REVERSE INTERGOVERNMENTAL AID REVISITED, AGAIN

Regular readers of the Legislative Update will recognize this article.  It first ran in 2008, and the updated 2012 state fiscal year numbers show that cities are still net donors of money to the state.  The State of Texas, unlike almost all other states, provides virtually no financial assistance to its cities.  State aid, defined as a grant made by the state to cities from revenue generated by the state, is practically non-existent in Texas.  Research conducted by numerous entities over many years has shown this to be true.  The most recent study, released in 2008 by the National League of Cities, found that only in West Virginia is state aid to cities lower than it is in Texas.

State aid flows readily in other states, particularly in populous states.  For instance, it is not at all uncommon for states to share state gasoline tax revenue with cities or to split other sources of state general revenue with municipal governments.

While city officials in Texas have seldom asked for state financial aid, they are increasingly aware of the numerous ways in which they are compelled to share city-generated revenue with the state in what can be described as a system of reverse intergovernmental aid.

Of the numerous ways in which cities transfer revenue to the state, five stand out:

  1. The state’s charge for administering the municipal sales tax.
  2. Fees levied on cities by the Texas Commission on Environmental Quality.
  3. “Local participation” in the cost of building and improving the state highway system.
  4. State fees imposed on municipal court convictions.
  5. State agency fees that exceed the cost of regulation (e.g., Texas Fire Commission fees).

The State’s Charge for Administering the Municipal Sales Tax

When a Texan purchases a product that is subject to the state and local sales tax, the merchant collects the entire tax due and remits it to the state comptroller.  The comptroller, in turn, remits the local share back to the appropriate local government (city, metropolitan transit authority, county, and/or special district).  For providing this service and for performing other administrative, enforcement, and reporting duties, the comptroller deducts two percent of the local share of the sales tax and deposits that amount in the state’s general revenue fund.

The two-percent fee is high compared to the same fee in other states.  Many states charge one percent or less; five states impose no charge at all.  In Texas, the two-percent fee generated over $137 million in 2012, of which cities pay over $90 million

In mid-2008, TML undertook an effort to determine how much the comptroller’s office spends annually to provide sales tax services to local governments.  The comptroller’s office informed TML that “(t)here can be no separate accounting of what costs are ultimately attributable to local tax administration that would not be arbitrary and potentially misleading.”  A TML committee was then formed to try to estimate the cost of collection to the state.  The committee’s estimate was at most $27.7 million per year, far less than the $90 million paid by cities, generating a “profit” of more than $62 million to the state.

The comptroller’s baseline budget is somewhere in the neighborhood of $215 million per year.  Thus, the total local government fee of over $137 million is enough to cover over 60 percent of the entire agency’s total expenses.

Texas Commission on Environmental Quality Fees

According to its website, the mission of the Texas Commission on Environmental Quality is “to protect our state’s human and natural resources consistent with sustainable economic development,” and the agency’s goal is “clean air, clean water, and the safe management of waste.”

One would think that this mission and set of goals would merit substantial funding from the state’s general revenue fund. That’s not the case.  The TCEQ website reveals that the agency’s revenue comes from the following sources:

State General Revenue
Federal Funds
Program Fees
Other Sources

2%
12%
84%
2%

Just who pays the “program fees” that constitute the lion’s share of TCEQ revenue?  To a great extent, cities do.

The agency imposes more than 40 different fees on cities; roughly 20 are related to water quality.  The revenue from these fees is used to pay for the costs of regulating cities under either federal or state law or both.  In other words, cities pay TCEQ to regulate them.

