This policy briefing report is the first of a series of policy seminars supported by Georgetown University's Public Policy Institute (GPPI).  TheGPPI's "D.C. Project" provides faculty and student research resources as a community service to support collaborative efforts addressing the needs of the District of Columbia.
 
 

I. Introduction

"... whether the solution [to the revenue problem] lies in a leaner city government, a higher Federal payment or help from the regional governments is moot. All will be necessary and all are appropriate."

Living in the District of Columbia and reading the local papers, residents may get the impression that this city is the only urban area struggling with crime, deficient public schools, financial shortfalls, an impoverished population, outmigration, or even allegations of mismanagement and corruption. In reality, cities across the country are searching for innovative ways to deal with decreased federal and state financial support, aging infrastructure, a shrinking economic base, and an increasing incidence of needy residents. Between 1977 and 1990 alone, direct federal assistance to local governments fell from $32.3 billion to $18.4 billion and federal direct aid to big cities fell from $9.3 billion in 1977 to $4.5 billion in 1990, a decline of 51% ; adjusting for inflation, federal aid to cities declined 60% from 1980 to 1992. The District of Columbia indeed is unique in one fundamental respect, however. The nation's capital is the only city without a state or county to turn to for financial support, and thus the city has been proportionally more reliant on its residents--the numbers of whom are rapidly declining--and the federal government for financial backing.

The District of Columbia Financial Responsibility and Management Assistance Act of 1995, signed into law by President Bill Clinton on April 17, 1995, established a financial authority ("control board") to turn around the District's budgetary and managerial shortfalls. Other cities, including New York, Philadelphia and Cleveland, have worked with financial oversight boards to resolve budgetary problems. Among other things, the District's control board is charged with the tasks of overseeing the elimination of budget deficits and cash shortages; ensuring efficient and effective delivery of services; and evaluating the fiscal status and operational efficiency of the District government.

The control board's plan to recommend options for a "more equitable structure" to support those services the District now funds that are normally supported or performed by states and the White House's recently-released proposal for the federal government to take over certain state-like functions are most relevant to this session of the Charter Review Task Force. Congress's role as the constitutionally mandated overseer of the District--in effect, the city's "state"--is used to justify such a reallocation of financial obligations. President Clinton, like many others familiar with the District's woes, asserted that the District's financial problems have in part been caused by a federal government that has "not done as much as we can" to help the city and in part by the reality that the District is "not quite a state, not quite a city, not quite independent, [and] not quite dependent." The Brookings Institution, on January 14, 1997, released a report by Carol O'Cleireacain, visiting fellow and former budget director and finance commissioner of the City of New York, asserting that the federal government should "take on the role of state to the United States' orphaned capital city." O'Cleireacain argues that unlike comparably-sized cities in the United States like Boston, Memphis and Baltimore, which receive 28-38% of their revenues from their states, the District receives no state money and the federal payment, which she put at 19% of FY1995 revenues, is insufficient to cover the city's state-like duties.
 

II. Municipal Spending by Function

Despite calls for the federal government to take over "state-like" functions currently performed by the District, it is important to note that there are no set principles nationwide about what services are performed by state, county, or municipal entities or even whether municipal services elsewhere in the United States are funded wholly or in part by the municipality. Just as Congress has ultimate authority over the District, the states have ultimate authority over their counties and municipalities. States have the power to decide what services the localities perform, set standards for performance, "directly establish the fiscal rules and institutions under which cities operate," provide auditing or fiscal oversight, and set revenue-raising restrictions and freedoms.

As legal creature of their states, cities are subject to state authority in virtually all aspects of city governance--boundaries, political structures, taxation, and the provision of services, especially education and criminal justice. City powers to tax are dependent upon delegation of state authority. About half of the states allow cities to levy some form of sales tax; only a dozen states allow city income taxes. The only significant tax considered to belong to local government is the property tax; even that is levied under state constitutional limitations and statutory controls, and is often subject to state or local referenda.

