December 11, 2012

TO:MEMBERS OF SENATE FINANCE COMMITTEE

FROM:LARRY L. LONG, EXECUTIVE DIRECTOR

SUBJECT:OPPOSITION TO SB 364

Chairman Widener, Ranking Minority Member Sawyer, Members of the Committee:

Thank you for the opportunity to testify on SB 364, a bill that would establish a new formula for the distribution of local government funds. CCAO opposes SB 364.

Introduction

While we oppose SB 364, it is important to acknowledge that we have worked with Senator Seitz since he first began working on this proposal. I believe that these conversations have been useful and the proposal before you is substantially different and better than his original proposal.

In addition, our opposition should not be interpreted that we do not recognize the fiscal problems being experienced by municipalities and townships. The problem this bill tries to address was brought on by the Great Recession and the need to balance the current state budget. As you know, this committee and the General Assembly had to fill an $8 Million state budget hole, which translated into a 17% problem. It is the position of CCAO that the 50% cut to the LGF and the accelerated reduction in reimbursements from Tangible and Public Utility Personal Property taxes imposed disproportionate cuts on all local governments. These cuts impacted counties, townships and municipalities. We also know that townships and municipalities were further impacted by the elimination of the estate tax, which did not affect county finances.

So our opposition is not against the needs of our partners in local government. We oppose the bill because it simply takes the current fixed pot of state money and strips money from most counties and gives it to other political subdivisions. And the rational for this is because Ohioans voted to authorize casinos and distribute some of the casino tax to counties. And it is becoming clear that casino revenue is a relatively unstable source of revenue for counties to rely on to provide basic and mandated services.

CCAO believes it is time to reconsider the cuts that were imposed on local governments in the state budget and to restore some of the disproportionate cuts. Naturally this probably needs to be considered in the context of the next state budget. While Ohio is not out of the budget woods yet, it appears we have begun to turn the corner economically.

Likewise, it is the position of CCAO that if we are going to reallocate LGF funding by picking winners and losers simply because counties receive casino money that such a decision needs to be made in the context of:

  • The services that are statutorily mandated to be provided by counties, townships and municipalities.
  • The services that counties are mandated to perform that directly benefit the residents of municipalities and townships.
  • Management tools county commissioners need in order to balance the county budget because of any revenue losses that result from a reallocation of funds from the county to townships or municipalities.

Overview of SB 364

SB 364 establishes a new default or statutory formula for determining the share allocated to each subdivision from a county’s Undivided Local Government Fund. Major elements of the legislation include the following provisions:

  • Eliminates the existing statutory or alternative formula in each county as of January 1, 2014.
  • Establishes a new default or statutory formula, and provides that the fixed county share is 30% of the county undivided LGF, unless an alternative formula is adopted.
  • Requires any alternative formula, including any existing statutory or alternative formula, be approved by 75% of the subdivisions in the county without regard to population or any other factor.
  • Eliminates the requirement that each board of county commissioners and the legislative authority of the largest city in the county approve any alternative formula. This also may reduce the share to the largest city in each county. However, the legislation provides that an alternative formula cannot result in fewerdollars to the county or the largest city in the county than the statutory formula would produce unless the county and the largest city, respectively, consent. This effectively means the county share will be 30%.
  • Provides that in any county in which the largest city is getting constitutional casino dollars (not including host fee money) and in which this new statutory formula would provide more money to the largest city in that county than it received in calendar year 2012, 50% of the additional money will be credited back to the county if the county would receive less money under the new statutory formula than it received in calendar year 2012.

Overview of Existing Law

Existing law provides that the county as a subdivision may receive no more than an established percentage of the total Undivided LGF, based on the percentage of the county’s population located within municipal corporations. The percentage shares are as follows:

  • If the municipal population is less than 41% - maximum county share is 60%.
  • If the municipal population is 41% - 80% - maximum county share is 50%.
  • If the municipal population is 81% or larger – 30% maximum county share.

According to local government information filed by county auditors with the state auditor’s office, 84 of the 88 counties use an alternative formula for distribution of local government funds (Coshocton, Harrison, Henry, and Lake are the exceptions).

SB 364 Cuts LGF Revenues to 77 Counties

Of critical importance to CCAO, 77 of the 88 counties currently receive more than a 30% share of the county undivided local government fund. All 77 of these counties collectively stand to lose millions from this revenue source if SB 364 is enacted.

