Highlights of a GAO Symposium: Addressing Key Challenges in an	 
Intergovernmental Setting (31-MAR-03, GAO-03-365SP).		 
                                                                 
Responding to many of the nation's critical challenges--such as  
meeting the health care needs of the poor or countering terrorist
threats--has been the joint responsibility of all levels of	 
government. The effectiveness of federal programs has		 
increasingly become dependent on state and local management and  
resources, as well as constructive interactions between federal, 
state, and local actors, including private or nonprofit actors	 
who are joining with government officials to carry out national  
policies and programs. This increased interdependence among	 
levels of government presents many challenges. While many policy 
areas have been nationalized and federally funded, greater	 
responsibility has been devolved to state and local governments  
for implementing programs to achieve national goals. The	 
intergovernmental system is facing the complexity of managing	 
programs involving numerous actors, and the flexibility and	 
capacity of the federal system to respond to unique local needs  
is challenged by long-term national and international trends. On 
November 20, 2002, GAO convened a symposium to identify and	 
discuss the key policy and fiscal issues facing the		 
intergovernmental system. The invited participants represented	 
federal, state, and local governments, national associations,	 
public interest groups, and research and academic institutions.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-365SP					        
    ACCNO:   A06561						        
  TITLE:     Highlights of a GAO Symposium: Addressing Key Challenges 
in an Intergovernmental Setting 				 
     DATE:   03/31/2003 
  SUBJECT:   Economic policies					 
	     Intergovernmental relations			 
	     National policies					 
	     Fiscal policies					 
	     Health care costs					 
	     Health care services				 
	     Tax administration 				 
	     Tax administration systems 			 

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GAO-03-365SP

                                       A

March 2003 HIGHLIGHTS OF A GAO SYMPOSIUM Addressing Key Challenges in an
Intergovernmental Setting

GAO- 03- 365SP

Letter 1 Appendixes

Appendix I: Participants Attending the November 20, 2002 GAO Symposium**
Addressing Key Challenges in an Intergovernmental Setting* 5 Introductory
Speakers 5 Participants 5

Appendix II: GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting 7 Background and Highlights of the Discussion 7
1. Mismatch Between Current Revenues and Spending Demands 8 2.
Intergovernmental Financing of Health Care, Particularly

Long- term Care for the Elderly and Disabled 14 3. Current Tax Structures
at All Levels of Government and

Interrelationships Between Them 18 4. Consider Reassessing the Assignment
of Responsibilities 22 Discussion of Need for an Ongoing Dialogue and
Possible Framework 28

Appendix III: Summary of Introductory Remarks 31

Appendix IV: Intergovernmental Relations Symposium Slide Presentation 33

Appendix V: Grant Programs to State and Local Governments 44 Figures
Figure 1: Composition of Spending as a Share of GDP Assuming

Discretionary Spending Grows With GDP and the Tax Cuts Do Not Sunset 9
Figure 2: State Spending by Function as a Percent of Total State

Spending After 1, 5, and 10 Years 16 Figure 3: Federal and State Revenue
Trends 19 Figure 4: Number of Federal Preemption Statutes Enacted Per

Decade 26 Figure 5: Summary of the Number of Grant Programs to State and

Local Governments: Fiscal Year 2001 44 Figure 6: The 20 Largest Grant
Programs to State and Local

Governments: Fiscal Year 2001 (obligations in billions) 45 Figure 7: Trend
in the Number of Federal Grant Programs to State

and Local Governments 1980- 2001 46

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Letter

March 31, 2003 Highlights of a GAO Symposium on Addressing Key Challenges
in an Intergovernmental Setting Addressing many of the nation*s critical
challenges* such as meeting the health care needs of the poor or
countering terrorist threats* increasingly depends on the joint efforts of
all levels of government. The effectiveness of federal programs has
increasingly become dependent on state and local management and resources,
as well as constructive interactions between federal, state, and local
actors, including private and nonprofit actors.

Consequently, the fiscal and policy fortunes of each level of government
in our system are increasingly interdependent. While citizens have
demanded federal action and many policy areas have become nationalized,
this has been accompanied by a growing reliance on state and local
governments to implement national goals. These arrangements confer mutual
benefits: the federal government gains valuable political and fiscal
partners and state and local governments gain federal resources and
support. However, the increasing connections among governments in our
system

have also raised vexing governance challenges. State and local governments
have been confronted with the challenge of addressing their own unique
responsibilities while at the same time assuming stewardship for a growing
number of national goals. The federal government must

reconcile its accountability for achieving national outcomes with its
growing reliance on independent third parties. It can be confusing for the
public to identify responsibilities for outcomes when so many players at
all levels of government are involved.