Even when city governments are obligated to perform duties, states often provide substantial supplements, particularly in the areas of public assistance and health, education, roads, and criminal justice. State aid to cities, like federal aid to the District, however, varies over time. During the era of "new federalism" in the 1980s, for example, "[c]utbacks in federal aid to states and rolling recessions made states effectively poorer and less flexible." States subsequently cut back their aid to cities while also being "unwilling to allow cities greater taxing authority or [relieving] them of some service obligations."

In the past, cities have often spent their largest percentage of revenue on public education, but special district bodies now operate many school systems, leaving some city governments with no direct financial obligations to public education. Moreover, states may further assist the operating budgets of these special districts or counties with state "equalization" grants. Services for city residents are often provided by county governments whose boundaries "may extend beyond city limits, be completely coterminous with those of the city, or even be encompassed by the city." For example, Cook County in Illinois, which includes Chicago, provides a majority of the health and welfare programs for the county's residents and Metropolitan Dade County, which encompasses Miami, governs and administers a wide range of municipal services across the entire county. While some cities operate public hospitals and public libraries, county governments in other jurisdictions oversee these services, often with either level of government receiving substantial state grants for these services. Some cities' municipal functions such as fire protection, water conservation, and parks may be governed by single purpose special districts which may have taxing authority. In addition, regional governing bodies, like Metropolitan Council in the Twin Cities of Minnesota, provide their regions with transit or wastewater services. Furthermore, the fact that many states and local governments "choose to leave the actual provisions of many services to nonprofit agencies or private businesses that carry out publicly funded activities under contract" adds another level to the provision of services in a municipality.

The federal government currently provides a block grant of $660 million to the District in addition to $52 million a year toward the unfunded pension liability handed to the District with home rule in 1975. The federal payment is intended to reimburse the District for congressionally-imposed restrictions on revenue raising including tax exempt land and entities, prohibition on a nonresident income tax, and a building heights limitation. Organizations such as the Rivlin Commission and the Appleseed Foundation--and most recently the Brookings' O'Cleireacain report--have argued that these payments to the District are inadequate given the city's duties, restrictions on revenue raising, and unique burdens as a result of its status as the nation's capital such as providing special police details to the President and diplomats and securing the city as a "venue for a national protest."

In light of these studies and the control board's mandate to balance the city's budget and put the city on sound financial grounding, the control board now plans to look in particular at Medicaid, prisons, mental health care, and roads and bridge maintenance. These high-priced obligations are often financed in part or entirely by states elsewhere in the U.S. In addition, on January 14, 1997, the White House released a "National Capital Revitalization and Self-Government Improvement Plan" for the District under which the federal government would "run the city's prisons, collect D.C. personal income taxes, pay a bigger share of Medicaid costs, repair major problems with roads and bridges," pay for the D.C. court system, and fund the pension plan. In exchange, the federal government would cease making the annual federal payment to the District.
 

III. Control Board Identification of D.C.'s "State-like" Functions
 

Medicaid

Medicaid is the federal grant-in-aid program that provides health care services to low-income individuals. The federal government reimburses all states a minimum of 50% of approved Medicaid expenses. Unlike any other city in the United States, the District pays the maximum 50% local government share for its residents' Medicaid. New York is one of only 13 states that obligates its localities to pay any portion of Medicaid costs, and its 50% local share (25% of total costs) is the second only to the District. The District's Medicaid costs have been escalating due to an increase in the number of recipients and a "significant rise" in the costs for medical services. In 1995, the District spent over $400 million in local funds on Medicaid-related health care, totaling over 8% of its general funds. The reality that one of the major impetuses for New York City's financial collapse in the 1970s was the city's high costs for Medicaid and other health-related expenses makes this area of District expenses a particularly pressing issue. The White House's plan proposes that the federal government pay 70% as opposed to 50% of Medicaid costs as long as the District follows "various HHS suggestions for programmatic improvements."
 

