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consolidations proposed by the Executive Management and Fiscal Affairs Committee relating to economic development, airport development, health, energy conservation and planning and by bills in Congress such as S. 605 (Food and Nutrition Programs), S. 1126—H.R. 443 (Environmental Programs) S. 2270 (Education Programs) and S. 878 (Assistance Reform) and other consolidation proposals under consideration within the administration should be at least partially implemented through the group ceiling device. This action, if taken concurrently with the reductions, will allow states to protect programs of vital priority and permit them to eliminate duplication and waste intolerable in a period of financial stringency. Consideration should also be given to application of the group ceiling approach to the consolidation proposals contained in the report prepared by the Advisory Committee on Inter-governmental Relations in 1977 relating to programs affecting child nutrition, vocational rehabilitation, older Americans, child welfare, domestic volunteers, forest land management, highway beautification, transportation safety, urban transportation, state transportation, water pollution, library aid, and state education assistance;

3. Cuts should be focused on programs such as LEAJ which function through project grants and which are precluded by federal guidelines from financing ongoing activities. Cuts directed at ongoing activities will frequently require the assumption of costs by state governments if federally identified needs are to be met, a result burdensome to state governments and also not conducive to the objective of reducing inflation by controlling overall government spending, federal, state and local;

4. Reductions in federal funds must be accompanied by reduced federal mandates directed at state governments. I urge that a high-level and visible group be established within the Office of Management and Budget under the direction of your Inter-governmental Relations Office to review recent and contemplated regulations relating to the implementation of federal programs by state and local agents. It must be recognized that reduced funds will, in many instances, require compromise of the original aspirations of these programs and their implementing regulations—aspirations in many instances excessive in any case. State and local governments, unlike the federal government, do not possess the power to coin and issue money. It must be made very clear, from the top, that federal regulations are not immune from the principle that "you get what you pay for;"

5. Reductions are obviously more tolerable when addressed to programs that are not fully established or which have hitherto been funded by project grants; and

6. The selection for reduction of categorical programs must be made in a way which sharpens the inherent division of functions between federal and state governments. Traditionally, law enforcement and education have been state functions. In view of the relatively small share of total funding supplied by federal aid to law enforcement and to education, we believe that states are better able to bear reductions in specialized programs in these spheres than in many others, particularly if the cuts take the form of ceilings on groups of programs. There are, however, large general federal education aid programs such as the Title I, vocational, handicapped, and delinquent education and library aid programs that are worth preserving; these programs tend to be those with the fewest restrictions upon use by the states and localities.

If, after applying these principles with rigor, limited reductions in the state share of revenue sharing remain necessary, they must be carried out in a way which does not compromise the continued existence of the program or the possibility of its increased funding in future years.

I note that the administration has delayed announcement of the identity of most of the programs to be subject to reductions. I assume that this delay has the purpose of allowing wide consultation with congressional representatives and state and local governments. I specifically urge that you meet, at an early date, with representatives of the Executive Management and Fiscal Affairs Commit. tee so that the results of its survey of state priorities may be given full consideration in your work. This course will ensure that the effect on inflation of federal spending cuts is not largely negated by state and local spending increases.

In your address to the nation, you repeatedly stressed the importance of discipline. An effective program requires not merely discipline by the federal gorernment but self-discipline by states; this self-discipline can only be the product of the exercise of responsibility for allocation of cuts within federally imposed group program ceilings. Sincerely,

HARRY HUGHES, Governor.

Obviously, Mr. Chairman, an important facet of my recommendations is the program we are discussing today, general revenue sharing. It is uniquely suited to meet the demands that will be placed on the intergovernmental system in the 1980's. I believe the following points support this conclusion:

Revenue sharing permits State and local governments to allocate Federal dollars to their highest priorities at a time when all public funds must be spent in the most effective way possible. Revenue sharing is a productive method for using Federal funds at a time when increased productivity in the public and private sectors is a major national goal. Revenue. sharing is controllable at a time when a consensus has been built for slowed growth in Federal spending. Revenue sharing promotes cooperation among the three levels of government at a time when shifting rules will place new strains on intergovernmental relations.

General revenue sharing has an important role in an intergovernmental grant system shaped by increased controversy over expenditure of Federal funds because it permits State and local governments to use the money for high priorities.

In Maryland, the disposition of the State share of revenue sharing is provided in the State budget, which is voted upon by the 188 elected representatives of the 23 counties and Baltimore Čity.

