The Impact of Tiering and Constraints on the Targeting of Revenue Sharing Aid

GAO examined the targeting efficiency of the Federal intrastate revenue sharing formula to provide Congress with useful information concerning renewal of the Federal Revenue Sharing Program. GAO compared the Federal revenue sharing formulas with New York State's revenue sharing program, which distributes funds to local governments under a completely different set of formulas. Both programs distributed roughly the same amount of aid to local governments in 1975. Both programs have the same objective, to relieve local fiscal pressures. The Federal formula tiers aid to geographic areas (counties) before distributing money to local governments. New York targets aid directly to the local governments. Constraints are placed on the Federal formula on how much aid is distributed to individual local governments, whereas no such constraints bind the State formula. GAO limited its analysis to county governments to ensure that only governments with similar service responsibilities were analyzed. GAO reviewed a measure of a local government's ability to pay for services, based on local levels of per capita income, and a measure of the degree to which local governments attempt to meet their needs through their own resources to determine which accounted for differences in per capita income.

With respect to county governments, GAO found that the Federal intrastate formula rewards governments which are making a high fiscal effort to provide local public services from local revenue sources. Per capita revenue sharing aid was most closely associated with the level of their fiscal effort. Jurisdictions with low per capita income received more aid per person. Federal program targeting was inefficient. Governments with comparable fiscal effort received widely differing levels of revenue sharing aid. New York State rewarded low per capita income jurisdictions irrespective of their level of fiscal effort. It was more consistent than the Federal program in distributing higher amounts of per capita aid to low income jurisdictions. Effort was not explicitly incorporated into the State formula. The State program was more efficient in targeting its aid to county governments. Governments with the same need were more likely to receive equal amounts of per capita revenue sharing aid under the State program than the Federal program. Because the Federal program employed a tiering process allocating aid funds to successively smaller geographic areas rather than distributing aid directly to governments and because there are maximum and minimum constraints on the Federal formula, there is relatively poor targeting of the Federal intrastate formula. The Federal program does distribute more aid dollars than the State program.