BACKGROUND PAPER

Federal Constraints

on State and Local

Government Actions:

April 1979

Congress of the United States

Congressional Budget Office
FEDERAL CONSTRAINTS

ON STATE AND LOCAL GOVERNMENT ACTIONS

The Congress of the United States

Congressional Budget Office
For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402
PREFACE

In recent years, state and local government officials have

expressed concern over the extent to which federal laws and

regulations constrain their actions and impose costs on their

jurisdictions. To assist the House Budget Committee Task Force

on State and Local Governments in evaluating these concerns,

Representatives Elizabeth Holtzman and Norman Y. Mineta requested the Congressional Budget Office to prepare this study.

The paper discusses different types of constraints and assesses

what might be involved in measuring their costs and benefits.

It also outlines some policy options that the Congress might

consider if there is a consensus that intergovernmental constraints do pose a problem. In keeping with CBO's mandate to

provide objective analysis, this paper makes no recommendations.

Federal Constraints on State and Local Governments was

written by Peggy L. Cuciti of CBO's Human Resources and Community Development Division under the supervision of Robert D.

Reischauer and David S. Mundel. Several other people, both at

CBO and elsewhere, contributed to this report. In particular,

the author wishes to thank Catherine Lovell and her associates

at the University of California-Riverside who are doing research

on the effects of federal and state mandates on local governments. They generously shared their work in progress and helped

clarify many issues. Other people who provided valuable

criticism include Stan Collender, Alfred Fitt, Richard Gabler,

Sophie Korczyk, Martin Levine, Robert Levine, Dave O'Neill, and

Charles Seagrave. The paper was typed by Jill Bury and edited

by Johanna Zacharias.

Alice M. Rivlin

Director

March 1979

CONTENTS

Page

PREFACE iii

SUMMARY vii

CHAPTER I. INTRODUCTION 1

The Federal Perspective 1

Federal Constraints as an Issue 2

CHAPTER II. TYPES OF CONSTRAINTS 5

Mandates 6

Contractual Obligations 9

Conditions of Aid 10

Other Contractual Obligations 17

Conclusions 18

CHAPTER III. ASSESSING COSTS AND BENEFITS 19

Types of Costs and Benefits 20

Example of a Cost/Benefit Analysis 26

CHAPTER IV. POLICY OPTIONS 31

State and Local Impact Analyses 32

Increased Congressional Oversight 35

Improving Grants Management 37

Grants Consolidation 38

Fiscal Reimbursement 40

Conclusion 47

SUMMARY

FEDERAL CONSTRAINTS AS AN ISSUE

The constraints that federal laws and regulations impose on

state and local government actions are a subject of concern to

both state and local officials and to Members of Congress. As

federal financial support of state and local functions has

increased, and as federal regulatory policy has expanded, so too

has the number of federal constraints. Critics contend that

certain constraints impose excessive costs and require actions

that are counterproductive to the achievement of federal programs' goals. They also argue that the extensive use of constraints compromises the principles of local self-governance and

political accountability.

The counter argument is that constraints are necessary to

further important national social and economic goals. While

contending that most regulations are appropriate given the expansion in federal responsibilities, some constraints might

nevertheless be criticized for being ineffective in furthering

federal goals.

TYPES OF CONSTRAINTS

There are two general types of federal constraints on state

and local action—mandates and contractual obligations:

o Mandates, the more coercive of the two types, are direct

federal orders that state and local governments must

follow. Most mandates are the result of court decisions

interpreting the Constitution; for example, directives

to provide legal counsel to the indigent, or orders to

desegregate schools. Some, but not many, mandates

derive directly from federal law. Examples include the

various laws prohibiting discrimination in employment,

and the Safe Drinking Water Act of 1974, requiring that

drinking water be tested for impurities and that

corrective steps be taken whenever necessary.

Vll
o Contractual obligations include constraints imposed as a

result of agreements between the federal government and

state and local governments. Such agreements are

generally prompted by the availability of federal grants

in aid. Conditions are specified as prerequisites for

program participation. Some conditions are "program

specific"; that is, they specify when and how money for

a certain program is to be spent to insure consistency

with stated objectives. Other conditions are generally

applicable to grant programs; their purpose is to insure

that all federally funded activities are consistent with

broad national goals, such as nondiscrimination and environmental protection. Not all contractual obligations

stem from grant-in-aid programs. Some, for example,

arise as a result of federal regulatory programs. For

example, under the Occupational Safety and Health program, states have the option of assuming administrative

responsibility, provided they agree to abide by certain

federal standards and guidelines.

ANALYSIS OF COSTS AND BENEFITS

Federal constraints involve costs, some of which fall on

state and local governments. At present, little is known about

the magnitude or distribution of these costs, although interest

in developing an aggregate cost figure is great. Such an estimate would be very difficult to produce, since it would involve

compiling a full inventory of constraints, as well as developing

acceptable methodologies for estimating costs. Furthermore, the

usefulness of such an aggregate figure would be limited, since

decisions are made with respect to specific laws and regulations. Moreover, a judgment about whether or not these costs

are excessive could not be made without a corresponding analysis

of benefits and a review of possible alternatives.

Estimating the state and local costs and benefits resulting

from specific laws or regulations is difficult. Many different

types of effects—some of which are not readily measured—have

to be considered. For example, analyses ought to take into

account private as well as public, indirect as well as direct,

intangible as well as tangible, and continuing as well as onetime costs and benefits.

Vlll
Furthermore, incremental costs should be distinguished fi^m

total costs. Only those costs and benefits associated with

actions that would not have occurred were there no federal

intervention should be attributed to a mandate or to a condition

of aid. Since there is overlap in the constituencies of policymakers at the federal, state, and local levels, it is not surprising that many constraints require actions that at least some

state and local governments would have taken anyway.

Total and incremental costs may also differ, because of a

redundancy in federal requirements. For example, as a condition

for receiving federal aid, a state or locality may be required

to prove compliance with an already existing federal law. Only

those costs and benefits associated with a change in compliance

can be attributed to the newer program.

The distribution of effects among jurisdictions is another

consideration in the analysis of costs and benefits stemming

from intergovernmental constraints. Analyses based on data

aggregated at the national level may prove insufficient to the

federal policymaker who wants to know not only whether a given

course of action makes sense overall, but also whether it

imposes unacceptably heavy burdens on specific jurisdictions.

POLICY OPTIONS

Critics who contend that intergovernmental constraints pose

a problem want the Congress and the Executive Branch to consider

changes in decisionmaking procedures and policies that would

lower the number of constraints, increase their efficacy, and

lighten the financial burdens they impose. There are several

approaches the Congress might consider in response to this

issue.

The first alternative is to take no explicit action, relying instead on the political process to prevent or change laws

or regulations that impose excessive burdens on state and local

governments.

A second course that the Congress might consider is to

alter decisionmaking processes so that concerns about constraints on state and local governments are more likely to be

addressed. Possible changes include:

IX

43-127 O - 79 - 2
o Requiring that analyses of state and local impact be

undertaken before the Executive or Legislative Branch

makes major decisions. Such a stipulation would complement recent executive orders requiring agencies to prepare urban and community impact analyses for major program changes and analysis of economic consequences—

including effects on state and local governments—for

all proposed regulations. State and local impact analyses would also supplement the information on the federal

costs of most bills that the Congressional Budget Office

now regularly gives to the Congress.

o Increasing Congressional oversight over agency rule

making. Since many constraints are imposed as part of

regulation, careful scrutiny of agency rule making could

result in fewer problematic constraints.

A third approach would be for the Congress to attempt to

lower the number of constraints by changing the structure and

substance of federal policy. Specifically, it might consider

the following:

o Reforming the administration of grant programs. Although steps have been taken to improve the management

of grant programs, the number and complexity of requirements could still be reduced by -better coordination and

by more standardization of procedures among different

programs and agencies.

o Consolidating existing grant programs or relying more on

block grants as opposed to categorical grants. At present, there are more than 440 categorical grant programs, many of which are very narrow in scope. Administration would be smoother if grants with similar purposes were consolidated. If this were done, however,

the federal government's ability to set priorities would

be weakened.

o Establishing a policy of fiscal reimbursement for some

or all of the costs that federal constraints impose on

state and local governments. Proponents of this approach argue that if Congress were required to appropriate funds, it might limit the number of requirements

to those of most importance and proven effectiveness.
CHAPTER I. INTRODUCTION

In recent years, state and local officials have been

troubled by the degree to which their actions are dictated or

constrained by decisions made at the federal level. They see

the system of regulation that has developed as costly, inefficient, and inflationary. Their concerns parallel many of those

of private businessmen.

In addition, there is the fear that two important principles—local self-governance and political accountability—are

both being undermined by federal actions. Local resources and

energy are finite. When resources are allocated to follow

dictates from higher authorities, they are diverted from locally

identified needs and priorities. The principle of political

accountability may be compromised inasmuch as state and local

officials are identified with—and held responsible at the polls

for—actions over which they have little control. Federal

officials, meanwhile, may escape the political onus of the

unpopular actions they order.

THE FEDERAL PERSPECTIVE

Most federal officials would agree that some regulations

are ineffective or too costly. At the same time, however, they

would argue that most regulations are necessary for implementing

federal programs and for achieving national policy objectives.

