Back to the Future: Revenue Sharing for Recession Relief

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THE AVENUE DECEMBER 7, 2009

Back to the Future: Revenue Sharing for Recession Relief

So it sounds like the president may call for some sort of additional aid to state and local governments Tuesday when he speaks on job preservation and creation at Brookings. That’s potentially very good, but it’s important that Congress and the administration get the job done right this time. One suggestion is that those working on the problem go back to the future this week and give general Nixon-style revenue sharing a chance. It could be that some of that old-time Rx from the Nixon era is really and truly the best way to hold off the ugly coming round of local government service cuts and layoffs forecasted in a recent Brookings/National League of Cities paper.

 Richard Nixon campaigns in 1972--wikipedia.orgThe question this week, after all, is how to ensure that more of the next round of federal aid winds up where it is most needed at the moment, which is at the local tier of the too often conflated category “state and local government.”

 The problem, in this respect, is that the last tranche of assistance, which flowed mainly through the State Fiscal Stabilization Fund (SFSF) within last winter’s $787 billion stimulus package, did not really get to local governments. 

To be sure, SFSF money has indirectly benefited local governments and so helped minimize layoffs by helping to moderate (somewhat) state local aid cuts. And it’s true that the bulk of the $35 billion so far awarded has saved an estimated 300,000 jobs in local places nationwide, mainly by propping up public education budgets and so forestalling local school district layoffs. However, the fact is that SFSF funds really had no pass-through provision to cities, suburbs, counties and towns, and so could not be used for local government fiscal stabilization because they were not received there. In that sense, SFSF staved off some local government cuts by moderating local aid cuts in states that provide significant assistance, but on balance the recovery package was a mixed bag not aimed at local fiscal stabilization.

And so the nation needs to focus explicitly this time on local government fiscal stabilization, and how to get flexible resources directly to local governments as they stare at one of the most daunting and widespread fiscal crises and decades.

As to the how of an intervention, there are many options, but one thing is clear: Simply running more federal money through the SFSF channel as “state and local aid” won’t cut it. And that is why Team Obama should be thinking (as it is) about more direct interventions and be working to structure an entirely separate aid channel for localities that directs aid straight to cities without a state pass-through. 

Last week, Bruce Katz and I suggested one way the government could do this: by utilizing the formula driven Community Development Block Grant CDBG)--a flexible program that provides communities with resources to address development needs particularly in urban or struggling locales. The problem with that approach is that CDBG is oriented most toward funding capital projects at a moment when municipalities are most in need of operating funds due to slumping tax revenues. To deal with that disconnect, one solution might be for Congress and the White House to raise the share of CDBG that can be used for administrative costs to 25 percent for a one-year or two-year emergency period. 

But here’s another idea: Congress and the administration should go back to the 1970s and bring back--for a limited time--the old general revenue sharing program (GRS) that worked effectively from 1972 to 1986. During those years, more than $83 billion was transferred from the federal government to state and local governments, with one-third of the money going to states and two-thirds to local governments until 1981, when state governments were excluded from the program. This system had the obvious benefit of providing a fast-moving response to local government liquidity crises. But it also had the virtue of targeting aid where it was most needed, by dint of a formula that took into account localities’ tax regime, population, and per capita income. Used today, such an emergency program could represent the smartest sort of emergency intervention. It would get aid out of Washington and out of state capitals and onto Main Street. It would address the coming local government liquidity crisis. And it would help keep cities and counties from cutting back in ways that could place a significant drag on the nation’s fledgling recovery just as the extraordinary interventions of the Recovery Act trail off late next near.

In short, Congress and the White House should look into GRS.  Like CDBG, a bygone Nixon-era program might well be a truly smart vehicle for helping to stave off a growing local government liquidity crisis.

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posted in: the avenue, metro policy, state fiscal stabilization fund, bruce katz, congress, white house, national league

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