At the time this concept was originally offered as an amendment to the state budget, CCAO had calculated net losses to counties of $23 million in CY 2012 and about $9.5 million in the first 6 months of 2013. Due to the assumptions CCAO used to calculate these numbers at that time, these estimates underestimated the amount of the revenue loss. (For example, the $50 million bump to the LGF provided by the legislature for SFY 2012 in HB 153 was not included in this calculation. The calculation also did not include the minimum distribution provision of $750,000 to 23 small counties).

Eight counties are currently at the 30% share and therefore might not be impacted by the formula (Butler, Cuyahoga, Darke, Franklin, Huron, Lorain, Putnam, and Summit). Not surprisingly most of these counties are urban counties with large municipal populations. Three counties currently receive less than 30% share of the undivided local government fund and might benefit from SB 364 (Belmont – 16%, Lake – 11%, and Lucas – 29.49%).

Small, Rural Counties Will Experience Greatest Loss

One of the unintended consequences of this amendment is the severe impact that this bill will have on small counties. Under HB 153, 23 small counties with limited local resources were the beneficiaries of a minimum distribution provision in which the county undivided local government fund was guaranteed the lesser of their SFY 2011 distribution or $750,000. In most of these small counties, due to their small municipal populations, the county share is 50% or more. This means that in some of the least populated counties in the state with the most limited resources, the redistribution of revenues will be the most dramatic. If the state fails to continue the minimum distribution provision in SFY 2014, the impact will be even more severe under this legislation with the county undivided LGF experiencing a full 50 % reduction in SFY 2014 and the county share of that amount being reduced by up to an additional 50%.

SB 364 Violates Constitutional Principle Prohibiting Non-Supplanting of Existing Funding Obligations

One of the chief arguments in support of SB 364 is that counties are receiving casino revenue and therefor the counties can afford to lose more LGF revenue. This argument is flawed in several ways.

The constitutional amendment provides that casino tax revenues are intended to supplement current state aid to counties, cities and school districts. The Ohio Constitution provides in pertinent part:

Tax collection, and distributions to public school districts and local governments, under sections 6 (C) (2) and (3), are intended to supplement, not supplant, any funding obligations of the state. Accordingly, all such distributions should be disregarded for purposes of determining whether funding obligations imposed by other sections of this constitution are met.

SB 364 appears directly to violate the principle of “non-supplanting ” that was included in the constitutional amendment.

Casino Revenue Projections Are Unreliable

CCAO has been tracking casino revenues since the Cleveland and Toledo facilities opened in May of this year. The Columbus Hollywood Casino just opened October 8 and thus there is no track record on its performance. Since June of this year, the first full month of operation for the Cleveland and Toledo casinos, each casino’s revenue has decreased in every single month since the first full month of operation. Revenues have declined in five consecutive months from $46 million in June to $34 million in November.

When the legislature created the “percentage of tax receipts” approach to funding the Local Government Fund in 2008 with the support of local governments, one of key issues was making sure that the LGF was a stable and reliable revenue source moving forward. If the past five months are any indication, casino revenue is at best an unstable and somewhat unreliable revenue source. The state should ponder the wisdom of attempting to make county government more reliant on this revenue source as a long term solution to local government funding.

Other problems associated with relying on casino revenue include the following:

  • A 2009 Department of Taxation/OBM study projected that the seven race tracks with video lottery terminals would reduce gross revenue at each of the four casinos by approximately 27%. Only one racino has opened (Scioto Downs – June, 2012). The other six are supposed to open in 2013 and 2014 meaning we will not see reliable revenues from the four casinos probably until 2015, after all seven racinos are open and operating with some type of track record upon which to base projections.
  • There are in excess of 800 “internet sweepstakes cafes” that compete for gaming dollars, which gaming industry sources suggest may siphon off as much as 10% or more of the dollars that would have been spent at a casino. Most of these internet cafes are located in or near urban areas where they will compete head to head with nearby casinos.
  • Although identified as “county casino revenue,” approximately 25% of this revenue is allocated under the constitution to the eight largest cities in Ohio that had a population of more than 80,000 at the time of the 2000 census.
  • Statewide projections of Gross Casino Revenues continue to be revised downward with no end in sight.

Counties Experience Significant Revenue Losses from State Revenue Sources

One of the arguments put forward in support of SB 364 is that counties have not experienced the same cuts as other local governments. Based on information provided by the state as well as local information, CCAO would contend that this is not an accurate portrayal of the current county fiscal situation.