Many of the regulations" imposed on state and local governments are part of federal grant programs that have been enacted

over the years in response to proven problems or needs. Because

federal lawmakers are accountable to their own constituents,

they must take steps to insure that federal funds are spent for

the purposes intended. When state and local governments choose

to participate in a grant program, they do so with the knowledge

that their actions will be subject to federal review and regulation. Continued participation by state and local governments

suggests that, regardless of regulation, they perceive that the

programs' benefits outweigh their costs.

"T"
Some intergovernmental constraints stem from federal regulatory policies designed to end practices determined to have

high social costs. Most such regulations are directed toward

the private sector: private businesses are prevented by federal

law from engaging in unfair labor practices; they must meet

safety standards for work places, adopt pollution control technology, and so forth. Occasionally, regulatory policies also

dictate or constrain state and local government actions. Some

people argue that, to the extent that state and local governments engage in practices similar to those of businesses, their

exclusion from federal regulation raises questions of equity and

prevents the full achievement of national policy objectives.

Other constraints have been imposed because state and local

governments have failed to fulfill their responsibilities under

the Constitution. Both the federal courts and the Congress have

acted to ensure that individuals' Constitutional protections are

honored when state and local governments serve as employers, law

protectors, and providers of services.

FEDERAL CONSTRAINTS AS AN ISSUE

The major reasons why intergovernmental constraints have

emerged as an issue is that, over time, federal regulations have

increased in number and complexity. As the federal government

has expanded its role as social and economic problem solver, it

has established numerous new programs and a concomitant number

of regulations. Since many of the problems new programs address

are inherently technical and complex (for example, environmental

pollution), so too must be the accompanying regulations. Furthermore, as programs mature and administrators face diverse and

unforseen circumstances, regulations tend to multiply.

Contributing to the concern over federal constraints is the

increasing number of governments affected. Many of the newer

grant programs involve local governments that had never before

participated in the federal grant system. The burden of compliance with regulations may be greater in these smaller jurisdictions, which have less specialized staffs and less experience

in dealing with federal officials.

Judicial actions have also contributed to the emergence of

the issue. Besides handing down some controversial rulings

based on the Constitution, the courts have assumed an important
role as enforcers of statutory and administrative law. This has

occurred because citizen and other interest groups have increasingly resorted to litigation as a way to change government

behavior. For example, the discretion of welfare program administrators has been reduced and the welfare rolls expanded as a

result of successful litigation by welfare rights organizations. Public works projects have been halted or delayed by

court orders following the discovery that procedures for environmental review had not been carried out.

As concern over inflation has mounted, attention has been

drawn to all possible causes, including federal regulation. Although the regulation of private sector activity is more often

cited, federal constraints on state and local governments also

can be inflationary. If the federal government requires actions

that are inefficient methods of achieving goals, inflation is a

certain outcome. Regulations resulting in different or better

state and local services could also cause the cost of services

to increase, but these changes would not necessarily be

inflationary.

The salience of the issue of intergovernmental constraints

goes beyond these developments, however. To state and local

officials, certain constraints seem more onerous in times of

budgetary stringency than they do in periods of budgetary expansion. Inflation, recession, taxpayer revolts, and tax and

expenditure limitation laws have all combined to force state and

local officials to reexamine their budgets. As a result of

these reexaminations, they realize the degree to which their

options are constrained and their costs increased by requirements imposed by higher levels of government.

While intergovernmental constraints are often discussed by

public officials and have been the subject of resolutions by

their organizations, there is little common understanding of the

range of federal actions being disputed or of the cost burden.

This paper is a preliminary step in sorting out the issues. It

is purely conceptual, and it provides neither an inventory of

intergovernmental constraints nor an estimate of associated

costs. The study has four objectives: to categorize the types

of constraints (Chapter II); to discuss types of costs and benefits that should be considered in deciding whether constraints

should be adopted or continued (Chapter III); and to examine

various approaches the Congress might take in dealing with the

issue of intergovernmental constraints (Chapter IV).

CHAPTER II. TYPES OF CONSTRAINTS

The different types of federal requirements that directly

affect state and local governments and that involve some degree

of coercion are examined in this chapter. These requirements

fall into two categories—mandates and contractual obligations:

o Mandates are formal orders issued by the federal government, which is legally the higher government and is thus

entitled to give orders under certain circumstances.

State and local governments have little option but to

comply with federal orders.

o Contractual obligations are conditional; they come about

when state and local governments enter into binding

agreements with the federal government. Most contractual obligations are associated with federal grant

programs.

According to the Constitution, there are limitations on the

• right of the federal government to mandate the actions of state

and local governments. Thus most federal requirements stem from

contractual agreements. Compared to the federal government,

states are much less restricted in their behavior toward local

governments. As a result, state laws include many nore direct

orders.l It should be noted, however, that numerous state

mandates have their origin in federal constraints imposed on the

states by way of the grant-in-aid system.

For a full discussion of state mandates, see the Advisory

Commission on Intergovernmental Relations, State Mandating

of Local Expenditures, (A-67, July 1978). See also, State

Limitations on Local Taxes and Expenditures, (Rept. A-64,

February 1977).
MANDATES

Direct orders, in the form of mandates, may come from any

of the three branches of the federal government. They may be

based either on federal statutes or directly on the Constitution. Most mandates affect only the private sector, so they are

outside the purview of this discussion. Some, however, are

directed exclusively toward state and local governments, and

others apply to the public and private sectors simultaneously.

Mandates Based on Court Orders

Most federal mandates that apply only to state and local

governments stem from judicial interpretation of the Constitution, in particular, the Bill of Rights and the 14th Amendment.

A wide range of state and local activities have been affected by

such rulings. For example, the Supreme Court has ordered that

electoral districts be redrawn, schools be desegregated, free

counsel be provided for indigents, juvenile court procedures be

reformed, and prisons and mental institutions be upgraded.

While direct court orders are issued to certain specific

jurisdictions named in adjudicated cases, the principles articulated in court opinions often have general applicability.

Jurisdictions not named in the cases are in effect mandated to

change their behavior, too, since not to do so would expose them

to court challenge. For example, as a result of Brown v. Board

of Education, the court ordered Topeka, Kansas, to desegregate

its schools. The impact of the Brown decision, however, was

very far reaching: school systems across tMe country were

signaled that the time had come to end de jure segregation of

schools.

Mandates Based on Federal Statute

The Congress often attempts to achieve social and economic

objectives by using its regulatory powers. Laws are passed and

administrative regulations are promulgated proscribing certain

actions and prescribing others. Mostly, these mandates have

been directed toward the private sector. The scope of some

social and economic regulatory policy, however, includes state

and local government actions.
Most mandates affecting state and local governments are

found in laws concerning either the environment or civil rights.

A number of examples follow:

o The Clean Air Amendments of 1970 (Public Law 91-604) require states to develop plans acceptable to the Environmental Protection Administration (EPA) to attain federal

air-quality standards. The EPA can require states to

plan changes in state transportation policies (for

example, by giving additional support to mass transit)

as well as to regulate the pollution-creating activities

of private persons (by establishing, for example,

emission-control requirements and inspection programs

for private cars).

o The Federal Water Pollution Control Act of 1972 (Public

Law 92-500) requires state and local governments to

adopt better methods of treating sewage in order to curb

the discharge of pollutants.

o The Safe Drinking Water Act of 1974 (Public Law 93-523)

requires all suppliers of drinking water (including, but

not limited to, publicly owned systems) to test their

water regularly for impurities. If "maximum contaminant

levels" are exceeded, acceptable treatment processes

must be introduced or another source of potable water

used.

o The Equal Employment Opportunity Act of 1972 (Public Law

92-261) prohibits state and local governments from discriminating in their employment practices on the basis

of race, color, religion, sex, or national origin.

o The Age Discrimination in Employment Act of 1967 (Public

Law 90-202) prohibits discrimination in employment practices on the basis of age.

The constitutionality of efforts to regulate state and

local actions has recently been called into question. Authority

to regulate both the private and public sectors stems from the

Commerce Clause, the Necessary and Proper Clause, and the 14th

43-127 O - 79 - 3
Amendment of the Constitution.^ Since the 1930s, the Supreme

Court has consistently upheld Congressional regulation of private business, including, for example, laws prohibiting discrimination in employment, housing, and public facilities;

statutes establishing minimum wages and other fair labor practices, and so forth. While for political reasons, the Congress

has rarely passed laws mandating state and local government

activities, until recently, it was widely assumed to have the

legal authority to do so. In 1976, however, the Supreme Court

ruled in National League of Cities v. Usery that the 10th Amendment guarantee of state sovereignty implies certain restrictions

on Commerce Clause powers as applied to state and local governments. Specifically, the Court invalidated the 1974 amendments

to the Fair Labor Standards Act (Public Law 93-259) that extended minimum wage and overtime pay protection—rights that had

long been enjoyed by employees in the private sector—to nonsupervisory state and local government employees. The Court

ruled that the extension of these provisions impermissably

interfered with the integral functions of state and local

governments and threatened their "separate and independent

existence."3

2. The "Commerce Clause" and "Necessary and Proper Clause" are

both part of Article I, Section 8 of the Constitution. It

reads, "The Congress shall have the power . . . [3] to

regulate commerce with foreign nations, and among the

several states and with the Indian tribes . . . [18] to

make all laws which shall be necessary and proper for

carrying into execution the foregoing powers and all powers

vested by this Constitution. ..." Additional authority

is granted in the 14th Amendment. Section 1 reads: "...

No state shall make or enforce any law which shall abridge

the privileges or immunities of citizens of the United

States; nor shall any state deprive any person of life,

liberty or property without due process of law; nor deny to

any person within its jurisdiction the equal protection of

the laws." Section 5 reads: "... the Congress shall

have power to enforce, by appropriate legislation, the

provisions of this article."