The intergovernmental system is now being tested by a complex array of
specific short- term and long- term challenges. For example, in areas
ranging from homeland security to education and health care, federal,
state, and

local governments are facing an increasing range of daunting problems in
managing programs involving numerous actors inside and outside of
government. Moreover, the unique advantages of a federal system* the
flexibility and capacity to respond to unique local needs* are challenged

by long- term trends such as advances in technology and communications
that span state and even national boundaries and inspire demands for
consistent national regulatory and tax policies.

Currently, the system*s challenges are most sharply defined by
increasingly acute expenditure and revenue pressures occurring at all
levels of government. In the near term, revenues have fallen, while other

developments, such as health care price increases, unexpected homeland
security threats, and the war against terrorism have greatly increased
spending demands at all levels of government. Over the longer term,
pressures will continue, driven in large part by the aging of the
population. At the same time, other trends, such as increased global
interdependency and rapidly advancing technology, could work to undermine
tax bases as more economic transactions occur within and across our
nation*s borders. In addition, state and local tax systems are not
designed to adequately

capture services* the biggest growth sector of the economy. Together, such
trends present fiscal and policy choices that will become far more
difficult over time if not addressed in a timely fashion.

Recognizing that decision makers can greatly benefit from a better
understanding of the constraints and challenges that our federal, state,
and local partners face, GAO convened a symposium on November 20, 2002, to
discuss the key policy and fiscal issues facing the intergovernmental
system. The invited participants consisted of a cross section of current
and former federal, state, and local officials, as well as observers from
academia, think tanks, public interest groups, and the private sector. The
summary of the participants* discussion reflects the views expressed by
the attendees and does not necessarily represent a complete perspective on
these issues or reflect the views of GAO.

As agreed with the participants, our goal was to reach consensus on the
top challenges facing the intergovernmental system and to engage in an
open and not- for- attribution- based dialogue. As expected, the forum
participants expressed a range of views on the challenges facing the
intergovernmental system. After a lengthy discussion, the following were
identified as the most significant intergovernmental challenges:

 mismatch between current revenues and spending demands; 
intergovernmental financing of health care, particularly long- term care

for the elderly and disabled;  current tax structures at all levels of
government and interrelationships

between them; and  consider reassessing the assignment of
responsibilities.

Another major topic of discussion was the need for ongoing dialogue about
national priorities and shared challenges. There was general agreement
that since the Advisory Commission on Intergovernmental Relations (ACIR)
was abolished, there has been a lack of a focal point and forum for
comprehensive discussions of intergovernmental issues and a formal
mechanism for forging partnerships. While no consensus was reached on the
type and format for such a renewed forum or focal point, we hope that

this symposium will serve as a springboard for future dialogue among
intergovernmental partners on the long- term challenges facing the nation
and advising the Congress on emerging domestic policy issues.

Appendix I provides a list of the symposium participants, and appendix II
provides highlights of the most significant challenges discussed by the
participants, as well as subsequent comments we received from them on a
draft summary of the discussion. It also includes a discussion of the need

for a forum for ongoing dialogue on intergovernmental issues. While
appendix II largely reflects the insights and perspectives of the
participants, it also contains additional information, such as that
provided in the background sections, to provide context and clarity for
the discussion. Appendix III provides a summary of introductory remarks
made by David M. Walker, Comptroller General of the United States, and
David Broder of the Washington Post. Appendix IV contains a set of slides

presented by GAO at the beginning of the symposium. This presentation was
designed to provide background information to spur the discussion among
symposium participants. Finally, appendix V contains an informative
summary of grants to state and local governments provided to us by the
Office of Management and Budget. I wish to thank the participants for
taking the time to share their knowledge

and provide their insights and perspectives on the important matters this
document discusses. We look forward to working with them on
intergovernmental issues of mutual interest and concern in the future. Key

contributors to this report were Ann Calvaresi- Barr, Thomas Yatsco, and
Amelia Shachoy. Paul L. Posner Managing Director, Federal Budget Analysis
and Intergovernmental Relations Issues, Strategic Issues

Appendi xes Participants Attending the November 20, 2002 GAO Symposium**
Addressing Key