To the extent that most counties (all but four) receive between 30 and 60% of the County Undivided Local Government Fund, clearly the 50% cut in Local Government Funds to the 88 undivided LGFs constitutes a significant revenue loss to counties as well as other local governments. Of the $535 million savings to the state and loss to local governments from the 50% Local Government Fund cuts, a significant percentage of those cuts were experienced by the 88 counties based upon their reliance on revenue distributions from this revenue source. Historically for most counties the LGF was typically the third or fourth largest revenue source for the county general fund after sales taxes, property taxes (inside millage), and investment income.

Counties and other eligible local governments experienced a loss of approximately $100 million or 15% in LGF revenues in 2009 due to a historic decline in state tax revenues caused by the Great Recession. Distributions were relatively flat in CY 2010 and 2011 and will decline significantly in CY 2012 and CY 2013 due to the cuts included in the state budget. If SB 364 is enacted, revenue distributions for counties would decline precipitously in CY 2014 following declines for all local governments in 2012 and 2013. In summary, if SB 364 is enacted counties will lose significant revenue from this important revenue source in four out of six consecutive years.

The state dramatically reduced its payments to local governments for lost Tangible Personal Property (TPP) and public utility tax payments (PUTP) resulting from tax reform. These revenues were redirected to the State General Revenue Fund to help balance the current state budget. Savings to the state and losses to counties from both revenue sources (TPP and Utility Payments) is estimated to be roughly $100 million per year in SFY 12 and SFY 13. Following school districts which clearly lost the greatest amount from the accelerated phase out of TPP and public utility tax payments, counties were the second largest category for lost revenues from these two revenue sources. This is true because counties have many levy funded agencies that rely on property taxes to provide county services.

Counties Experience Significant Revenue Losses from Local Revenue Sources

Local property tax revenues for all local taxing districts including counties have declined across most of Ohio within the past four years for the first time since the Great Depression. The decline in property valuations is being experienced by all local governments through declining property tax collections. As property values have declined, property tax levies are not generating the amount of revenue that county auditors projected at the time the tax levies were approved. This is a significant problem for all local governments, but is more so for counties given the sizable number of property tax levies that counties depend on to provide county services.

Another major revenue loss has been experienced by counties in the realm of investment or interest income. Over the past ten years and mostly over the past five years investment income for most counties is off by approximately 80%. As previously mentioned investment income had been perhaps the fourth largest revenue source for the county general fund. Of all the revenue losses to the county general fund the loss of investment income has been the largest and most severe.

Other county general fund revenue sources have not been immune from the generally depressing effect of declining business activity. Most county fees experienced declines during the recession from depressed business activity. Even sales tax revenue which has generally been a bright spot for county government experienced declines during 2008, 2009 and in some counties during 2010.

County Services Provided to All Residents of the County

Counties are essentially agents of the state in the administration of uniform services to the residents of counties, whether they live within municipalities or townships. County government is required by state law to provide a multitude of services to all of its residents regardless of where they live. These services include:

  • Human and social service programs – provided by the county department of job and family services, children services board, child support enforcement agency, board of developmental disabilities, board of alcohol, drug and mental health, the family and children first council, and senior service programs;
  • Funding for severe medical conditions – for individuals that contract or have been exposed to tuberculosis, and families with children with severe medical handicaps;
  • Services to veterans – as they return home and adjust to society;
  • Elections and voting registration – conducted by the county board of elections
  • County Justice System – utilizing the common pleas court system and its various divisions to protect public safety, settle estates, protect abused and neglected children, and in other domestic situations. Most municipalities do not have a municipal jail, but use the county jail;
  • Services provided by county elected officials – county sheriffs keep the peace, county prosecutors provide general legal guidance to townships, and county coroners provide death investigations and other critical services .

If the state wants to alter how it supports local governments and how local governments pay for services, then the state should conduct a comprehensive analysis not only of revenue sources but also of the services provided and the relationship of those services to mandates provided by the state upon local governments.

SB 364 will pit local governments against each other at the state and local levels. To the extent that one of the priorities of the Kasich Administration has been to promote shared services, collaboration and cooperation among local governments in order to save money and improve local government efficiency, SB 364 will have the practical effect of undermining cooperation as local governments fight among themselves over declining state revenue sharing.