3. National League of Cities v. Usery, 426 U.S. 833 (1976).
How broadly the legal reasoning articulated in the National

League of Cities decision will be applied is as yet unclear.

Clarification is required on two major issues. First, what is

the range of activities that are crucial to the states' "independent existence" and that must be protected from Congressional

action? And second, is the protection offered absolute or only

partial—subject to a balancing of the federal interest in the

objective to be achieved by the regulation and the state's

interest in freedom of action?^

Although the National League of Cities decision suggests

limits on the Congress1 authority to issue direct orders to

state and local governments, the decision does not preclude the

use of other, less coercive means to achieve similar ends. As

discussed in the next section, the Congress can offer inducements of various sorts to get state and local governments to

change their behavior.

CONTRACTUAL OBLIGATIONS

Numerous intergovernmental constraints have their bases in

contractual relationships. When the Congress determines that a

national policy objective can be furthered by some change in

state or local behavior, it may seek voluntary cooperation. In

effect, the federal government proposes to enter into a contractual arrangement: it offers some benefit (generally, but

4. Major questions regarding the scope and implications of

this decision remain for several reasons. First, while

five Justices were in agreement on the outcome in the

National League of Cities case, there did not appear to be

a consensus regarding the legal standard; only four Justices signed the Court opinion with a fifth filing a

separate concurring opinion. Second, the decision is a

clear departure from past reasoning by the Court (for

example, Maryland v. Wirtz 392US183 [1968]), so there are

few precedents to draw on for clarification. And finally,

the court has not had occasion since the National League of

Cities decision to decide whether the principles enunciated

in that case affect statutory mandates other than those for

minimum wage and overtime pay. The lower courts have tended to decide related cases on narrower grounds and have

not extended the reach of the case to other areas.
not exclusively, in the form of financial assistance), in return

for state and local government agreement to act in a given way

subject to federal regulation. For numerous historical and

political reasons, intergovernmental constraints stemming from

voluntary agreements are more common than are federal mandates.

Federal grant programs are the source of most contractual

obligations. Occasionally, however, other circumstances will

prompt such agreements imposing requirements on both parties.

These are discussed briefly following the section on conditions

of aid.

CONDITIONS OF AID

Federal grants are made available to state or local

governments contingent on the potential grantees' willingness to

implement certain programs and/or to meet conditions specified

in federal law or in administrative regulations.

Voluntary or Mandatory?

Although constraints that are imposed as conditions of aid

technically are incurred voluntarily, they may, for a variety of

reasons, seem mandatory from the perspective of state or local

officials. This is the case for the following three reasons:

o The choice to participate in the federal program may be

made by state officials, but the burden of administering

the program in accordance with federal regulations falls

on local governments. For example, Aid to Families with

Dependent Children (AFDC) is a grant program available

to states. Yet in 18 states, local government agencies

are responsible for administering the program. The

regulations guiding local administrators come from their

state governments, but many have their source in federal

regulations.

o Conditions of aid may have changed since the decision to

participate was originally made. While participation

remains voluntary, state and local officials may believe

that, despite the change in regulations, they have no

option but to continue participation, since constituents rely on the service provided. Since it is not

10
feasible for states to assume the federal share of program costs, regulations imposed after a program is

underway are perceived as tantamount to mandates. The

1976 amendments to the Unemployment Insurance (UI) law

offer an example. In order for states to continue to

qualify for grants for administration and for employers

within the state to continue to receive a federal tax

credit for UI taxes paid to the state, coverage must be

extended to all public employees. The costs of noncompliance are perceived as beting so high as to make the

change in regulation seem coercive.

Current constraints may stem from decisions made several

years earlier. For example, in order to receive federal

aid for the construction of a highway, a state must

agree to keep the road up to federal highway safety

standards. Decisions made as long ago as 20 years thus

constrain the budgetary choices available to present day

state and local officials.

Program-Specific Versus Generally Applicable Grant Requirements

Certain grant program regulations are described as

"program-specific," meaning that they apply to a single program

and are intended to guide program administration in ways that

federal officials deem best for achieving that program's goals.

Other regulations are general in that they apply to many grant

programs and are designed to further national policy goals more

or less independent of specific program goals. The two types of

requirements described—program-specific or general—represent

polar opposites, and many program requirements fall somewhere

along the continuum between the two. For the sake of discussion, however, various program requirements are classified

here as either program-specific or general.

Most aid requirements are program-specific, and these are

of two sorts: programmatic and procedural. Programmatic requirements specify the scope, quality, or quantity of the service to be provided with the program money. For example, medicaid regulations specify and describe a certain eligible population (all AFDC and Supplemental Security Income recipients) and

kinds of services to be provided, (for example, inpatient hospital care, physician services, laboratory and X-ray charges,

and so forth). Procedural requirements dictate some aspects of

11
how the programs are to be administered. The most common procedural requirements relate to planning, reporting, and fiscal

management. For example, Gteneral Revenue Sharing (GRS) recipients are required to report annually to the Department of the

Treasury on how they use their GRS funds. They must also have

an outside audit done according to generally acceptable auditing

standards once every three years.

Program-specific regulations are often objected to on

grounds that they are cumbersome, costly, and inefficent. State

and local officials argue that conditions are so diverse

that no single set of regulations can be appropriate everywhere.

On the other hand, if an effort is made to write regulations

applicable to every set of circumstances, the system becomes so

complex as to be unworkable. State and local officials also

argue that the problem is exacerbated by lack of coordination

among federal agencies and by a tendency to write regulations

that are more concerned with how a program is to be run rather

than with what is accomplished.5

Sometimes federal regulations draw complaints on grounds

that they amount to inappropriate extensions of federal authority. Most people would agree that the federal government has a

legitimate interest in how federal funds are spent and that

regulations directed toward that end are acceptable. But when

regulations are written to further federal goals by directing

state or local actions that may be related in function but that

are otherwise independent of the grant-aided activity, state and

local officials object. The following are some examples:

o The Land and Water Conservation Act includes a provision

that no land purchased by the state with federal funds

can be used for anything other than recreation without

the consent of the Secretary of the Interior. This provision has been interpreted as meaning that if federal

funds are used to purchase a 10-acre parcel of land to

be added to a several-hundred-acre state forest, then

5. See National Governors Conference, Federal Roadblocks to

Efficient State Government, Vol. 1, February 1977, pp. 1-8

and pp. 13-19.

12
the whole state forest comes under the rules of the

Bureau of Outdoor Recreation.^

o The 1976 amendments to the Unemployment Insurance

Compensation Act make the federal tax credit for private

employees' contributions to state unemployment insurance

funds and the state governments' participation in grants

for administration contingent upon the extension of unemployment insurance to state and local employees.

o The National Health Planning and Resources Development

Act of 1974 makes receipt of federal health grants contingent on the establishment of health planning agencies

that administer "certificate of need" programs, regulating decisions by hospitals and nursing homes to expand

facilities or to purchase major new equipment.

Some conditions of aid have little to do with the specific

purposes or objectives of the programs to which they are attached. On the contrary, in an effort to further broad national

policy objectives, such as environmental protection or nondiscrimination, generally applicable grant requirements are put in

place. The objectives are deemed sufficiently important to disallow federal support of any project that would interfere with

their achievement. Generally applicable requirements are an

important means of insuring consistency with federal policy.

For example, the general environmental review requirement prevents the federal government from doing more harm to the environment with a local public works grant than it does to help

it through a conservation program.

Generally applicable grant requirements are put into effect

in two ways. Separate laws may be passed making a requirement applicable to all grant programs across the board.

Title VI of the Civil Rights Act of 1964 (Public Law 88-352),

which prohibits discrimination in any program or activity

receiving federal financial assistance, is an example. Alternatively, the requirement may be appended to each statute authorizing a grant program. For example, most statutes authorizing

grant programs for construction contain a clause invoking the

6. See National Governors Conference, Federal Roadblocks to

Efficient State Government, Vol. 1, February 1977, p. 11.

13
Davis-Bacon Act, which requires that all laborers employed on a

federally funded project be paid at rates not lower than those

being paid on private construction in the same locality.

In a major study of the federal grant system, the Advisory

Commission on Intergovernmental Relations (ACIR) identified

several groups of general policy requirements.' Several of

these categories are described in the following paragraphs:

o Nond iscr imination. Mandated prohibitions against discrimination in employment are supported by grant-in-aid

regulations prohibiting the use of federal funds for

discriminatory practices. Title VI of the Civil Rights

Act of 1964 offers the most general protection against

racial bias. It states that "no person in the U.S.

shall on the ground of race, color or national origin,

be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any

program or activity receiving federal financial assistance." Similar protection has been accorded to the

handicapped and to the aged.** The provisions regarding handicapped persons are particularly controversial,

since compliance can involve considerable outlays of

money to modify existing structures in order to accommodate handicapped persons. Although sex discrimination

has not been prohibited in federal aid programs on an

across-the-board basis, provisions have been appended to

a number of the statutes authorizing specific programs.

7. See Chapter 7, in ACIR "Generally Applicable National

Policy Requirements," Categorical Grants; Their Role and

Design, (Report A-52, 1978).

8. Section 504 of the Rehabilitation Services Act of 1973

(Public Law 93-112) states that "No otherwise qualified

handicapped individual in the U.S. shall, soley by reason

of his handicap, be excluded from participation in, be

denied the benefits of, or be subjected to discrimination

under any program or activity receiving Federal financial

assistance." The Age Discrimination Act of 1975 (Public

Law 94-135), using similar language, prohibits discrimination based on age.

