States Renege on Local Aid

In December, Stephen Laker found himself in an agonizing position. As public health administrator for the Vermilion County Health Department in Illinois, Laker was six days into a ,500-a-day payroll cycle but he had only $7,000 in the bank.

Under a grant arrangement with the state of Illinois, the public health agency was committed to providing certain services for which it would be reimbursed by the state. But massive budget shortfalls forced the state to withhold the reimbursement. As of December 1, Illinois owed the Vermilion County agency almost $800,000.

Laker’s dilemma is familiar to cities, counties and school districts nationwide. State lawmakers are holding onto payments owed to municipal governments and using the money to balance state books. In New York, Governor David Paterson temporarily held back $750 million in local aid last December. In Arizona, Governor Jan Brewer proposed delaying transfers to schools. In Rhode Island, Governor Donald Carcieri targeted aid to cities and counties as part of his proposal to close a nearly $650 million gap through the end of the next fiscal year.

Conflict between state and local governments is nothing new. But by holding money back, state officials are forcing their local counterparts to make even more difficult decisions about program cuts and tax increases. That has opened up a new gulf between the two levels of government and sparked lawsuits accusing state governments of improperly withholding money.

“For the last three recession cycles, it’s been common for states to reduce financial support for local governments during the recession, and once they come out of it, they restore most of what they’ve cut,” says Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois-Chicago. This time is different. Now local officials are wondering whether that money will ever come back.

 In Vermilion County, Laker had to cut programs he had built up over a 39-year career. Three maternal-and-child-care programs that served about 115 clients went by the wayside. Although the agency eventually got most of the money it was owed, Laker predicts that those services are gone for good. He says he selected the three programs because he saw little chance of their being funded beyond June 30 anyway.

In Pawtucket, R.I., Carcieri’s original budget proposal would mean a drop in state funding of almost $15 million over a three-year period, about 14 percent of the city’s budget. “It probably won’t come back in my lifetime,” says Ronald Wunschel, the city’s finance director. Pawtucket Mayor Jim Doyle takes a similarly bleak view of the governor’s proposal. “What he’s saying to us, in essence, is, ‘I’m not going to interfere with the other taxes. I will not increase taxes.’ He’s putting it on us and saying: You do it.”

Last week, Carcieri, reacting to a lawsuit and to pressure from the legislature, agreed to release a $34 million payment to local governments. The money was supposed to be allocated on Friday, but a Pawtucket official said Tuesday that the city is still waiting to receive its $2.5 million share.

Raising property taxes is a difficult proposition in Pawtucket, which has one of the highest foreclosure rates in the state. Coat drives and soup kitchens are drawing more people than in any recent year, and municipal workers, who haven’t seen a raise in four years, are taking furlough days. The senior center and the library are open fewer hours and youth leagues maintain their own athletic fields. “Street lighting is something that people take for granted but maybe they shouldn’t,” says Doyle. “We might have to start reducing the lighting in some areas of the city.”

In North Carolina, about 7 percent of the proceeds from the state’s corporate income tax had routinely been transferred to local governments for school capital costs, but starting this year, lawmakers decided to put that money — roughly $125 million over two years — towards the deficit. For Cabarrus County, a fast-growing county near Charlotte, that translates into an annual loss of about $2 million. “We’re not counting on it coming back,” says Pam Dubois, the county’s finance director. “If it does, great. But when we’re projecting out what we’re going to be doing for the next five years we’re acting like it’s not going to be there.”

In Arizona, Governor Brewer wants to defer about $350 million that is owed to school districts this fiscal year until next fiscal year. At the Flagstaff Unified School District, budget and finance director Adrianne Sanchez would have to make up about $8 million from a $64 million budget. Last year, Sanchez says, the state rolled over a payment into the current fiscal year, promising schools they would get their money by July. The July promise turned into August, then September. Finally, on November 4, Flagstaff got its deferred payment, thanks to stimulus funds. “They don’t have stimulus dollars this year, so I don’t know where they’re going to get it from,” Sanchez says.

She is preparing for further state budget cuts ranging from $6 million to $14.5 million, depending on the outcome of this spring’s election to temporarily raise the state sales tax. School officials are considering tapping into a $10 million line of credit as well as closing two schools. The cuts could also threaten Sanchez’s job.

Elsewhere, recipients of state aid have tried suing the state to recover some of the money they say is owed to them. Budget-related lawsuits have been filed in New York, Colorado, Pennsylvania, Florida and Connecticut. A group of New Jersey cities and towns came close to suing the state over cuts in state aid late last year, a move that would have been unprecedented, according to Michael Cerra, senior legislative analyst with the New Jersey League of Municipalities.

California, no stranger to budget wrangling, lost a major lawsuit last year over transportation funding for localities, forcing state officials to have to look elsewhere for $2.4 billion in savings over two fiscal years. Lean years give “perhaps a greater motivation for groups to go to court,” says H.D. Palmer, deputy director of the California Department of Finance.

In Kansas, one state lawmaker has launched a preemptive strike against legal action. After a group of school districts filed a motion with the state Supreme Court over school funding levels, state Senator Dick Kelsey introduced a resolution barring school districts from using state money to sue the state. “They can take up a collection among all these administrators that are making humongous money,” he says. “If they want to write their own checks, fine.”

Pagano, the University of Illinois professor, says states can expect more lawsuits until governments agree on a more sustainable way to raise money. “What this recession has demonstrated is that the fiscal architecture of local governments is so outmoded, because it is so focused on such a narrow base of a county’s or a city’s wealth that is can’t sustain itself in the future if property values don’t rebound,” he says. “I’m optimistic that it’s going to hurt so much that states and local governments are going to have this conversation because they’re both in this together.”

Until that happens, local administrators like Vermilion County’s Stephen Laker are going to continue drawing up doomsday scenarios. Under the most draconian outcome, his health department would be forced to cut almost 70 percent of its staff.  “I was tentatively planning on retiring on May 31,” he says. “I’m not going to do that now because I can’t leave them in a mess. I’ve got to at least get another budget. It’s not fun.”