment and research activities, and a management improve- ment commission, geared to battling inefficiencies in government; he also proposed the establishment of an Urban Development Corporation to coordinate state agency efforts to rebuild urban areas. In December, the state also responded to concerns of 28 cities that police and fire-fighter layoffs were forthcoming, due to capped property taxes, by making S7.4 million available to the 28 cities Afield associate interview and New York Times, 1984). Education continues to be a major concern in many states and will be the focus of many upcoming legisla- tive sessions. Chicago schools project deficits between $100 million and $300 million over the next few years, and as yet there has been no ~give. in the state's posi- tion not to provide additional funding. California will consider whether to step up its funding for K-12 educa- tion. The state share was increased $800 million last year, and several reforms, such as lengthening the school day and school year, were initiated. on review of last year's reforms, the state may increase its in- tended contribution to local education. Oklahoma is considering property-tax equalization reforms, which are opposed by rural areas. A move by Washington's governor to reduce state funding for K-12 education was found
221 unconstitutional, and the state is now considering in- creasing state support. Efforts to revitalize cities often take an entre- preneurial approach and attempt to join business and government. Urban enterprise zones represent one such initiative, and as of 1983 nine states had enterprise zones in operation (Sabre Foundation, 1983). Of the eight states under discussion, five had adopted some type of urban enterprise zone initiative as of 1983 (Revzan, 1983). In New Jersey, Newark and Jersey City are participat- ing in that state's urban enterprise zone program, which offers a combination of tax incentives, low-interest loans, and eased regulatory and permitting processes (New York Times, 1984). Florida was the first state to pass an urban enterprise zone initiative. In Florida, three bills, passed in the wake of 1980's Liberty City riots, offer incentives to corporations in an attempt to revitalize distressed areas. Two of the bills relate to enterprise zones and allow corporations to take deductions from their state corporate-profits taxes for either hiring people from designated, dis- tressed areas or locating operations in those areas. Almost all metropolitan areas in Florida have estab- lished enterprise zones. The third bill was designed to encourage corporations to make donations that would af- fect community redevelopment by granting corporations a 50 percent tax credit for donations to eligible proj- ects. To be eligible, a project must be related to eco- nomic development or physical development or redevelop- ment, and since fiscal year 1981 donations to those projects have totaled over $3.5 million. The largest such project to date is Miami's Business Assistance Center, geared to providing employment opportunities and small business development in LibertY CitY. The full impact of Florida's enterprise zone initia- tives is difficult to assess, since corporations are allowed to take the tax deduction up to five years after undertaking the eligible activities. Despite the fact that the figures to date may understate the impact, the record is quite impressive. Under the enterprise zone job credit, $4,143,829 in credits have been claimed from 1981 through 1983 for the creation of 4,679 jobs in dis- tressed areas. The state's other enterprise zone initi- ative resulted in 13 corporations' locating or expanding operations in distressed areas between 1981 and 1983.
222 Florida's Housing Finance Agency (HFA) has also be- come active in both single-family and multifamily hous- ing and has increased its focus on low- and moderate- income people. Through the combined efforts of the HFA and local governments, Florida issued bonds for financ- ing single family housing to the full extent allowed by the federal government, $547 million in 1983 alone. The Housing Finance Agency has narrowed the target popula- tion for its single-family program by reducing the in- come eligibility level from 150 percent to 120 percent of the median family income. Contrary to the conven- tional wisdom concerning housing finance agencies, this agency's bonding efforts are concentrated on rental housing. In 1983, Florida ranked second in the nation in the dollar value of bonds sold for multifamily rental hous- ing. This statistic almost understates the Florida ef- fort in that Florida sold nearly two times more in bonds than did the state that ranked third. Since 1981, the Florida HFA has issued $365 million in bonds for single- family housing and $400 million in bonds for rental housing. While the agency has issued bonds for financ- ing federally assisted housing, the greater portion of its efforts has focused on market rate, nonsubsidized rental housing. Since 1981, $285 million in market rate bonds have been issued with the requirement that 20 per- cent of the rental units be set aside for low-income people, those with incomes up to 80 percent of the median family income. The remaining units are then available to those with incomes that are not greater than 150 percent of the median. Other initiatives to provide low-income housing in Florida come about through the Development of Regional Impact process and the state review of development in Areas of Critical State Concern. Through these proc- esses the state, regional, and local governments can issue development orders or permits on the condition that a certain percentage of low- and moderate-income housing be provided. This mechanism helps to make up for the federal withdrawal of assistance in low-cost housing. FORGING THE PARTNERSHIP The difficulties associated with forging a new part- nership between state and local governments are similar
