Devolution.

Devolution is in the air. The federal government may be on the brink of passing important new responsibilities to state government -- if not this year, then in 1997. Block grants, reduced aid and elimination of regulations are all part of this historic move to transfer power and responsibility from the federal government to the states.

Now many governors and legislators are contemplating similar reforms for state and local governments. Is that wise?

To answer this question, state officials can turn to guidelines espoused by NCSL's Task Force on State-Local Relations a decade ago to help them grapple with the issues raised by devolution, says the chair of that task force, Stanley Aronoff, now president of the Ohio Senate. "We were pioneers in examining the proper relationship between state and local governments," he says. "Now that devolution is on the cutting edge of public policy, legislators and governors should think hard about implementing more of the policies we endorsed."

The preamble to the task force recommendations started with these prescient words: "We are on the brink of a period of significant change in the way state and local governments interact ... Federal aid already has decreased considerably and further large reductions appear likely. These changes create a vacuum that forces states to reassess their policies."

In the 10 years since that statement, states have in fact been forced to reassess their policies. But, with a few exceptions, states have ignored one of the main task force principles, that of viewing state and local governments as part of a unified system. John Shannon, former executive director of the U.S. Advisory Commission on Intergovernmental Relations (ACIR), coined two phrases to describe this period. Although he was talking about the relationship between the states and the federal government, his labels apply just as well to a discussion of states and local governments:

* De facto federalism, because states act in a piecemeal fashion rather than as part of a conscious "grand design."

* Fend-for-yourself federalism, because states increasingly tell cities and counties, "You're on your own."

One important sign of "fend-for-yourself federalism" is that state aid to local governments has been growing more slowly than other state spending. In 1992, the last year for which figures are available, state aid (including assistance to schools) was 32.3 percent of total state spending. That was the lowest proportion in any year since the U.S. Census Bureau began reporting that statistic in 1957. Before 1989, aid had never been less than 34 percent of spending.

Another indicator is that in every year since 1985, local taxes have risen faster than state taxes. Although states have increasingly encouraged cities and counties to rely on sales taxes (12 states loosened restrictions on the local sales tax between 1990 and 1993), the property tax accounted for most of these local tax increases. Slow growth in state aid to local governments is not the only reason local taxes are going up faster than state taxes, but it's one of the reasons.

GUIDANCE FOR DEVOLUTION

When legislators turn to the task force recommendations, they will find guidance on two themes of vital importance in a period of devolution -- ways to increase governmental efficiency and principles basic to a rational "sorting out" of responsibilities between state and local governments.

EFFICIENCY

Efficiency is especially important now because states and local governments will be receiving less federal aid at the same time that voter resistance to tax increases has stiffened and demands for increased spending remain strong. Four ways states can help their localities improve efficiency are to relax mandates, provide technical assistance, develop benchmarks for evaluating local activity and decentralize decisionmaking.

Mandates. Many states have enacted barriers to new unfunded mandates on local governments during the past 15 years. But states could go further and reconsider many existing mandates, perhaps relaxing or repealing them.

Mandates are not all the same. Some set out standards of "good government," ensuring high ethical standards, nondiscrimination and full disclosure of government affairs to citizens. The task force maintained that such mandates are appropriately paid for at the local level.

But other mandates are unreasonable impediments to the efficient provision of services. The task force called particular attention to mandates prescribing local personnel policies, environmental standards, service levels and tax base exemptions.

Powerful groups of local employees often succeed in "end runs," asking state government to require cities and counties to provide certain benefits that the employees could not obtain through bargaining, such as generous pension requirements for police and firemen. The state mandates, but local taxpayers foot the bill.

Several governors have attacked such mandates recently. Last year New Jersey Governor Christine Todd Whitman got the Legislature to repeal a requirement that police chiefs had to be paid at least 10 percent more than any other member of the police department. And this year New York Governor George Pataki has proposed that the state end its requirement that disabled firefighters be given full pay until they are 70. Following the same principle, Pataki recently vetoed a change in arbitration procedures that is likely to raise New York City police salaries more than city government feels is justified. The Legislature, however, overrode the veto.

