More Flexibility Needed in Setting Revenue Sharing Adjustment Reserves

Under the Revenue Sharing Act, the Secretary of the Treasury makes adjustments for under or overpayments discovered after funds have been allocated to participating state governments. To ensure that funds remain available to make these adjustments, the Secretary has established reserve accounts by withholding up to the maximum allowable 0.5 percent of entitlements. GAO reviewed the size of the Revenue Sharing adjustment reserve fund to determine if the Secretary has withheld only the funds necessary to cover expected claims.

The Revenue Sharing adjustment reserves for most states are substantially larger than necessary. However, in a few states, because of larger than normal claims, they are or have been too low. The current imbalance between the size of the reserve accounts and the size of past claims has occurred for the following reasons. The 0.5 percent ceiling on the amount the Treasury can withhold inhibits its ability to make large adjustments when necessary. Also, the Secretary withholds the maximum amount for each state each time funds are withheld, although most states have required less than one-tenth of this amount for adjustments and the act allows smaller withholdings. GAO believes that giving the Secretary greater flexibility in varying reserve withholdings by raising the present ceiling would minimize the need for larger reserves. The Secretary could greatly lower reserves by basing them on each respective state's normal claim. Increasing the ceiling would allow local governments to use a greater portion of their revenue sharing funds when they become entitled, instead of holding the funds in non-interest-bearing accounts. Even without legislative amendment, however, the Secretary can reduce reserve levels by more flexibly managing the reserves according to the differing needs of individual states.

Recommendations

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