Columbia, SC — YOU MIGHT NOT be familiar with the local government fund used to direct aid to cities and counties to help them administer state-mandated services and programs, but you’ve been affected by it.
The degree to which lawmakers fulfill their obligation to provide the funding to local governments — counties in particular — can affect your taxes and even the quality and quantity of services on the local level.
The fund has taken a serious hit in recent years and not simply because of the struggling economy. Lawmakers have dipped into the dedicated fund to pay for other things.
When that happens, counties, which rely more heavily on the fund than cities, have only a few ways to fill the funding gap: raise property taxes, cut services or use savings.
S.C. law requires the state to give local governments 4.5 percent of the general fund revenues collected the previous year. But in recent years, legislators have suspended that requirement.
If the state were to live up to its promised allocation, it would owe cities and counties nearly $262 million for the fiscal year that starts July 1. But the House budget only provides local governments the same amount they received this year — $212 million; $182 million of that is recurring funds, and the remaining $30 million is one-time money. The Senate agreed to do the same on the second reading of the budget last week; it will consider final approval this week.
The local government fund can be traced back to the 1920s, when the state used 11 different taxes to generate revenue for city and county operations. This aid to subdivisions, as it was known, was collected by the state, and a portion was distributed to cities and counties. The amount came out to about 10 percent of the state general fund.
The funding began to decrease after Home Rule was passed in 1975. The unpredictability of the fund made it difficult for cities and counties to budget effectively, so in 1991, lawmakers passed the State Aids to Subdivision Act, establishing the 4.5 percent set aside.
When the Legislature suspended the law requiring the set aside in 2009, that cut the fund by $50 million for the 2009-10 fiscal year. For the current fiscal year, the Legislature increased the fund by $30 million, using one-time money, but that was still $41 million below what the law requires.
As the state’s finances rebound, it’s critical for lawmakers to return to the 4.5 percent funding level. Truth be told, even if the state were to hit the statutory requirement, it wouldn’t be enough to cover the real cost of operating state offices and programs.
According to a study published last year by S.C. Association of Counties titled “The Fiscal Impact of Selected State Mandates on County Governments,” local governments spent $624 million on state-mandated programs and services but received just $494 million in state aid during the 2009-2010 fiscal year; that’s a $130 million shortfall. Between 1992-93 and 2009-10, the net cost of state mandates to county governments rose nearly 4 percent a year on average while the increase in the local government fund was only 0.48 percent per year, suggesting a growing gap.
The joint study by the University of South Carolina and Clemson and Francis Marion universities considered costs for state-mandated services such as the Circuit Court system, elections and voter registration, jails, magistrates and indigent defense.
The study didn’t include a number of other expenses local governments are forced to incur, such as capital expenses or costs for the auditor, coroner, most health department costs, the sheriff, the solicitor or the treasurer. Counties also must provide office space for the local Department of Social Services, the legislative delegation and more.
In other words, the state doesn’t come close to paying for the services counties are mandated to provide.
Meanwhile, the cost for operating elections, the court system and special purpose districts such as recreation and for providing space for local state offices keeps climbing.
And raising taxes to cover that cost isn’t as simple as it used to be. The same lawmakers who have placed demands on counties that they don’t fully pay for have seriously limited local governments’ ability to raise money. Among other things, the Legislature has capped cities’ and counties’ ability to raise property taxes.
Local governments have begged for decades for more taxing options, but lawmakers largely refused. They have approved some sales-tax options, but with heavy restrictions. For example, the 2 percent tax on restaurant food can be used only for tourism-related projects.
Things could get worse as a House study committee explores changing the formula for the distribution of the local government fund, including possibly increasing municipalities’ share.
Instead, lawmakers should provide full funding under the current law with no increase to municipalities. Counties receive 83 percent of the fund because they administer many state-ordered functions while municipalities are responsible for a very few, if any.
Whether the formula is changed or not, the precedent lawmakers set by suspending the 4.5 percent set aside is troublesome. They have gotten a taste of those funds and will be tempted to raid this account when it seems expedient. As it seems more and more.
And each time they don’t resist the urge, it will send shock waves to the counties as councils are forced to raise taxes, cut services or tap their savings to make ends meet.
Reach Mr. Bolton at (803) 771-8631 or email@example.com.