California has been repealing mandates since the 1980s. But a county spokesman reports that once a mandate has been in force for a number of years, citizens become accustomed to it, so counties find it difficult to stop providing a service even after a mandate requiring it has been dropped.

Technical assistance. A second way of enhancing efficiency is for the state to suggest methods to streamline local costs. This kind of help can come from comparison studies of how certain services are provided in other cities, or research on a new technology that could help deliver, for example, trash pickup in a more efficient way. New York's secretary of state used to have a large staff for that purpose, but it was wiped out when the state budget was in deficit in 1991. More recently, New Jersey has been providing such assistance when requested by local governments. Even if the ideas suggested are not new, the fact that an impartial state agency has proposed them may provide political cover that helps locals overcome resistance.

Benchmarks. A third role for states is to collect and analyze comparative information about city and county spending, taxes, fees, personnel policies and services. Such information needs to be presented in an easy-to-use format that helps local governments and citizens understand how operations compare with those of similar cities and counties in the state. It may reveal, for example, that a county has unusually high per capita spending for a particular service or that its wages or fringe benefits are far out of line with its peer group. Such information can provide a context for better decision making. Connecticut and Georgia are good examples; they both publish reports with useful comparative spending information for local governments.

The benchmarks could also be part of an annual report -- the State or Local Government -- which is another proposal of the task force. The report would help state officials, citizens and local officials understand whether fiscal conditions are deteriorating and, if so, why. Is it because of falling federal or state aid, changed demographics, mandates or local management practices?

Decentralizahon. Decentralization can promote efficiency while helping to assure that services are responsive to citizen needs. For example, Florida recently established a new governance structure for health and human services, shifting decision making authority from Tallahassee to 16 regional boards appointed by the governor. The volunteer boards determine priorities, oversee the budget and policies and evaluate district administrators.

SORTING OUT

Sorting out refers to what level of government performs what functions and how they are financed. For many years, it has been assumed that services for the poor should be primarily the responsibility of the federal government, with most of the remaining costs borne by states. Following this reasoning, most states have picked up the cost of Aid to Families with Dependent Children and Medicaid that is not paid by the federal government.

Now that the federal government may turn over more responsibility for welfare and Medicaid, would it make sense for states to follow suit, turning over more welfare and poverty-related programs to cities or counties? That is precisely what New York Governor Pataki is proposing. He explains the rationale this way: "At the federal level the needs of New York State are not the same as the needs of South Dakota or Iowa. At the state level, the needs of Brooklyn or the Bronx might be very different than the needs of Cattaraugus County. For too long, the programs have been just dominated and micro-managed from above to meet a model that really doesn't exist."

Although many state officials have asked for control of welfare and Medicaid, arguing that they can run the programs better if freed from federal restrictions, local officials have not been begging for a similar transfer of authority to them. In fact, most of them oppose it. "The central cities have a disproportionate share of poor people. It is both more equitable and more efficient for the state to finance the costs of welfare and related programs," says Michael Lawson, director of government finance for the Connecticut Conference of Municipalities.

Many state officials worry about becoming "welfare magnets," with poor people moving to their states because they have higher benefits. Whether or not this happens, the problem would be much worse if local governments controlled welfare since it is easier to move from county to county than from state to state. Besides, the counties or cities that have the most poor people are often the very ones with the fewest resources to provide welfare benefits.

Nevertheless, devolution of poverty-related programs from state to local governments is likely to be seriously considered. New York's governor has called for just such policies in this year's budget, and other governors may follow suit.

More is involved than just welfare and Medicaid. Representative Ann Rest, chair of Minnesota's House Tax Committee, worries that counties will be left with heavy burdens financing other social services -- housing assistance, foster care and prenatal programs, for instance. "We shouldn't just leave local governments holding the bag, without considering their ability to pay for services that are critically needed," she says.

Phil Dearborn, ACIR director of government finance says, "The big question is who's going to look after the indigent. Will cities be able to ignore them? We've been through this before with the homeless, and that's a relatively small problem. If I were a city official, I'd be pretty frightened."

It does make sense for states to reconsider how functions are sorted out, but this should be done based on the answers to such questions as: Does the program provide local or statewide benefits? Can costs be controlled locally? Is it important that some minimum level of service be provided?