Prisons

Cities across the United States typically operate jails (temporary restraining facilities) as opposed to prisons (long term corrections facilities) which often are funded and/or operated at the county or state level. The District operates both jails and prisons. According to the District of Columbia FY1997 Budget and Financial Plan, the District of Columbia Department of Corrections seeks "to ensure public safety and uphold the public trust by providing for the safe and secure confinement of pre-trial detainees and sentenced prisoners..." The Department of Corrections currently operates eight "secure facilities" in the District, six prisons in Lorton, VA, and eight Community Corrections Centers (halfway houses), five of which are privately managed. In 1995, the District spent almost $243 million (5.5% of total spending) on the Department of Corrections, less than $4 million of which came from federal and private funds. In comparison, Boston contributes only a minor portion of Suffolk County's corrections costs because the state of Massachusetts pays nearly 95% of all corrections costs in the state. Closer to the District, the state of Maryland even funds the Baltimore City jail. The White House plan includes $885 million to the District for prison renovation and construction along with federal takeover of operations of the District's prison facilities at a cost of $891 million over five years.
 

Mental Health

The District has operated the city's mental health services since Saint Elizabeth's Hospital was transferred to the city in 1987. Among the states, mental health care is typically funded by a combination of state and federal funds. The District's Commission of Mental Health oversees the Adult Services program of mental health services to adult residents of D.C.; the Children and Youth Services program for mental health services to children and youth in the District; the Forensic Services program for mental health evaluations and treatment of persons referred through the criminal justice program; the Office of Administration for administrative support for the commission; and, the Executive Management program for guidance and support in the management and administration of the commission. The total cost of these programs to the District was $113.7 million in 1995. The White House plan does not include reference to mental health services.
 

Road and Bridge Maintenance

Road and bridge maintenance in the District falls under the Department of Public Works, the overarching department that includes service delivery (such as trash collection, snow removal, drivers' licenses and vehicle inspection, etc.), and infrastructure maintenance and construction. Road and bridge maintenance is part of the Design, Engineering and Construction Activities (DECA) unit of the department which manages "all permanent components of public space" in the city including design, construction, and maintenance of streets, bridges, highways, tunnels, sidewalks and public buildings. DECA expenditures for 1995 were $33.5 million or 26% of the total Department of Public Works expenditures and are estimated at $43.6 in 1997.

Elsewhere in the United States, states typically finance at least a portion of highway construction and maintenance, and they may earmark funds for specific transportation projects. Some portion of costs are covered by motor fuel taxes and vehicle charges. In Delaware, for example, the state finances all the costs of local road construction and maintenance, while most states share revenues with localities to cover these costs. Despite state and federal aid, many localities use local general funds to build and maintain roads and bridges, however. The White House plan for the District includes $125 million in 1998 for a "new fund that would pay for D.C. road and bridge construction and Metro capital expenses."
 

Taken together, the four areas the control board plans to address account for more than 15% of the District's fiscal year 1995 spending--over $750 million--and more than 15% of fiscal year 1997 projected spending--over $880 million.
 
 

IV. Other Governmental Functions and Intergovernmental Responsibilities
 

Health and Human Services

As mentioned earlier, the District is the only city in the United States that pays for the entire local share of Medicaid; in addition, the District pays the entire local share of AFDC payments along with supporting mental health and subsidizing a city hospital, D.C. General, the latter of which costs the city more than $50 million a year. Elsewhere in the country, states and counties typically play a substantial fiscal role in the delivery of health care services to city residents; "In most places where local revenue is required for welfare expenditures, a county jurisdiction, which often includes some suburbs and thus has a broader tax base than the central city, is responsible for the raising of these revenues." New York City pays 50% of the local share of its welfare costs (compared with the District's 100%). Only nine states require localities to pay a share of AFDC. Chicago, on the other hand, pays no AFDC costs and its health services are paid for by Cook County.