Of all the fees, the two that have the most impact on cities are the consolidated water quality fee (CWQF), which is imposed on wastewater treatment facilities, and the public health service fee (PHSF), which is paid by suppliers of public drinking water.  The recent funding shortfall for state agencies meant that the TCEQ’s water program fees were insufficient to run the programs starting in the current biennium.  The agency could either get more funding from the state’s general fund via the state legislature, or increase program fees.  The agency chose to increase program fees, and significantly increased both the CWQF and the PHSF.  The annual income from cities for the TCEQ from these two fees alone is now expected to be:

CWQF
PHSF

$22.90 million
$20.15 million

Other fees paid by cities (the water quality permit application fee, stormwater permit fees, the solid waste disposal fee, and others) add considerable amounts to state coffers.  In fact, cities (through the payment of fees) generate more revenue for TCEQ than does the state’s general fund.

Some might say that the fee-dependent financing structure used by TCEQ is fair, since cities receive a service for each fee they pay.  However, when cities impose fees-for-service on other levels of government, the legislature often acts to prohibit or limit those fees.

For example, when the legislature prohibited the imposition of stormwater fees on public institutions of higher education, some lawmakers argued that it’s unfair for one level of government to impose a fee on another level.

And when the legislature prohibited the imposition of municipal impact fees on school districts (unless a district agrees to pay the fee), the legislature’s bill analysis stated that…

…impact fees place an undue burden on districts…payment of impact fees by school districts to cities amounts to a needless transfer of money among public entities and constitutes a de facto tax on school districts.

This statement is particularly ironic given that cities pay TCEQ fees and are not exempt from the state's 20-cent-per-gallon gasoline tax.  “Public entities” (cities) are paying a state tax each time a police car or fire truck refuels.

Local Participation in State Highway Projects

The best way to describe “local participation” is to quote from a state document titled “Background and Need for Partnering.”  That document makes the case that the Texas Department of Transportation (TxDOT) faces a funding shortfall because growth in population, vehicle-miles per capita, and total vehicle miles have grown at faster rates than growth in the highway system and growth in revenue available for highway projects.  Those trends, according to the report, will continue.

To help address this dilemma…

TxDOT continues to seek additional ways to fund the state transportation program.  For years, TxDOT has partnered with local public agencies to make transportation improvements on state highways.  This local participation has come in many forms, including provision of right-of-way, financial contributions, maintenance agreements and other forms… Cooperative partnering between state and local agencies will be needed to meet future transportation needs.  TxDOT will depend on local and regional leaders to provide both leadership and commitment to help carry projects forward…TxDOT is currently suggesting to local agencies that they consider increasing their participation in TxDOT projects in order to expedite scheduling of locally desired projects.  (Emphasis added.)

In short, “local participation” may become a “pay-to-play” system imposed by TxDOT on local governments that wish to see highway projects in their area move forward.

How much do cities annually contribute in local participation?  In fiscal year 2012, cities pitched in more than $112 million in cash and much more in right-of-way donations and in-kind services. In addition, the state gasoline tax paid by cities accounts for many more millions of dollars paid by cities for the state transportation system.

Here’s the bottom line.  In most states, the state government makes grants to cities to help those cities build and maintain city streets.  In Texas, city governments transfer municipal revenue to the state to help pay for the state highway system.

State Fees on Municipal Court Fines

Municipal courts in Texas collect funds on behalf of the state for a wide variety of state programs.  These state programs range from the Criminal Justice Planning Fund to the Crime Victims’ Compensation Fund.  In most cases, the fees are imposed on persons convicted of any criminal offense.  For these collection efforts, cities are generally allowed to keep some small amount of revenue as reimbursement for the costs incurred to collect the fees and remit them to the state.

Many city officials contend that state court costs adversely impact municipal courts in two ways.  First, the state’s court costs are complicated to administer.  While cities can keep a small percentage of the costs as an administrative fee, that amount is not sufficient to reimburse the cities for the bookkeeping and administrative problems connected with this function.  Second, when setting an appropriate fine for an offense, a judge must consider the fact that the defendant will also be paying state court costs.  As a result, municipal fine revenue is often lower than it would otherwise be because the judge has considered the state court costs when setting a defendant’s total fine.

Municipal court clerks also point out that the state requires that in the event of a partial payment, the state court costs must be paid first before the city can keep any of the fine.  This means that cities must do all the work collecting fines but are not allowed to keep any money until the state court costs have been fully satisfied.