The range of purposes for which States currently use revenuesharing funds demonstrates that the program is now accommodating the diverse priority needs of different sections of the Nation. Over half of the money which States receive is earmarked for education and social service programs.

Thirteen States spend all of their funds for educational programs. These States are Florida, Illinois, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Virginia, and Wisconsin. Eight States, Alaska, California, Connecticut, Colorado, Idaho, Michigan, Minnesota, and New Mexico, spend all of their funds for social service programs.

State funds are also used to finance construction projects. These provide immediate job opportunities and lasting benefits to State citizens and help make public facilities accessible for handicapped persons.

State funds support pension benefits. This is an emerging area of public sector concern in light of the House pension task force finding that public pension plans face a $150 to $175 billion unfunded liability. Revenue sharing supports part of an effort in many States to put their pension systems on an actuarially sound basis, and many of the workers covered by pension plans aided with State revenue-sharing dollars are local government employees.

State funds are used to provide tax rebates. They are being used directly to alleviate property taxes in four States. Rebates are targeted to homeowners, farmers, renters, and handicapped persons.

For 1981, Maryland has budgeted general revenue sharing in the loan fund of the State. If the program is reauthorized, these moneys will be used in lieu of issuing general obligation bonds. The pay-asyou-go approach will result in interest savings of more than $22 million to the taxpayers over a 15-year period.

On the national level, because of the substantial portion of the State share passed through to local units of government, ending State revenue-sharing payments will have the effect of adding $1 billion to the property tax burden faced by taxpayers.

I would say that $800 million of the revenue sharing at the State level is passed through to school districts throughout the Nation. For example, in Maryland until this year, we used our revenue sharing in the pension program. We picked up the entire cost of social security and retirement costs for teachers. Teachers are local employees in Maryland. They are employees of the local boards of education. The State has assumed that responsibility and the funds have been used for that purpose.

This year, as I have indicated, we used them for a different purpose because we were not certain of the future of revenue sharing.

I might also add that there were suggestions that in Maryland, where we are proposing a very significant increase in State aid to education, $67 míllion, we budget our revenue sharing there so that that program would be contingent upon revenue sharing. I was not willing to go along with it. I thought it was like playing Russian roulette with the local governments.

The point I am making is that it is being, and has been, used in Maryland as a benefit to local governments.

The reduction proposed by the House Budget Committee should not be taken lightly by House Members, and I hope the members of this subcommittee will act to preserve State participation in the revenuesharing program.

According to the National Productivity Council team that examined the Federal impact of the grants system on State and local productivity, "the impact is primarily negative because of the delays and additional costs caused by the myriad of regulations and excessive 'redtape?.” General revenue sharing at $2.3 billion for the States has administrative requirements costing the Federal Government an estimated $437,000 of the program's budget each year. Put another way, for every dollar spent on administration. $5,263 are put to work. It is a model for all of us who seek increased government productivity.

Revenue sharing is a highly controllable Federal aid program. Through administration and congressional control, it has grown at an annual rate of only 3 percent since the program began. This growth rate is far short of the rate of growth of Federal outlays, which have increased by 12.5 percent annually in the same period.

The result has been a substantial decline in the value of revenue sharing. To have maintained the purchasing power of the $6.1 billion outlay for revenue sharing in fiscal year 1974, the program would have had to provide a little more than $10 billion this fiscal year.

The fiscal problems of the Federal Government, with its projected budget of more than $600 billion, have not been caused by the $2 billion State revenue-sharing program, the cost of which, as we have seen, has hardly changed in the last 8 years. To the extent that grantsin-aid have contributed to these problems, the difficulty has been the inability of the Congress, with its more than 300 committees and subcommittees, to control hundreds of billions of dollars in narrow categorical grant programs.

In a time of scarce resources, cooperation between levels of government is vital if the goals and policies of government are to be accomplished. The Federal Government has placed on State and local governments about 1,200 mandates, of which about 1,000 have been imposed since the enactment of revenue sharing.

General revenue sharing is one way for the Federal Government to recognize the assistance State and local governments have provided, at considerable expense in some cases, in meeting these standards. Through general revenue sharing, the Federal Government can, in turn, provide assistance for locally set priorities.

Intergovernmental mandates will continue to be an issue in the 1980's. Then, as now, the debate will center on how the costs can be met in an era of limited resources, not on whether the mandated programs are justifiable or even desirable.