The District's overall health care expenditures make up more than 15% of its total expenditures, over half of which are paid for with local funds. In contrast, Baltimore is estimated to spend 7.8% of its 1997 budget on health care services, of which only 12% is derived from local sources. Boston spends 7.3% of its general funds on health and human services and, in addition to receiving state support for welfare services, received over $25 million in 1996 from the state for various health education and treatment programs.
 

Public Education

Projected 1997 expenditures for the District of Columbia's public schools system is approximately 15% of its budget ($668 million) including building repairs and teacher retirement funds. Nearly 85% of this budget is paid for with locally-raised revenues, although the District did receive an unbudgeted special grant of $12 million from the federal government in 1996 for school repairs. Since 1968, the District schools have been run by an elected Board of Education which operates free from city government oversight, but without independent taxing authority; in other words, the city government pays for the schools, but does not have control over how these funds are spent. The control board recently took over management of the city's schools, granting control to a Chief Executive Officer and a panel of appointed officials; the residual role of the elected Board of the Education has yet to be completely clarified.

Across the United States, education has typically been a local obligation, with cities or special school districts financing the bulk of the education budgets. The balance of education expenses may be in part financed by the state and, within the past 30 years, with federal grant money as well.

Nationally, states have been paying increasingly larger percentages of local school costs, in part because they have constrained local property taxes and in part because local officials have successfully argued that state-mandated education reforms should be paid for by state taxes.

Boston, for example, pays for its public schools with 42.8% ($472 million) of its general funds, of which more than 25% comes from the state. Overall, Massachusetts finances over 46% of elementary and secondary education costs, while neighboring New Hampshire, at the other extreme, pays for only 7%. Other cities--like Austin, Texas and Memphis, Tennessee--do not pay for education at all and instead rely on special school districts which have their own taxing and spending authority. The state of Texas contributes about 7% of Austin Independent School District's funds, while the state of Tennessee contributes approximately 50% of Memphis City Schools' budget. Baltimore city is expected to spend 42.8% of its budget ($874 million) on education, nearly half of which comes from state money.

In general, states, as opposed to cities, support public universities. A few cities play a "small role in higher education," and many cities finance a portion of city community colleges. New York City, for example, formerly funded and managed a university system, but this obligation was turned over to the state during the fiscal crisis in the 1970s. Similarly, Baltimore City used to run Baltimore City Community College (BCCC), but Maryland has fully funded the school since 1990. The District, on the other hand, does fund a university system, the University of the District of Columbia, which includes graduate programs and a law school. Together, these obligations cost the city $88 million in 1995 and are projected to cost $76 million in 1997, although projections are changing on a daily basis.

In addition, the District supports a city library system at a cost of over $20 million a year ; elsewhere in the United States, libraries are often paid for wholly or in part with county and/or state funds.
 

Public Works

Many public works functions, such as garbage collection, street maintenance, and water and sewer treatment are typical municipal obligations although some regional authorities, like the Metropolitan Council in the Twin Cities, operate and pay for wastewater treatment. In addition to paying for and managing typical municipal public works and wastewater treatment, the District also undertakes state and county functions like operation of a Department of Motor Vehicles (issuing licenses, registering cars, etc.) and payment for a portion of the mass transit costs for Metro (WMATA). Total Department of Public Works' costs to the District were $127.2 million in 1995 and are estimated to be $159 million in 1997.

Regional transportation authorities, like the Washington Metropolitan Area Transit Authority, often govern mass transit systems, with local jurisdictions subsidizing the authority based on the "reach of the transit system." The District paid $123 million to WMATA in 1995 and is budgeted to spend over $130 million in 1997, while suburban Maryland will pay $99.3 million and Northern Virginia jurisdictions will pay $89 million in 1997. The majority of these county contributions are reimbursed by their respective states. Nationwide, some regional transit bodies have authority from their states to levy taxes.
 