14
o Environmental Protection. The National Environmental

Policy Act of 1969 (Public Law 91-190) requires that all

financial assistance programs, including both loans and

grants, be reviewed to determine whether they will have

a "significant impact" on the environment. A statement

of the anticipated environmental impact must be prepared

before the proposal can be funded. Specific things to

be considered in the review process are stated in

several laws and executive orders. These include the

effects on air and water quality, on fish, wildlife, and

endangered species, on "wild and scenic" rivers, on

historic and archeological sites, and so forth.

o Relocation and Property Acquisition. The Uniform Relocation Assistance and Real Property Acquisition Policies

Act of 1970 requires that anyone displaced as a result

of a federally funded activity be compensated fairly.

The law and its regulations set standards governing the

acquisition of property and the benefits and services to

be provided to displaced residents.

o Labor and Property Procurement Standards. Two laws with

general applicability regarding the use of grant funds

are the Davis-Bacon Act of 1931 and the Work Hours Act

of 1962. As written, the Davis-Bacon law required that

workers on federal construction projects be paid at

locally prevailing wage rates. Its provisions have now

been extended to state and local government construction

projects that are funded by the federal government under

any of 60 different grant programs. The Work Hours Act

specifies that employees carrying out federally funded

activities must be paid overtime rates for hours worked

in excess of eight-hour days and 40-hour work weeks.

The Federal Procurement Policy Act of 1974 allows

federal regulation of the procurement of services and

goods other than real property using federal grant

funds, but to date no generally applicable regulations

have been issued. "Buy America" provisions, however,

which currently constrain federal government purchases

to domestically produced raw and manufactured materials,

have been extended to four large federal grant programs

during the past two years.

15

43-127 O - 79 - 4
o Citizen Participation. Requirements for citizen participation in the implementation of grant-aided programs

are increasingly common, though the exact stipulations

vary from program to program.

Conditions of aid designed to further broad national policy

goals have been objected to on several grounds. The major complaint is that they divert resources away from—and thereby hinder the achievement of—the primary goals of grant programs.

General policy requirements are often imposed without any increases in program funding. To the extent that these requirements are costly to implement, resources are either diverted

from program operations or an additional commitment of state/

local revenues is required. For example, the requirement

for environmental review is likely to increase the costs of any

project to which it is applied. It costs something to perform

environmental impact analyses. Furthermore, if a project is

delayed or modified to meet environmental objections, its costs

are likely to increase. So long as appropriations are fixed,

added costs may mean fewer projects can be undertaken and that

specific program goals (for example, improved transportation)

would be sacrificed in favor of environmental considerations.

Another criticism lodged against generally applicable regulations is that they may not be cost-effective. State and local

officials dispute whether the means set forth by the federal

government for the achievement of national policy objectives are

the most efficient ones available. For example, some critics

have argued that public transportation is better made available

to the handicapped by means; of taxi vouchers or some other form

of personalized service than by adapting existing buses and subways, as is now proposed by the Department of Transportaton.^

Some generally applicable regulations are disputed on

grounds that they further goals that the grant recipients care

little about achieving. For example, the Davis-Bacon Act

requirement that prevailing wage rates be paid to workers on

grant-funded projects is perceived by many state and local

9. Department of Transportation, "Nondiscrimination on the

Basis of Handicap, Federally Assisted Programs and Activities; Notice of Proposed Rulemaking," Federal Register,

June 8, 1978, Part V.

16
officials as doing little more than increasing the power of

unions in the construction trades. Some officials object to

incurring costs that further this goal.

OTHER CONTRACTUAL OBLIGATIONS

State and local governments sometimes enter into agreements

with the federal government for reasons other than the availability of financial aid. These agreements vary in terms of the

benefits derived and the requirements imposed. Some examples

are discussed below:

o Social Security coverage. Participation in the Social

Security system is mandatory for private employers, but

it is optional for public employers. At present, nearly

9.5 million, or 75 percent, of state and local employees

have Social Security coverage under 50 state agreements.

Wherever there are agreements, state and local governments and their employees are subject to requirements

governing taxation and benefits.

o Occupational Safety and Health. In 1970, to help curtail work-related injuries and illnesses, the Congress

authorized the establishment of safety standards in private places of business. In general, enforcement of

these standards is a federal responsibility. The law

provides for intergovernmental agreements, however,

whereby states would assume responsibility for the

administration of health and safety standards. A condition of any such agreement is the willingness of states

to extend equivalent protection to public employees

within the state. At present, 21 states have chosen the

state-enforcement option.10

10. When states assume responsibility for administering Occupational Safety and Health Administration (OSHA) standards,

they receive small grants covering part of the costs. One

state in addition to the 21 cited above administers an OSHA

program for public employees but leaves administration of

the private sector program to the federal government.

17
CONCLUSIONS

Of the two types of federal constraints discussed in this

chapter—mandates and contractual obligations—the former are

the more coercive. They are less of an issue, however, since

not so many of them exist, and of those that do, many are beyond

the control of the Congress. Of greater concern are constraints

originating in contractual obligations, particularly those that

are conditions of receiving federal financial aid.

18
CHAPTER III. ASSESSING COSTS AND BENEFITS

The total costs associated with federal constraints—particularly that portion of costs not borne by the federal government—are matters of widespread interest. At present, no estimate of total costs exists, and it is not clear that one could

be produced. The difficulties of compiling an inventory of constraints and of estimating the costs of compliance for all state

and local governments are formidable.1

Even if an estimate of total costs were available, its usefulness to federal policymakers is uncertain. This is the case

for several reasons:

o Costs considered without regard to benefits offer little

basis for evaluation. If federal constraints are a

problem, it is not because they are costly per se

but rather because they are costly relative to the

benefits they yield or relative to the benefits that

other uses of the same money could yield.

o Aggregate costs give little guidance to policymakers who

must make decisions on specific laws or regulations.

Even if the total costs imposed by federal constraints

were found to be too high, more information would be

needed to know what policy changes would correct the

problem. In other words, an estimate of total costs

would only be useful if it were backed up by an estimate

of costs for each federal mandate or condition of aid.

A major research effort funded by the National Science

Foundation is currently underway in the School of Administration, University of California-Riverside. The study's

aims are to inventory federal and state constraints affecting local governments and to develop a methodology for

estimating the costs associated with these constraints. The

completed study will also contain preliminary cost

estimates.

19
o Aggregate costs provide little information regarding the

burden inposed on specific types or levels of government. Costs are not distributed evenly among state and

local governments. A situation that seems satisfactory

or beneficial for state and local governments in general

may nevertheless be problematic for certain specific

governments. Focusing on aggregate costs would reveal

nothing about particular jurisdictions' problems.

Although the utility of an estimate of total costs is uncertain, knowing the effects of specific laws or regulations on

state and local governments would be useful to federal policymakers. Judgments regarding equity and efficiency would be

facilitated if decisionmakers knew the magnitude of the costs

and benefits inposed, how the costs and benefits are distributed

among states and different types of local governments (for example, cities and counties), and whether they compare favorably

with what could be achieved by alternative actions.

This chapter discusses the various types of costs and benefits that ought to be considered when any government action is

evaluated. In addition, it examines the particular conceptual

and measurement difficulties that arise when intergovernmental

constraints are at issue.^

TYPES OF COSTS AND BENEFITS

Public and Private Costs and Benefits. Intergovernmental

constraints, by definition, have as their primary goal a change

in state and local government behavior. Government actions

involve costs (personnel, equipment, and so forth), which are

generally referred to as public, even though they are ultimately

borne by tax-laying private citizens. But government actions

may result in direct private costs as well, that is, costs apart

from taxes. Such costs occur when a mandate or condition of aid

causes changes in private as well as public actions.

2. See Julius Allen, Estimating the Costs of Federal Regulation; Review of Problems and Accomplishments to Date,

Congressional Research Service, Report No. 78-205E, for a

related discussion focusing on federal regulation of the

private sector.

20
As an example of these costs, consider a mandated state

plan to improve air quality standards. Such a plan is likely to

involve auto emission control standards and inspection. The

state would incur costs in the development and administration of

the state plan. Owners of older cars would bear the costs of

the additional equipment and maintenance needed to keep cars

operating up to standard. These costs would be in addition to

those borne at the time of car purchase as a result of the

direct federal regulation of car manufacturers regarding the

installation of air pollution control equipment.

Benefits arising from state or local governments' response

to a federal directive may accrue to particular client groups,

to the public at large, or to the government itself. For example, a reduction in air pollution achieved by state implementation of federal air quality standards should result in several

benefits. If the air is cleaner, health problems should be

decreased; the populace as a whole may profit from this improvement, but the benefit would be greatest for the elderly and anybody with respiratory problems. The benefit should also be felt

by state and local governments to the extent that they finance

or directly provide health-care services. Clean air should also

result in lower maintenance costs (less cleaning, less frequent

painting, and so forth) and a longer useful life for physical

objects such as cars, buildings, and bridges.

Direct Versus Indirect Costs and Benefits. Some costs and

benefits follow directly from the action specified by a federal

constraint. Direct costs include those incurred by state or

local governments, or by private parties, as they comply with

the mandate or condition of aid. Direct benefits are generally

those that were intended and that justified the imposition of

the constraint in the first place; however, other direct benefits may also be realized. Indirect costs or benefits are those

that follow, generally with some lag, as economic and social

adjustments to the change in government policy are made.

