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 million, 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 govern

ments.

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

ture estimates than it does at the Federal level. When States, using national economic forecasts, underestimate the rate of inflation, their balances rise because revenues respond more quickly to inflationary forces than do expenditures. However, the record clearly shows that inflation takes its toll on the expenditure side of the State budgets also and the temporary balances rapidly evaporate.

State operating balances are necessary because of the accounting system used at the State level. As Senate Majority Leader Robert Byrd and others have noted, if the Federal Government were to use the State accounting system and to separate its operating and capital expenditures, it too would have a balance. Yet, its underlying fiscal condition would not have changed. Nothing would be different but the bookkeeping.

Perhaps the best example of how misleading undue emphasis on State balances can be is that California, which is projecting a $1.5billion balance for fiscal year 1980, has just had its bond rating downgraded by Standard & Poor's. California is projecting a miniscule $112 million balance for fiscal year 1981, less than 1 percent of its budget, and that does not take into account the very possible adoption of a major new tax limitation in June.

Maryland is projecting a fiscal year 1981 surplus of $14,999. I would be less than honest if I did not add that we hope it is going to be more than that, but the bottom line on the budget that is before the legislature now is $14,999. I know the estimates are that our revenues may be a little higher than we currently anticipate, but it is not going to be any tremendous bonanza.

In Maryland, if both operating expenditures and State debt were combined for accounting purposes. Maryland would have a $2.1 billion deficit, showing that because of the way we keep our books, a separate account from our general operating budget-we might have a surplus in our general operating budget-it is very difficult to say that overall the State has a surplus when it has over $2 billion of debt in its capital account and well over $200 million a year debt service requirements. Mr. Chairman, we support a straight extension of the existing program as Mr. Wydler has proposed in H.R. 2291.

Mr. WYDLER. Here, here!

Mr. HUGHES. Until the administration has submitted its bill, I will be unable to comment on it adequately. However, I will simply note that we have reviewed the administration proposal that States be required to establish commissions to study State-local fiscal relations as a condition of continued participation. Although Governors support reauthorization of revenue sharing in its present form, we feel that a fresh look at the complicated fiscal relationship between States and local governments could yield some useful results.

We strongly believe that the reauthorization legislation, if it contains a commission requirement, must set up a balanced, simple process that maintains the normal relationship between constitutionally created institutions and ad hoc commissions.

In addition, it should not place roadblocks in the way of existing State processes for resolving intergovernmental questions. Approximately 20 States, including Maryland, have already established Statelocal advisory bodies and it is important that the work of these groups not be duplicated.

In our view, the case for the commissions might be more persuasive if the Federal Government would set the example by directing greater attention to the recommendations of its own commission, the Advisory Commission on Intergovernmental Relations, which 2 years ago recommended a comprehensive approach to Federal aid reform. Neither the administration nor the Congress has yet responded to those recommendations which were based on the most comprehensive study of the Federal aid system ever undertaken and which the Governors have been urging for the last 2 years as the most sensible way to control Federal spending and to reduce the cost of government at all levels.

In conclusion, this bipartisan program has been a key in improving the capacity of State and local governments to meet the needs of our citizens. It is a recognition that the superior revenue gathering ability of the Federal Government justly should be used in part to address needs at the local level within a context of local discretion.

It also recognizes that there are numerous governmental services. and facilities that require local management. I cannot stress too strongly the genius of general revenue sharing-that of combining federally gathered resources with responsive local management to meet the needs of those who pay the Federal, State, and local tax bill.

Mr. Chairman, the Governors greatly appreciate the leadership you have shown with respect to revenue sharing and look forward to working with you for reauthorization of this important program.

I would like to thank you for your attention to my statement. Mr. FOUNTAIN. Thank you very much, Governor, for a very detailed, thought-provoking, and meaningful statement.

Without objection, your complete statement and your letter to President Carter will be included in the record at this point.

[Mr. Hughes' prepared statement, with attachments, follows:]