In recent years, the number and amount of the state fees collected by municipal courts have grown rapidly.  For example, on a typical traffic offense conviction, a municipal court defendant must currently pay $82 in state-imposed fees before any city fine is collected.  The following chart is a comparison of the present situation with fees imposed just 11 years ago.



Crime Victim Compensation

Judicial/Court
Personnel Training

Fugitive Apprehension Fund

Consolidated Court Costs

Juvenile Crime/Delinquency
(Prairie View A&M)

Correction Managment Institute
(Sam Houston State)

State Traffice Fine

Jury Pay

State Judges' Salaries

Indigent Defense

Total

January 2002

$15.00

$2.00


$5.00

$17.00

$0.50


$0.50


- -

- -

- -

- -

$40.00

January 2013

$15.00

$2.00


$5.00

$17.00


$0.50


$0.50

$30.00

$4.00

$6.00

$2.00

$82.00

In many ways, municipal court collection of state fees is similar to the state’s collection of municipal sales tax.  In each case, one level of government is processing a tax/fee levied by another level of government, is remitting it, and is keeping a fee for providing those services.

While there are similarities, however, there are also substantial differences.

For example, the state doesn’t really “collect” the municipal sales tax; it’s collected by the merchant.  With regard to state fees on municipal court fines, however, a municipal court employee actually collects the fees and bears the brunt of any resulting fee-payer anger.

Second, the state controls the level of the municipal sales tax, but cities certainly don’t control the level of state fees on municipal fines.  So while cities can’t unilaterally raise the city sales tax without permission from the state, the state can (and frequently does) increase the amount of state fees that cities must collect and remit.

How much state fee/fine revenue do municipal courts collect annually?  For 2012, the amount was just over $227 million.

State Agency Fees that Exceed the Cost of Regulation

Most regulatory agencies are essentially “self-funded.” This means that they are required to collect fees from those they regulate to cover all direct, indirect, and operational costs. The Commission on Fire Protection is no different. It is required to generate revenue through fees on cities and firefighters to cover all of the costs of the commission for the biennium. For the current biennium, this amounts to $3.9 million. However, a rider was placed in the commission’s budget during the last few hours of the 2011 session. The rider requires it to generate an additional $3.38 million to be swept into the state’s general revenue fund for general purpose state spending.

To raise the needed revenue for the operation of the commission and to return the required $3.38 million to the state, the commission previously raised fees by 142 percent. (Commission staff indicates that no future increases are currently planned.) Many firefighters, and in some cases the cities they work for, saw this fee increase for what it was: a new, legislatively-imposed state tax on their profession.

The proposed state budget for 2014-2015 again requires the commission to generate all of their operating revenue and return another $3 million for state general revenue spending.

Conclusion

What’s the grand total amount of reverse intergovernmental aid in Texas?  After making various adjustments, the annual total is over $253,000,000, just from these five sources of reverse intergovernmental aid.  (Please note that simply adding the totals from the previous sections yields a much higher amount.  Certain adjustments were made to that number in relation to sales tax administration and court fees to arrive at $245,000,000.)

And why does this transfer of revenue from cities to the state matter?  It matters because these transfers of resources result in either reductions in municipal services or increased local fees or taxes—most often the local property tax, which is the only general purpose municipal tax that a city council can raise or lower.

Texas taxpayers remain concerned about property taxes.  It is clear that some of the pressure on the property tax results from reverse intergovernmental aid, a system under which governments that must depend on the property tax (cities) transfer revenue to a level of  government (the State of Texas) that has many revenue sources.

It’s not hard to understand why some state legislators are tempted to turn to cities and ask them to generate revenue for the state.  It’s much harder to understand why some of those same legislators have been trying for several years to limit the revenue-generating capacity of cities by placing caps on the municipal property tax.

TML member cities may use the material herein for any purpose.
No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the
Texas Municipal League.

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