These distinctions are best illustrated by an example.

Consider the requirement that states adopt a 55 miles-per-hour

speed limit, which in 1974 was made a pre-condition for the

receipt of federal highway aid.^ Direct, one-time costs were

imposed on governments because speed limit signs had to be

3. Federal Aid Highway Amendments of 1974 (Public Law 93-643).

21
altered or replaced. Continuing costs could include additional

police patrol and court costs because more people would be inclined to violate the limit. Another continuing cost would be

reduced revenues from gasoline taxes if compliance led to better

fuel efficiency and fewer gas purchases. Of course, private

businesses and individuals also bear costs. At lower speeds, it

takes longer to get from one place to another. Ultimately, reflecting the higher costs of transportation from production

through marketing, the consumers must pay higher prices. Direct

benefits include energy conservation and accident reductions

attributable to slower driving speeds.

Indirect costs are borne as production and consumption patterns change in response to price changes. Some companies may

find their markets contracted, and others may go out of business

when added transportation costs make their product noncompetitive. Interstate trucking firms may lose business to railroads;

firms and places with access to rail transportation may benefit,

while those that rely exclusively on trucking may lose.

From the perspective of any given individual, business, or

place, these second-order effects can be very real and very

important. From a national perspective, indirect gains and

losses may balance out, and as a result, they are often omitted

from analyses seeking to determine the efficiency of a given

action. The pattern of gain and loss may be an important consideration, however, in evaluating whether an action is fair and

equitable.

Tangible Versus Intangible Costs and Benefits. While

dollar values can be assigned to many costs and benefits expected from a government action, certain effects are less tangible

and more difficult to quantify. Indeed, a number of services—

pollution control or police services, for example—are provided

publicly rather than privately precisely because of the difficulties in pricing the benefits.

Costs, too, can be intangible. Consider the requirement

that there be "maximum feasible" participation by affected

citizens in planning and operating a Community Action Program

in the 1960s.^ That requirement gave rise to relatively few

4. Title II of the Economic Opportunity Act of 1964 (Public

Law 88-452).

22
tangible costs. In some instances, however, intangible costs in

the form of city-wide tension and conflict were very high.

Likewise many of the benefits from the citizen participation

requirement were also intangible—for example, the development

of leadership skills in impoverished communities.

More common is the case in which costs are quantifiable but

benefits are not, leading to an imbalance in analysis and possibly to misleading conclusions. Requirements of the National Environmental Protection Act of 1969 (NEPA) provide a good illustration. Cost considerations include: staff time to research

and prepare environmental impact statements; price increases

attributable to the combination of inflation and the lengthened

time between project conception and actual construction; and

project changes necessary to minimize adverse environmental effects (for example, rerouting a highway in a way that adds to

its length). Calculating the benefits is more difficult. How

do you quantify the value of preserving marshes or coastal wetlands so that birds can maintain their migration patterns or

that an endangered species can survive? Yet it is precisely

because such things are valued that there was at least an initial willingness to require environmental review despite the

costs it was known to entail.

One-Time Versus Continuing Costs and Benefits. Some costs

and benefits occur only once, while others continue. Regulations under Section 504 of the Rehabilitation Services Act, requiring program accessibility to the handicapped, impose both

kinds of costs. The prohibition of architectural barriers in

new buildings results in one-time costs. Proposed Urban Mass

Transit Authority regulations, however, could impose both

one-time and continuing costs, since buses accessible to the

handicapped—so-called "kneeling buses"—are more costly both to

purchase and to operate than are ordinary buses. Operating

costs are expected to increase because mechanical equipment that

allows accessibility requires additional maintenance. Also,

since buses usable by the handicapped carry fewer passengers, a

city transit system may need more of them to maintain an adequate level of service.

Total Versus Incremental Costs and Benefits. Analyses of

government regulations must take account of the distinction

between total and incremental costs. Total costs and benefits

are usually calculated assuming that all actions consistent with

a federal regulation are in fact attributable to that

23
regulation. This approach results in an overstatement, because

the federal government rarely requires something to be done that

some state or local governments would not do of their own

volition. In other words, some actions would have taken place

anyway. Only the costs and benefits of actions that would not

have occurred were there no federal intervention should be

attributed to a federal mandate or condition of aid.

Consider, for example, the costs and benefits associated

with the mandate that all sewage be treated using the "best

practicable" technology before the sewage is discharged into any

waterway.5 Presumably, by 1983 all municipalities will be in

compliance, and the nation's waterways will be substantially

cleaner than in 1972 when the mandate was imposed. But what

proportion of the total costs and benefits will be directly

attributable to the federal mandate?

One alternative is to consider the mandate responsible for

all costs incurred in the treatment of sewage and for all the

associated benefits. This seems unreasonable since many municipalities had sewage treatment programs before 1972. No mandate should be credited with costs or benefits accrued prior to

its adoption.

A second alternative is to count the full cost and all of

the associated benefits of adopting or upgrading technology to

meet standards specified by the mandate. The resulting estimate

assumes implicitly that no municipality would have changed its

sewage treatment procedures after 1972 had the federal law not

been passed. This assumption seems unrealistic, however, since

at least some state and local decisionmakers would probably have

been influenced by the same environmental movement that brought

about federal action.

A third alternative for assessing the costs and benefits of

the federal mandate, then, is to compare the level of activity

in sewage treatment specified by the mandate with a projection

of what the level would have been if there were no mandate.

This approach seems reasonable, but it is extremely difficult to

carry out because it requires a causal model of state and local

behavior.

5. Federal Water Pollution Control Act of 1972.

24
Redundancy of regulation may also result in incremental

costs and benefits being less than total costs and benefits.

Sometimes state or local governments will be subject to some

prior law or regulation mandating the same action. The requirement may be repeated to reiterate federal commitment to the

policy and to increase the speed or level of compliance on the

part of state and local governments. When a regulation is

redundant, it is not clear how costs and benefits should be

counted. For example, nondiscrimination in employment is a

condition for receiving most federal grants; at the same time,

state and local governments are prohibited by federal law from

engaging in discriminatory employment practices. Does nondiscrimination as a condition of federal aid result in additional

costs or benefits? The answer would depend to a large extent on

the degree to which there was or would have been compliance with

the previously enacted federal law.

Compliance. In general, a maximum level of costs and benefits would be calculated by assuming full compliance with federal requirements by state and local governments. In reality,

compliance will be less than 100 percent; a lower estimate of

costs and benefits taking this into account might provide a more

realistic basis for making decisions.

Variations Among Jurisdictions. An intergovernmental constraint will have different effects in different jurisdictions.

This is due both to place-to-place variations in policy and to

differences in objective circumstances. Consider again the case

of the sewage treatment mandate. The cost of the federal mandate can, of course, be relatively large for communities with no

prior treatment capability. Little if any additional costs will

result for municipalities that were already using the best

available treatment technologies when the new mandate went into

effect. For some jurisdictions, however, substantial benefits

may accrue if the mandate forces municipalities upstream to

reduce the discharge of pollutants.

Because costs and benefits are likely to vary so much from

jurisdiction to jurisdiction, analyses conducted using data

aggregated at the national level may provide insufficient information to the decisionmaker. While the ratio of costs to benefits may be satisfactory for the nation as a whole, unacceptably

large burdens may nevertheless be imposed in some jurisdictions. Clearly, it would not be feasible to consider the effect

25
of proposed mandates and requirements on each and every jurisdiction. But because of the variation among jurisdictions, it

would be desirable to consider the consequences of decisions for

a sample of jurisdictions representing diverse situations.

EXAMPLE OF A COST/BENEFIT ANALYSIS

To illustrate the problems discussed above, and to demonstrate the complexity of the analytic task, the costs and benefits of a specific set of regulations are discussed here. The

regulations proposed by the U.S. Department of Health, Education, and Welfare (HEW) in 1976 to implement Section 504 of the

Rehabilitation Services Act will serve as the illustration.

This example was chosen because the economic impact analysis

accompanying those regulations is one of the most comprehensive

ones ever undertaken.°

The Requirements. HEW's regulations prohibited recipients

of federal aid (including educational institutions, health-care

providers, and social service agencies) from discriminating

against handicapped persons. The discusion here is restricted

to those regulations that deal with the exclusion of handicapped

persons because of physical barriers in buildings and other

structures.^

Two standards were established, one governing new construction, and the other, existing facilities. New facilities must

meet standards set by the American National Standards Institute

6. See Dave O'Neill, Discrimination Against Handicapped Persons; The Costs, Benefits, and Economic Impact of Implementing Section 504 of the Rehabilitation Act of 1973

Covering Recipients of HEW Financial Assistance (revised

version of an impact statement published in the Federal

Register, May 17, 1976, Office of Civil Rights, HEW, May 4,

1977). This analysis is cited as an example of the type of

analytic effort expected for a regulatory analysis under

Executive Order 12044 by the Council on Wage and Price

Stability.

7. See Subpart C of the regulations. The Section 84.22 sets

standards for existing facilities; Section 84.23 deals with

new construction.

26
by having no barriers. For programs operated in existing facilities, a standard of "program accessibilility" was established.

The proposed regulations stated that the recipient must ". . .

through the elimination of physical obstacles or through other

methods, operate each program or activity ... so that . . .

when viewed in its entirety is readily accessible to handicapped

persons." The HEW economic impact analysis interpreted this as

meaning that if modifications to facilities were too difficult

to achieve, then other types of program adjustments would be

acceptable. For example, in a university library that is inaccessible to students in wheelchairs because of narrow stack

aisles and no elevators, establishing a stack search service for

handicapped students might be sufficient accommodation.