The NCSL task force urged state to think about whether some functions should be turned back to local governments while others are assumed by states. Should programs that primarily benefit local residents receive state aid? Should other expensive aid programs that are not related to local needs and local tax bases be reformed or repealed?

Some states have already been making changes. Many have assumed the cost of operating criminal courts. California realigned mental health programs in 1991, turning them over to counties while providing new revenues (including a half-cent sales tax increase) to defray most of the costs. Last year Iowa relieved counties of a big share of the cost of mental health programs. Many states have decided that they should no longer pay the cost of teacher pensions, preferring to support education through an equalizing aid formula. Each of these changes had a good reason behind it. The change in California encouraged localities to be more price conscious. The Iowa reform relieved the property tax. Because rich school districts pay higher wages and usually have smaller class sizes, turning over teacher pension plans to local districts in exchange for more state money in school aid formulas is a fairer way to distribute state funds.

One potential pitfall of devolving programs to local governments is the possibility that they wont have the resources to assume the added responsibilities.

"If states trust counties to run the programs, then they should also trust them to raise the money for them, provided that local officials are willing to take the heat," argue Jean Ross, director of the California Budget Project. She says California counties are in a tight spot because of court interpretations of voter initiatives that say counties can't raise taxes without a vote of the people. In Utah, a legislative task force was formed last year to study county revenues as well as program requirements imposed by higher levels of government. The task force recommended that a 0.5 percent county option general use tax be authorized by the Legislature this session.

Sorting out is directly related to state aid. It may be logical to turn over a function to cities counties if the program is still a priority to the state and if an appropriate amount of aid is provided. If a state has a large number of small programs, it could be a good idea to combine them in a block grant. But creating a new block grant does not necessarily justify sharply slashing aid. Last year Connecticut Governor John Rowland proposed several new block grants, with funding reduced 25 percent. The legislature rejected his proposal although it did cut aid for some programs.

Two legislative agencies -- Virginia's Joint Legislative and Audit Review Commission (JLARC) and California's Office of the Legislative Analyst -- issued blueprints in 1993 for how states should think about sorting out. Phil Leone, JLARC's director, says that its study generated considerable discussion but that little concrete action resulted because solutions are so complicated. The same is true in California. Perhaps the coming budget crunch will lead these and other states to revisit their suggestions.

Leone reports that JLARC's study led to creation of a group concerned about the relationship between cities and suburbs. This year the partnership has proposed that the state provide grants to regions to promote cooperation within metropolitan areas. Along the same lines, in the 1980s, Virginia began to promote regional jails by subsidizing part of their operating costs, an initiative that has been successful in reducting governmental costs.

OTHER THEMES

Another idea is that states should have some kind of forum where state and local officials can discuss ways of improving policies. This could be a legislative commission on state-local relations or a state ACIR, but most such organizations in the past have fallen short of what is needed. Two of the most successful state ACIRs in the 1980s had strong leadership from powerful legislators, Representative John Bragg of Tennessee and Speaker Bob Shaheen in South Carolina. Today, Colorado Senate Leader Tom Norton is significantly involved with the Colorado ACIR.

North Carolina's State-Local Partnership Act recently established a task force that could serve as a model for other states. It consists of state leaders from both the executive branch and the legislature as well as representatives of major groups of local governments. Since last June the task force has been trying to develop some commonly accepted principles for devolution. Ron Aycock, executive director of the North Carolina Association of County Commissioners, strongly supports this effort but adds that it is too soon to tell how successful it will be.

Another task force idea that is important for states to consider in this period of devolution is that state officials need better information about local governments. Too few governors and legislators have a good understanding of the problems facing cities and counties and how state policies affect them. South Carolina's State Budget Division, for instance, has developed a "fiscal impact statement team" that allows the state to survey local officials quickly about program costs of proposed mandates. Virginia has a mandate catalog that allows legislators to quickly review programs locals have to pay for.

IT'S TIME FOR A CHANGE

With devolution upon us again, it is time for states to take up another major tenet of the task force: "The time has come for states to change their attitude toward local governments -- to stop considering them just another special interest group and to start treating them like partners in our federal system of providing services for citizens." Legislators should be aware of local governments truly become partners, the devolution revolution may work.