223 to those encountered in modern marriage. In both these partnerships, changing social conditions are forcing a reconsideration of roles and responsibilities. Rela- tions are sometimes strained by the combined demands and restrictions one partner places on another. In both cases, the need to forge a new partnership is great, and the character of the partnership will be derived through the painstaking deliberations that occur between the partners throughout their union. However, relations between states and local governments, like relations between marriage partners, not only evolve over time but also differ from case to case. If the states' reactions to the trials of the 1980s provide any indication, states' responses to local gov- ernment can be expected to vary greatly. Indeed, state responses to local government can take such polar forms as increased state aid, as in Massachusetts and Florida, or of state retrenchment, as in Washington. In strug- gling to contend with statewide issues, a state's ac- tions may not paint a coherent picture of its responses to local government. California, for example, provided increased financial aid to local governments after the passing of Proposition 13 and also transferred some of the financial responsibility for medically indigent adults to the counties. New Jersey is another example. That state has developed an array of programs to aid local governments but has also pressed them to repay debts to the state and raised the interest penalty from 6 percent to the market rate. As of 1983, Newark owed the state $7.75 million (New York Times, 1983). Thus, state responses to local government can be expected to change over time, to vary state by state, and, within a single state, to differ from issue to issue. The states' responses to the challenges of the New Federalism have been so varied, so tied to state issues, that generalities are hard to draw. The picture is mixed. To some extent, this is due to the fact that the story is still in the telling; the states are still in the process of responding. Perhaps to a greater extent, the challenge of the New Federalism was overshadowed by other challenges, particularly the recession and state- revenue shortfalls, that confronted the states. In reviewing the states'-actions with respect to their increased authority under the block grants, it becomes apparent that many state decisions, as in California and Illinois, are politically based. One of the reasons Nathan and Doolittle (1983) cite to explain the alloca-
224 tion changes in CSBG funds, the block grant that had the most notable changes in its allocation struc- ture, was that the recipients, community action agen- cies, had no political base in the states. Although the states' records are mixed, the prospects for a strengthening of the state-local Partnership are better than ever. _ The states have improved their capa- bilities and have shown some willingness to respond to the problems of local government through the development of a wide variety of initiatives. The mechanisms the states develop will probably increasingly include man- agement initiatives, a focus in both block-grant poli- cies, such as Illinois' emphasis on the proven effec- tiveness of programs in refunding decisions under the CSBG, and other state programs, such as New Jersey's Urban Development Corporation. Other state initiatives may well include greater private sector involvement through state-developed incentives, as in enterprise zones or, as in Florida, requirements of the Development of Regional Impact or Areas of Critical State Concern processes. In general, the states now seem more apt to respond to specific problems than to take a comprehen- sive approach to urban problems, or, in grant terminol- ogy, states tend to take a categorical, not a block, approach. The states' responses to the challenges of the New Federalism are uneven. In some cases, local governments may perceive themselves as the estranged but still de- pendent partners in this new partnership. Some states have shown a willingness to grant local governments a larger measure of independence in the form of increased revenue-raising options, but these options have seldom been broad based. Where states place strict revenue restrictions on local governments, those governments can come to view the very provision of basic services as a state, rather than a local, responsibility. Aside from public-private sector initiatives, the states remain the only potential, external source to which cities and other local governments can turn for responses to the problems they cannot solve themselves. Increased federal aid to local government is unlikely if not impossible given the changing national fiscal pri- orities. Local governments could profit by the sharp lesson learned by community action agencies: A strong state political base is vital when the states become the principal dispersers of aid.