Analyzing the Costs. The major costs for most recipients

were expected to be the direct cost of achieving compliance by

modifying existing or proposed structures. The analysis led to

the following conclusions:

o The standard for new construction was estimated to entail relatively low costs. Based on previous studies

done by HEW and the General Accounting Office (GAO), the

regulatory analysis indicated that meeting the barrierfree standard could increase the costs of buildings by

one-half of one percent or less. Much new construction

already meets the standard. This might be the case because owners and architects have been made aware of

handicapped persons' needs or because buildings are

already subject to state laws or the federal Architectural Barriers Act of 1968, which mandate similar

standards. Since many buildings are already being built

to be barrier free, the incremental cost (as opposed to

the total cost) imposed by the proposed regulations was

estimated to be very small.

o In contrast, the requirement that programs run in existing structures be made accessible to the handicapped was

estimated to entail substantially greater costs—between

$299 and $544 million. To reach these totals, the

analysis considered the cost implications for each major

category of recipient. Educational institutions were

expected to bear the greatest burden.

In the absence of information on the characteristics of

the physical structures in which HEW grant recipients operate

27
programs, the methodology for estimating the costs of making the

structures accessible to the handicapped is inevitably somewhat

rough. For example, the HEW analysis built up its estimates of

costs for higher education based on existing surveys of what

compliance would cost several universities in diverse situations. Assuming costs were proportional to the value and age of

structures, and using data on the value of university buildings

and changes in enrollments over time (a proxy for age of structures) , the HEW analysis extrapolates from cost information

available for a few specific universities to all universities.

Whether or not there were slightly better ways to arrive at the

estimate is not at issue; what is clear is that severe data

limitations result in very uncertain estimates.

The costs resulting from HEW's proposed regulations will

fall on grant recipients in both the public and the private

sectors. HEW's economic impact analysis did not distinguish how

much of the total costs would fall on state and local governments, although it seems that the methodology used would have

allowed at least a crude estimate of the split. Given that educational institutions were expected to bear the greatest cost

burden, and that state and local governments finance a large

part of education at all levels, the cost impact on state and

local governments would be relatively large.

The possibility of indirect costs is an additional consideration in the analysis of the proposed regulations. If

direct costs of compliance are relatively large and if they differ among recipients that are in direct competition with each

other, then indirect costs could result. For example, to cover

the cost of making their programs accessible to the handicapped,

universities may have to raise tuition. Since compliance costs

are bound to differ, some schools will raise tuition more than

others. If, as a result, enrollment declines, then the regulation has imposed an additional indirect cost. The HEW analysis

did not include any estimate of indirect costs.

Most of the costs imposed are of a one-time nature. For

recipients that must shift the way a service is delivered, however, as opposed to modifying a facility, the costs could be of

a continuing nature. The HEW analysis asserts that such costs

would be relatively small,. To facilitate comparison with benefits, which are expected to be recurring over time, one-time

costs are expressed on an annual basis.

28
Analyzing the Benefits. The benefits of the proposed regulations are expected to accrue to handicapped individuals whose

opportunities for education, jobs, and other social services are

now restricted by the inaccessibility of physical facilities.

Many of the benefits will be immeasurable because it is difficult to quantify the improvement in morale that can follow from

a handicapped person's ability to lead a more "normal" life.

Some benefits, however, will be tangible. Access to jobs

could increase the number of handicapped employees. Increased

education might make a severely handicapped person more selfreliant, reducing the need for constant supervision. It could

also increase the potential earnings of the handicapped.

The premise underlying the analysis of benefits is that

better access will result in increased attendance in schools and

that, with more education, disabled persons will hold more jobs

and have higher earnings. This assumption seems reasonable

since handicapped persons are apt to undertake work requiring

more mental than physical skills, and many such jobs demand

higher levels of education.

The benefit from making higher education accessible to the

handicapped will mount over time as each year more handicapped

students graduate and enter the work force. The HEW analysis

attempts to measure benefits over the long run. The measurement

approach taken was to compare the existing levels of education

and earnings for handicapped persons with what they might have

been if the regulations had been in effect for a long enough

period to have achieved the final steady level of benefits.

Specifically, based on the 1970 census, it was found that 3.3

percent of all severely disabled people aged 18 to 44 had completed college. It was assumed that had all institutions been

accessable, this proportion might have been twice as high. It

was further assumed that a college degree would enable a

severely disabled person to earn at the same rate as a partially

disabled person. The result of these calculations is an estimated benefit of $100 million earned annually by handicapped

persons.

An alternative approach would have been to estimate the

number of additional college-educated handicapped persons entering the labor force in each year, and to estimate the increase

in their lifetime earnings. The present value of the future

flow of benefits could then have been compared with the present

value of the total costs of achieving compliance.

29
Impact on State and Local Governments

From the perspective of state and local officials, the cost

calculation is more important than the benefit calculation.

After all, costs will be realized in the short run, and to a

large extent they will be financed by state and local taxes.

For any particular jurisdiction, costs will depend on the degree

to which its activities are funded by HEW (in particular,

whether it finances higher education) and the characteristics of

that area's public buildings.

If handicapped persons benefit as they are estimated to in

the HEW analysis, state and local governments will also benefit,

albeit indirectly. Greater self-reliance for handicapped prsons

could lessen the need for special services. Also, higher earnings would bring more revenue in the form of taxes.

30
CHAPTER IV. POLICY OPTIONS

State and local officials have raised the issue of intergovernmental constraints in hopes of reducing the number of constraints and lightening the financial burden imposed on states

and localities by the federal government. Many of these officials argue that the constraints are excessive and that, in many

instances, the political and financial costs exceed the benefits. Whether or not the Congressional policy changes urged by

state and local officials should be adopted is essentially a

political question. Quite possibly, the constraints imposed—

though burdensome for state and local officials—are necessary

to achieve important national goals.

The Congress might consider several responses to the critics of intergovernmental constraints. One is to take no explicit action. This approach is based on the premise that the

political process can be relied on to prevent or correct excesses of federal authority and to modify regulations that are not

cost effective.

A second approach would involve the Congress" changing its

decisionmaking procedures to increase attention to—and

provide greater information on—the costs and benefits that proposed federal actions might impose on state and local governments. The Congress might consider two specific changes:

o Requiring that analyses of state and local effects be

made part of legislative and administrative decisionmaking, and

o Increasing Congressional oversight over rule making in

the agencies.

A third approach would be to attempt to decrease the number

of intergovernmental constraints by changing the structure and

substance of federal policy. Three specific sorts of changes

have been proposed:

o Reforming the administration of grant programs;

31
o Consolidating existing grant programs and relying more

on block, as opposed to categorical, grants; and

o Establishing a policy of fiscal reimbursement for costs

imposed on state and local governments by federal constraints.

These procedural and policy changes are discussed in the remaining sections of this chapter.

STATE AND LOCAL IMPACT ANALYSES

State and local impact analyses have been proposed as a way

to provide more information to federal decisionmakers. The

desired effect would be to lessen the number of new constraints

which, relative to their alleged benefits, are either very

costly or inefficient. Such analyses could be required for any

bill considered by the Congress and for proposed administrative

regulations. The scope of the requirement might also be

extended to include periodic review of existing laws and

regulations.

While primary emphasis has been placed on the need for

reliable estimates of the costs that federal actions would

impose on state and local governments, a full state/local impact

analysis ideally would consider what benefits are to be achieved

and whether alternative actions might be more effective.

Current Practice

The Legislative Branch. State and local impact analyses

are not currently part of the legislative process, although the

implications for state and local governments of proposed federal

actions are often explored in committee hearings and reports.

The Congressional Budget and Impoundment Control Act of

1974 requires the Congressional Budget Office to prepare estimates of costs for public bills reported by all Committees

except Appropriations.-'- To date, most of CBO's analyses have

1. See Section 403 of the Congressional Budget and Impoundment

Control Act (Public Law 93-344).

32
been limited to federal costs, although state and local impacts

have occasionally been considered. F'or example, cost analyses

of the various welfare reform proposals considered by the Congress last year included estimates of the fiscal relief to be

accorded to the states. The House Committee on the Budget has

recommended that CBO's cost estimating responsibilities be

expanded to include—whenever possible—consideration of state

and local government costs.

Some precedent for federal action requiring state/local

impact analyses is established by the 26 state legislatures,

which require "fiscal notes" detailing for all proposed legislation the resulting local government costs. Usually such analyses are limited to estimates of direct costs; no consideration

is given to benefits or to alternative actions that could produce similar results more efficiently. Estimates are generally

produced by Executive Branch agencies and reviewed by legislative staff.

The Executive Branch. Two recently issued Presidential

orders require agencies to analyze proposed regulations and

legislation. These analyses may fulfill the need identified by

state and local officials. The two orders are described in the

following paragraphs:

o Executive Order 12074 requires that "urban and community

impact analyses" be prepared to identify "aspects of

proposed federal policies that may adversely impact

cities, counties, and other communities." The analyses

are to consider possible economic, demographic, and

fiscal changes and their associated costs and benefits

as they affect central cities, suburban areas, and nonmetropolitan areas.

o Executive Order 12044 requires federal agencies to

analyze "the economic consequences for the general

economy, geographical regions or levels of government"

of any proposed "significant" regulation and of possible

alternatives. (Any regulation that would result in an

annual effect on the economy of $100 million or more, or

that would result in "major" increases in costs or

prices for individual industries, levels of government

or geographic regions is defined as "significant.")