Public Safety

Public safety, including police, fire and emergency medical services, are typically municipal functions which often take up the largest percentage of city revenues nationwide. In fiscal year 1995, the District spent over $510 million on police, fire and EMS, more than 10% of its total budget and the city is estimated to spend nearly $600 million in 1997, including costs for the retirement funds. In comparison, Baltimore city is estimated to spend almost 15% of its revenues on public safety in 1997, Boston is budgeted for 23.9%, and Austin will spend 47.1%

The states' role in public safety is typically confined to "patrol of state highways, maintaining a central clearinghouse for statistics, data on vehicles (including stolen ones), and criminal information files..." although "special state task forces on organized crime, drugs, and other subjects overlap federal and local responsibilities." Some states, like Maryland for example, also provide grants to "counties and qualifying municipalities to be used exclusively for the purpose of providing adequate police protection."
 

Parks and Recreation

For the most part, maintenance and operation of city parks and recreational facilities have been funded and operated by municipal governing bodies.

...the pattern of responsibilities for recreation and park activities is one of consistent division of federal, state, and local responsibilities. The federal government maintains federally owned wilderness areas and the National Park System... States maintain state park systems... Local governments, including some regional park authorities, maintain another level of parks, with user charge participation confined primarily to golf courses and other more expensive facilities.

In several states, however, counties have taken over municipal responsibilities for certain cultural and athletic facilities like zoos and parks, although this takeover has typically only been done during "severe city fiscal stress and when there are evident spillover effects to suburban residents, as in the case of Detroit." Some community centers receive state and federal education grants as well. The District spent $25.5 million in 1995 and is estimated to spend $33.6 million in 1997, all of which is funded with locally-raised revenues.
 

Judicial System

Unlike most cities in the United States, the District operates a court system by funding a trial court (D.C. Superior Court) and a court of appeals (D.C. Court of Appeals). With the exception of juvenile cases and many misdemeanors, adult criminal cases are prosecuted by the federal government's Office of the U.S. Attorney General. Other cities partially or wholly finance their judicial system, but the fiscal situation is changing. During the 1970s, the New York city court system's funding and administration were "permanently shifted...to the state government" and other states have made similar financial decisions during the past decade. Some courts in the U.S. are funded in part with county money. In 1995, the District spent $33.5 million on the D.C. Court System and $80.5 on the Superior Court and the Court of Appeals, and is estimated to spend, respectively, $33.9 and $87.3 in 1997. At an estimated cost of $129 million in 1998 and $685 million over a five year period, the White House plan proposes that the federal government "take direct responsibility only for funding" of the District courts, allowing the courts to continue to be "self-managed."
 

VI. Conclusion

There are no general rules nationwide regarding which level of government (state, county, or municipal) pays for and operates services for city residents. The intergovernmental division of fiscal and managerial responsibilities varies across the United States. But it is clear that the District's unique role as an entity without a higher county or state entity has meant that the city bears burdens and obligations often ascribed to other levels of government. The control board's examination of four "state-like" duties will likely reach the same conclusion supported by numerous studies and the White House's proposal: the District simply cannot afford to perform all its current obligations without additional financial assistance. The questions the control board and others involved in the city government will need to address thus include:
* Are all the city's current services/obligations essential?
* Can the current programs be cut back in such a way that an acceptable level of service is maintained or must some services be eliminated all together?

• If the District can not afford its current level of service, but these services--such as Medicaid, mental health, etc.--are deemed essential to the city's residents, how will they be funded and who will perform the services?
• Though many people have called for the federal takeover of city services, does this mean that the federal government would simply pay for the services (allowing the District to continue providing them), or would the federal government pay for and administer the programs?
• How will the relationship between the local government and the federal government be altered by fiscal and managerial changes?
• And, most relevant to the Charter Review Task Force, can the current form of government established by the Home Rule Act sustain the new relationship, or is an entirely new structure of government necessary?

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Phone Contacts

Cities of Austin, Baltimore, Boston, District of Columbia, and Memphis Budget Offices

Office of the City Administrator, Washington, D.C.

Office of Congresswoman Eleanor Holmes Norton

Washington Metropolitan Area Transit Authority