I believe that general revenue sharing plays a direct role in alleviating the burden that the important but unfunded mandates place on State and local governments and that this aspect of the program will take on increased importance during the belt tightening of this decade.

Over the years, States have developed sizable programs of aid to local governments. The National Governors' Association Center for Policy Research has calculated that the level of State aid to localities was $78.1 billion, compared to $16.6 billion in direct local aid provided by the Federal Government, in 1977. For example, in Maryland $1.2 billion, or 41 percent, of general fund revenue will be returned to the political subdivisions of the State.

I think that figure will increase by the time we finish our next general legislative session in the next 10 days.

General revenue sharing has an important role in the extensive programs of State aid to local governments. According to the Bureau of the Census figures, over 40 percent of all State revenue-sharing payments are passed directly through to local units of government.

A recent National Governors Association Center for Policy Research study indicates that State aid, in conjunction with Federal funds that pass through the State, are more responsive to distressed cities than is direct Federal aid to cities. It suggests that programs like general revenue sharing, which establish a partnership between Federal funds and State priority-setting and targeting abilities, have a track record for efficient targeting.

I am submitting a copy of the report for the record. [Subcommittee note: Report is available in the subcommittee files.]

Mr. Hughes. States contribute to Federal initiatives in a variety of ways. Federal agencies frequently hire State officials to administer their programs. Figures recently released on Department of Health, Education, and Welfare staffing practices indicate that while HEW has 145,000 people on its direct payroll, it has 84,000 additional workers in State governments and 572,000 employees in local governments.

GAO and others have shown that the Federal Government does not offset all of the administrative costs its grantees bear, so even when the Federal Government provides a grant for State administration of Federal programs, States contribute in overhead charges.

In some cases States contribute cash to the administration of some Federal initiatives. For example, States pick up part of the cost of

running the Federal food stamp program in addition to defraying the overhead costs associated with the program.

The point is that, in addition to contributing to the achievement of Federal mandates and providing aid to local governments, States provide cash assistance to Federal programs. The effect of State spending reductions in any of these areas would be significant in the intergovernmental system. The cut in revenue sharing recommended by the House Budget Committee jeopardizes the intergovernmental initiatives to which the States contribute.

Mr. Chairman, I would be remiss if I closed my statement without touching on an issue that has been raised in every debate in Congress this session on the revenue-sharing program; namely, the fiscal condition of the States. It is important that the facts about the fiscal condition be placed in the record of these hearings.

Revenue-sharing payments have never been based solely on need. Revenue sharing is not only an aid program. It is a commitment by the Federal Government to recognize the principles of federalism and the importance of decentralization.

To be sure, need is a factor in the formula for determining the amount of funds distributed to each government, but it is not and never was intended to determine whether a government participated in the program.

However, if one assumed that need is primary in participation, the fiscal situation of the States does not justify elimination of their State role. Our own fiscal surveys have shown State government balances have been in the aggregate, relatively small compared to expenditures. The estimates are that 29 States will have balances below the 5 percent generally assumed to be necessary to meet emergencies in 1980.

Operating balances at the State level are a function of fiscal responsibility and caution about the future and not of excessive prosperity. Of the 50 States, 48, including Maryland, have legal constraints against incurring deficits and must maintain balances to deal with emergencies, to protect their credit ratings, and to provide reserves against cash flow problems.

As a result of discrepancies in predicting inflation rates, actual receipts and expenditures often vary from the projections. Recent underestimates of revenues by Federal agencies reflect the lack of precision in predicting even national economic trends. For example, the U.S. Congressional Budget Office estimated in January 1979 that the fiscal year 1979 Federal Government receipts would total $453.3 billion, whereas actual receipts were $12.6 billion-2.8 percent higheror $465.9 billion, largely because the inflation rate was greater than projected.

Last month the Congressional Budget Office estimated that revenues for fiscal year 1981 would total $582 billion. The estimate does not include the windfall profits tax and when it is adjusted for the new tax the total is $599.2. This is still $13 billion lower than the revenue estimate that the House Budget Committee used last week.

I make this comparison not to criticize or compare estimating techniques but to show that revenues are subject to change not just at the State level but at the Federal level as well.

The difficulty of translating national forecasts into revenue projections creates even more uncertainty in State level revenue and expendi

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