Agencies are also directed to establish procedures for a

33
periodic review of existing regulations. In support of

the process, two interagency groups have been established. The Regulatory Council is charged twice a year

with compiling a comprehensive list of all regulations

being developed. The lists are to include preliminary

assessments of costs and statements of the legal constraints within which agencies are operating. The Regulatory Analysis Review group, chaired by the Council of

Economic Advisors, will review and comment on selected

regulatory analyses produced by the agencies.

Although it is too early to evaluate the effect of these

orders, they do seem to set up procedures for analyzing federal

actions that impose costs on state and local governments.

Whether the analyses will be used to influence rather than

justify decisions remains to be seen. A possible problem is

that the threshold for determining "significance" as defined

above is set too high to subject many important regulations to

analysis. Some regulations, when taken singly, may have little

effect but when considered as part of a larger course of action

may impose sizable burdens. For example, the application of

Davis-Bacon wage standards specifically to the Urban Development

Action grant program involves relatively few dollars. But when

all the grant programs to which the Davis-Bacon standards apply

are considered altogether, the cost implications may be

substantial.

The Judicial Branch. No proposal for analysis of state and

local impact prior to decision involves the judiciary. Although

the courts frequently make decisions affecting state and local

governments, a decision process based on the adjudication of

particular cases is not well structured for analysis of broader

implications for categories of people, businesses, or governments . 2

Assessment

Although in principle, requirements for comprehensive

analysis offer great promise, in practice they are likely to

fall short of expectation. The discussion in the preceding

For a discussion of the limited capabilities of the courts

as policymakers, see Donald Horowitz, The Courts and Social

Policy, Brookings Institution, 1977.

34
chapter indicated the complexity of performing state/local

impact analysis. Better data and causal models need to be

developed before reliable estimates can be produced of the

various types of costs and benefits that might result from

intergovernmental constraints.

Tangible, direct, public costs would be the easiest to

estimate. Whether incremental costs—that is, those directly

attributable to the requirement—could be distinguished from

total costs would depend on the substance of the mandate or the

contractual agreement. Less tangible, indirect, and private

costs, as well as most benefits, would be harder to measure.

Furthermore, breaking down costs and benefits to the level of

individual jurisdictions would be difficult if not impossible

given the speed with which analyses would have to be performed

to be useful in decisionmaking. Whether, despite a positive

assessment in the aggregate, a proposed constraint would put

significant burdens on certain jurisdictions would be difficult

to know. Despite these difficulties and the inevitable uncertainties that surround estimates, however, analysis of state and

local impact would nevertheless produce information useful to

decisionmakers.

Good analysis will more easily be done for proposed administrative regulations than for new laws. This is so because

costs and benefits depend to a large extent on administrative

interpretation and practice. When a statute is considered,

interpretation and practice are not known.

Perhaps the greatest benefit could be derived from a

selective but intensive review of existing intergovernmental

constraints. The possibility for good analysis is much greater

in evaluating past experience than in projecting future

impacts. The Congress, in consultation with state and local

officials, could direct that studies be done to assess whether

changes in certain mandates and program requirements are

warranted.

INCREASED CONGRESSIONAL OVERSIGHT

Federal policy is to a large extent shaped by administrative regulations. Statutes cannot include the level of detail

needed to guide all the decisions necessary to implement a program; indeed, this is the essence of the Executive Branch's

35
function.3 That state and local officials' ire is mostly

directed toward federal agencies for excessive and unwise rule

making is not surprising. State and local officials also argue

that agencies issue regulations that are contrary to, or that go

beyond, legislative intent.

The Congress is an important point of access for state and

local officials having difficulty implementing federal agency

regulations. The Congress can direct agencies to change the

rules and guidelines governing program administration, and it

has done so. In its reauthorization of housing and community

development programs last year, the Congress directed the

Department of Housing and Urban Development (HUD) to change its

interpretation of law in several respects.4 For instance, in

developing housing assistance plans, communities are required by

statute to allow for the needs of low-income individuals who are

not at the time residing in the community but who might be

expected to if appropriate housing were available. HUD's regulations were based on a "fair share" approach—estimates of

"expected to reside" were to be based on the size of the lowincome population in the metropolitan area. The Congress

directed that a much narrower interpretation was intended; that

the estimate of the low-income population expected to reside in

a community should be based on the number of existing and projected job opportunities within that community.

The Congress has indicated its intention of scrutinizing

HUD regulations closely. It has directed the agency to notify

it of proposed rulemaking and to provide it with draft language

in advance of public release. If the relevant Committee in

either House has difficulty with the regulation, the date the

rule goes into effect is to be delayed to allow the Congress

time to give further legislative guidance to the agency.

Similar procedures could be adopted with respect to other

federal agencies.

3. In the case of General Revenue Sharing and block grants,

much of the Executive function is assigned to state and

local officials.

4. Housing and Community Development Amendments of 1978 (Public Law 95-557).

36
IMPROVING GRANTS MANAGEMENT

While many conditions of aid governing program administration seem not to be particularly burdensome when considered

singly, taken together they absorb considerable resources and

generate frustration in state and local officials. Improved

management of intergovernmental grant programs, they argue,

could make a considerable difference—that the number and complexity of requirements could be reduced by better coordination

and greater standardization across programs and agencies.

Steps have been taken over the past 10 years to improve the

grants management system.5 Prompted by the Intergovernmental

Cooperation Act of 1968 and several interagency studies, three

major federal management circulars (FMCs) were put into effect:

o FMC 74-7 standardizes and simplifies 15 areas of grant

administrative requirements, for the most part affecting

financial management.

o FMC 74-4 establishes principles for determining allowable costs under grant programs.

o FMC 73-2 standardizes procedures for federal audits and

calls for the coordination of federal/state/local audit

requirements.

In addition, the Joint Funding Simplification Act of 1974 requires federal agencies to facilitate state and local governments combining grants from several programs in support of a

single project.

Despite these steps, however, state and local officials

argue that more needs to be done to eliminate duplicative planning and reporting requirements, to standardize rules and regulations (particularly with respect to the generally applicable

conditions of aid such as the environmental and nondiscrimination provisions discussed in Chapter II), and to increase consultation among federal, state, and local officials at early

5. For an extensive discussion of efforts to improve grants

management, see ACIR, Improving Federal Grants Management,

Report A-53, February 1977.

37
stages of the federal rulemaking process. State and local officials maintain that a stronger central management staff is crucial to further progress. They argue that central coordination

is necessary both to enforce agency compliance with existing

management policies and to initiate additional changes.^

GRANTS CONSOLIDATION

The overall number of federal grant regulations can be cut

if the Congress is willing to give state and local government

officials greater authority over the use of federal grant funds.

It can do so by consolidating narrow categorical programs that

are similar in purpose and by reversing the tendency to recategorize and add additional strings to existing block grant

programs.

Federal grant programs are generally considered to be of

three types:

o General purpose fiscal assistance, typified by General

Revenue Sharing, whereby funds are allocated by formula

and are given to state or local governments with few, if

any, restrictions regarding use.

o Block grants, such as the Community Development Block

Grant program, whereby the Congress specifies the objective to be achieved and a broad range of permissible

uses. Funds are generally allocated by formula. Local

officials decide what activities are to be supported.

o Categorical grants, which are given by the Congress to

finance narrow, circumscribed kinds of activities.

Similar recommendations for improving the administration of

grants programs have been made by several groups. See for

example, ACIR, Improving Federal Grants Management; Commission on Federal Paperwork, Federal/State/Local Cooperation (July 1977); National Governors Conference, Agenda for

Intergovernmental Reform, Vol. 2 of Federal Roadblocks to

Efficient State Government (February 1977). See also The

Federal Assistance Monitoring Project of the ACIR, Streamlining Federal Assistance Administration; An Interim

Report to the President (September 8, 1978).

38
Exairples include Aid to Families with Dependent Children, Environmental Protection Agency grants for wastewater treatment construction, and project grants for the

promotion of the arts. Funds may be distributed by formula or on a project basis. Either way, federal administrators retain a fair amount of control and responsibility for overseeing programs, which are administered

by state and local governments,

For the most part, general purpose fiscal assistance and block

grants are developments of the last decade. Whereas in 1968,

categorical programs accounted for 98 percent of all federal

grant outlays, by 1977 their proportion had declined to 76

percent.^

In the last couple of years, the trend toward decentralization in the federal grant system has, to some extent, been

reversed. The tendency in the reauthorization process and in

the administration of block grants and General Revenue Sharing

has been to recategorize and to increase restrictions and regulations. For example, when General Revenue Sharing was reauthorized, provisions regarding nondiscrimination, financial

management, and citizen participation were strengthened. A

second example is the reauthorization in 1978 of Comprehensive

Employment and Training (CETA) programs. Although CETA is

commonly considered to be a block grant, it now contains

numerous requirements concerning individual eligibility and the

mix of employment services that may be provided.

An analysis of which grants are appropriate for consolidation is beyond the scope of this paper. The ACIR, however,

has analyzed the topic in some depth and has proposed the merger

of 170 categorical grant programs into 24 programs. 8 some of

the bigger consolidations suggested (involving nine or more

separate programs) are in the areas of transportation safety,

comprehensive regional transportation, comprehensive state

transportation, pollution prevention and control, omnibus

education assistance and preventive and protective health. The

ACIR has also recommended that the Congress enact legislation

7. ACIR, In Brief the Intergovernmental Grant System: An

Assessment of Proposed Policies (1978), p. 8.