225 There have been enough favorable responses on the part of the states, including those states without a strong history of providing what Wolman would classify as ~urban. aid, to justify the optimistic position that cities and other local governments should concentrate on building new relationships with the states. Through their recent efforts, the states have shown that they are becoming and will continue to evolve as strong part- ners in the federal system. The states have emerged as the chief partner in the federal system from whom local governments can expect a favorable response to local needs. REFERENCES Billitteri, T.J. 1984 Painful progress: Liberty City's makeover goes one step at a time. Florida Trend 26(11): 82-g8 - Bradbury, K.L., Ladd, H.F., with Christopherson, C. 1983 The initial impacts on state and local fi- nances. Pp. 293-324 in L.~. Susskind, ea., prODosition 2 1/2: Its Impact on Massa- chusetts. Cambridge, Mass.: Gunn ~ Hain. Oelgeschlager, Gold, S.D. n.d. Recent developments in state finances. Pre- pared statement of Hon. John B. Tucker. Pp. 219-281 in U.S. Congress, Joint Economic Com- mittee, Hearings Before the Joint Economic Com- mittee, Part 1. 98th Congress, 1st Session. Washington, D.C.: U.S. Government Printing Office. Kerr Foundation, Inc. 1983 1983 Oklahoma State Expenditures in Brief: A Description of Oklahoma State Government Expen- ditures by Function in the Fiscal Year Ended June 30, 1983. Oklahoma City: Kerr Founda- tion. Logalbo, A.T. 1982 Responding to tax limitations: finding alter- native revenues. Governmental Finance 11(1): 13-26. MacManus, S.A. 1982 Planning for federal cutbacks in Texas. Texas Business Review 56(5):209-214.
226 Matheson, S.M. 1983 Prepared statement of Hon. Scott M. Matheson. Pp. 7-21 in U. S. Congress, Joint Economic Committee, Hearings Before the Joint Economic Committee, Part 1. 98th Congress, 1st Ses- Sian. Washington, D.C.: U.S. Government Printing Office. Miami Herald 1984 Survey: Floridians support tax hikes to bolster education. April l:lA,23A. Nathan, R.P., and Doolittle, F.C. 1983 The Consequences of Cuts: The Effects of the Reagan Domestic Program on State and Local Government. Princeton Urban and Regional Center. New Jersey: Princeton University Press. New York Times 1983 Jersey is pressing debtors to pay up. July 31:1-44. 1984 Trying a new way to revive cities. April 22:II-18. Revzan, L. 1983 Enterprise zones: present status and potential impact. Governmental Finance 12(4):31-37. Rittenoure, R.L., Warner, L., and SteiL, S.B. 1984 Oklahoma's legislative process in a period of fiscal change. Public Budgeting and Finance 4(2):42-57. Roberts, J.F. 1983 Remarks of Jane F. Roberts, state-local rela- tions associate, U.S. Advisory Commission on Intergovernmental Relations. Presented at the Fifth Annual Government Cash Managers Con- ference, Arlington, Virginia. Sabre Foundation 1983 Enterprise Zone Activity in the States: Sum- mary of Survey Findings. Washington, D.C.: Sabre Foundation. Tax Foundation, Inc. 1984 State-local tax take rises despite contractions of U.S. economy. Monthly Tax Features 28(2):1-2, 4. U.S. Advisory Commission on Intergovernmental Relations 1981 The States and Distressed Communities. ACIR Information Report M-133. Washington, D.C.: U.S. Advisory Commission on Intergovernmental Relations.
227 1982 State and Local Roles in the Federal System. ACIR Report A-88. Washington, D.C.: U.S. Advisory Commission on Intergovernmental Relations. 1983 1981 Tax Capacity of the Fifty States. ACIR Report A-93. Washington, D.C.: U.S. Advisory Commission on Intergovernmental Relations. 1984 Significant Features of Fiscal Federalism. ACIR Report M-137. Washington, D.C.: U.S. Advisory Commission on Intergovernmental Relations. U.S. Congress, Joint Economic Committee 1982 Trends in the Fiscal Condition of Cities: 1980-1982. Washington, D.C.: U.S. Government Printing Office. 1983 Trends in the Fiscal Condition of Cities: 1981-1983. Washington, D.C.: U.S. Government Printing Office. U.S. Department of Housing and Urban Development 1982 The President's National Urban Policv Report. Washington, D.C.: U.S. Department of Housing and Urban Development. Warren, C. R. 1980 The States and Urban Strategies: Analysis. Washington, D.C.: Printing Office. A Comparative Washington Post 1984 The Japaning of Texa s. U.S. Government April 17:A21. Wolman, H. 1984 The Reagan Administration and Urban Policy Impacts. Discussion draft, Urban Institute Changing Domestic Priorities project, Wash- ington, D.C.