8. ACIR, Categorical Grants: Their Role and Design (1977),

A-52, pp. 298-305.

39
giving the President authority over program consolidation

similar to his involvement in government reorganization. Under

such legislation, upon submission of a Presidential plan, the

Congress would be required to approve or disapprove the plan by

resolution within 90 days.

FISCAL REIMBURSEMENT

A policy of full fiscal reimbursement has been proposed to

minimize the financial burden placed on state and local governments by intergovernmental constraints. If such a policy were

adopted, the federal government would be obligated to pay the

full cost of any state or local actions taken in response to

federal requirements. As proposed by the National Governors Association (NGA), the principle would not apply to court ordered

mandates. It would apply, however, for all other mandates or

contractual obligations put into effect by statute or administrative regulation after the date of adoption.9

State Precedent

The primary model for a policy of fiscal reimbursement is

the one adopted by the State of California to govern its relationships with local governments.10 In 1972, the California

state legislature passed the Property Tax Reform Act of 1972

(SB90). This law established rate and revenue limitations for

local governments and at the same time adopted the principle of

reimbursement for increases in local costs attributable to new

state mandates regarding service provision or local taxing.

Under the provisions; of SB90, the State of California is to

reimburse local governments for revenue losses arising from new

exemptions granted by the state affecting property, sales, or

use taxes, and for the costs of new services or increases in

service levels mandated by state law, administrative regulation,

or executive order subsequent to 1972. A local government may

9. National Governors Association, Policy Positions 1978-1979,

p. 26.

10. Other states such as Montana, Louisiana, and Pennsylvania

have also adopted the principle of reimbursement for state

mandates.

40
apply for reimbursement of the full cost of a mandated service

even if that government had been providing the service before

the state mandate. If it does so, however, it must reduce its

maximum property tax rate or revenue limit by an equivalent

amount. Excluded from coverage are: legislation specifically

requested by local governments, programs mandated by the federal

government, court decisions, or voter initiatives, mandates that

provide for self financing or result in no new duties; and laws

that define crimes or establish new penalties.

The reimbursement process works as follows. The State

Department of Finance is responsible for estimating mandated

costs associated with new legislation. The department also

reviews agency-prepared estimates of costs associated with

administrative regulations. Appropriations are to be provided

to cover both one-time and continuing costs associated with

covered mandates. Each year local governments submit claims for

reimbursement to the State Controller. If local governments

believe that reimbursement ought to be forthcoming and none is

provided, they may lodge a claim with an independent

administrative Board of Control. The Board reports to the

Legislature on the number and amount of claims it awards. Upon

receipt of the report, an appropriations bill sufficient to

cover all approved local government claims for reimbursement

must be introduced in the legislature. Decisions of the Administrative Board of Control may be appealed in the state court

system.

The reimbursement policy has resulted in only a small increase in state aid for local governments. Between 1972 and

1976, the California State Government provided $85 million in

reimbursement for newly imposed mandates. Over the same period,

total state aid equalled $26,500 million.ll

Current Practice

Neither a clearly articulated policy nor consistent practice exists regarding the placement of financial responsibility

for costs incurred by state and local governments in meeting

11. Reimbursement amount reported in ACIR, State Mandating of

Local Expenditures, p. 26. Total state aid reported in

Bureau of the Census, State Government Finances, volumes

for 1973 through 1976.

41
federal requirements. In some instances, state and local

governments must bear the costs; in others the federal government provides full or partial compensation.

Costs imposed by mandates are more likely to be borne by

state and local governments than are the costs associated with

other constraints. This is so because many mandates derive from

the courts and only rarely is federal assistance provided to

cover the costs of compliance. Federal financial assistance is

more common when mandates stem from federal statute and associated regulations. For example, when the Congress passed the

Water Pollution Control Act of 1972 mandating sewage treatment,

it also established a capital grant program for wastewater

treatment facilities to share the cost of constructing required

municipal facilities. Not all mandates have corresponding grant

programs, however. For example, no grant funds are earmarked

for assisting local governments to establish treatment capabilities required to meet safety standards for drinking water.

The federal government pays most of the costs associated

with grant-in-aid requirements. This is true almost by definition, since the primary purpose of grant requirements is to

govern the use of federal funds.

In certain circumstances, however, state and local governments bear direct costs generated by grant requirements. When

actions or standards are required for participation in a grant

program, but the cost of taking those actions or achieving the

standard is not covered by the grant, a financial burden is

imposed on the recipient. For example, a state that must upgrade its hospitals in order to receive medicare or medicaid

payments may face significant costs. Similarly, the requirement

that public facilities be accessible to the handicapped before

federal aid can be received could impose high costs on state and

local governments.

A comparable situation arises when state and local governments are required to share the costs of a grant funded activity; in such instances, any requirements increasing the cost of

that activity will create financial burdens. For example, _if

the federal government pays 75 percent of the cost of constructing sewage treatment plants, and Davis-Bacon requirements

increase total project costs by 5 percent, then state/local

costs will increase by the same proportion.

42
In addition, grant requirements can result in indirect

costs the full burden of which fall on state and local governments. For example, Davis-Bacon requirements might affect the

price of state and local construction that has no federal

funding.

Whenever federal regulations specify actions that are contrary to program goals, prohibit grantees using the money as

they choose, or impose a financial burden, the benefits to state

and local governments of participating in a federal grant program are lessened. So long as states and localities continue to

participate, however, one must assume that there are net benefits for the recipient governments and their citizens.12

Analysis of Reimbursement Option

A policy of fiscal reimbursement can be justified on three

grounds:

o To minimize the extent to which federal requirements

claim local resources, thereby crowding out actions with

greater local priority;

o To make the distribution of costs more equitable; and

o To deter the federal government from imposing additional

requirements.

Crowding Out. Advocates of a reimbursement policy argue

that the resources available to state and local governments are

limited. When such resources are used to pay for actions

ordered by the federal government, they are unavailable for

activities judged to be important by the local citizenry. In

other words, residents' choices regarding local public services

are crowded out by federal requirements,.

12. There are instances of state and local governments' refusing assistance for which they are eligible on the grounds

that the conditions associated with the program impose

costs that exceed benefits. For example, Montgomery

County, Maryland, has refused Urban Mass Transit Authority

assistance grants because of objections to Section 13(c),

which requires labor sign-off on grant applications.

43
ability to pay. In the case of some regulations, other considerations may affect equity judgments. For example, if the

purpose of a regulation is to curb abuse, having the offending

parties bear the costs of remedial action seems reasonable. Few

would argue that the federal government should reimburse private

business for the cost of complying with minimal health and safety standards for places of work.

An across-the-board policy of fiscal reimbursement is unlikely to enhance equity regardless of how equity is defined,

since the circumstances underlying federal regulations differ.

Depending on the geographic pattern of costs relative to benefits, the fiscal ability of governments facing the greatest

costs, and the reasons for the imposition of the federal requirement, equity may or may not be enhanced by the federal

assumption of costs. Equity is more likely to be advanced by a

flexible policy of considering each federal requirement on its

own merits.

Deterrence. A third reason for supporting a policy of fiscal reimbursement is that it might act as a deterrent to the

imposition of new constraints. If federal officials have to

raise taxes to cover all of the costs, some advocates reason,

they will think twice before requiring that actions be taken by

state and local governments. A reimbursement policy might be

limited in scope to areas judged to be better left to state and

local discretion.

ACIR's recommendations regarding reimbursement by state

governments seem in large part to be based on the "deterrent

effect." In policy areas where the state interest is large,

and/or where the effects of local actions "spill over" to places

outside their jurisdictions, partial reimbursement is considered

appropriate. But "to minimize state intrusion into matters of

essentially local concern," such as public employee working conditions, the commission recommends that full reimbursement

be required to accompany relevant mandates.^

14. ACIR, State Mandating of Local Expenditures, Report A-67,

July 1978, pp. 9-12.

44
Possibility for Limited Reimbursement

While the NGA has recommended a policy of fiscal reimbursement applicable in a broad range of circumstances (including

some not caused by intergovernmental constraints), the Congress

may prefer to embrace the concept but to a limited extent. The

scope of applicability of such a policy could be restricted by

attention to the following factors:

° Types of constraints to which the policy would apply.

Determining when reimbursement would apply is much

harder at the federal level, where constraints take a

variety of forms involving different degrees of coercion, than at the state level, where mandates are the

common practice.

o Types of costs eligible for reimbursement. Reimbursement could be limited to only certain of the costs described in Chapter III (for example, incremental direct

public costs). Measurement problems identified as

posing difficulties for the analysis of costs and

benefits would make implementation of a reimbursement

policy very difficult.

o Extent of reimbursement. State and local governments

could be reimbursed in part or in full.

CONCLUSION

Relations between levels of government in the U.S. federal

system have clearly been changing over time. Constraints have

increased in number and, with them, the degree of federal control over state and local government actions has grown. Whether

or not this change in intergovernmental relationships should be

viewed as problematic is essentially a political question.

Regardless of one's judgment concerning the desirability of

the expanding federal role, particular constraints may be ineffective or they may impose relatively high costs. If there

are to be changes, inquiry must be redirected from the general

to the particular. Individual programs and requirements must be

analyzed to determine their costs and benefits and to discover

whether better courses of action exist.

45

O