Appendi x I

Challenges in an Intergovernmental Setting* Introductory Speakers David M.
Walker, Comptroller General of the United States, U. S. General Accounting
Office David M. Broder, Columnist, Washington Post

Paul Posner, Managing Director, Federal Budget Analysis and
Intergovernmental Relations Issues, Strategic Issues, U. S. General
Accounting Office

Participants Jonathan Breul, Director, Federal Management and Performance,
IBM Business Consulting Service (formerly with the United States Office of

Management and Budget) Enid Beaumont, Georgetown Public Policy Institute,
Georgetown University

Tim Conlan, Associate Professor, Public and International Affairs, George
Mason University

Harley Duncan, Executive Director, Federation of Tax Administrators Julia
Friedman, Deputy Chief Financial Officer/ Chief Economist, Government of
the District of Columbia

Natwar Gandhi, Chief Financial Officer, Government of the District of
Columbia

David F. Garrison, Vice President, National Academy of Public
Administration

William T. Gormley, Professor, Georgetown Public Policy Institute,
Georgetown University

Robert Greenstein, Executive Director, Center on Budget and Policy
Priorities

John Kincaid, Professor and Director, Meyner Center for State and Local
Government, Lafayette College

Iris Lav, Deputy Director, Center on Budget and Policy Priorities

Larry Naake, Executive Director, National Association of Counties Richard
P. Nathan, Director, The Nelson A. Rockefeller Institute of Government,
State University of New York, Albany

Sue Nelson, Democratic Deputy Staff Director, Committee on the Budget,
United States Senate Robert O*Neill, Jr., former President, National
Academy of Public Administration Sallyanne Payton, Professor, The
University of Michigan Law School Scott D. Pattison, Executive Director,
National Association of State Budget Officers

William Pound, Executive Director, National Conference of State
Legislatures

Andrew Richardson, Majority Staff Director, Subcommittee on Oversight of
Government Management, Restructuring and the District of Columbia,
Committee on Governmental Affairs, United States Senate

Ray Scheppach, Executive Director, National Governors Association Hannah
Sistare, Visiting Fellow, The Brookings Institution Christopher Smith,
Counselor to the Secretary, Department of the Treasury Carl Stenberg,
Dean, College of Liberal Arts, University of Baltimore Carl Tubblesing,
National Conference of State Legislatures Cameron Whitman, Director,
Policy and Federal Relations, National League of Cities

Henry Wray, former Senior Counsel, Subcommittee on Government Efficiency,
Financial Management, and Intergovernmental Relations, Committee on
Government Reform, House of Representatives

GAO*s Symposium on Addressing Key

Appendi x II

Challenges in an Intergovernmental Setting Background and This symposium
was convened as a springboard to enhance constructive Highlights of the

discussions among federal, state, and local actors about national
priorities and resources; discuss possible formats for an ongoing dialogue
to forge Discussion

links between all levels of government; help to shape GAO*s future work in
this area; and eventually advise the Congress on emerging domestic policy
issues. Our goal in sponsoring the symposium was to have participants
discuss the full range of challenges facing the intergovernmental system*
with an eye toward those that are long term in nature* and come to
consensus on the top challenges that need to be addressed collaboratively.
Discussion of Key

After introductory remarks, a lengthy discussion ensued of the key
Challenges

challenges facing the intergovernmental system. At the close of this
discussion, participants identified the top intergovernmental challenges
that need to be addressed collaboratively. Symposium participants
identified the following four as the top long- term intergovernmental

challenges:  mismatch between current revenues and spending demands; 
intergovernmental financing of health care, particularly for long- term

care of the elderly and disabled;  current tax structures at all levels
of government and interrelationships

between them; and  consider reassessing the assignment of
responsibilities. Each section of this summary is prefaced with
supplemental background information derived from introductory
presentations, 1 research and interviews conducted by GAO in preparation
for the symposium, and previous GAO reports.

1 Introductory presentations were delivered by David M. Walker,
Comptroller General of the United States; Paul Posner, GAO Managing
Director, Federal Budget Analysis and Intergovernmental Relations Issues;
and David Broder, Columnist, Washington Post. Summaries of remarks by Mr.
Walker and Mr. Broder can be found in appendix III and slides presented by
Mr. Walker and Mr. Posner can be found in appendix IV.

1. Mismatch Between Current Revenues and Spending Demands

Background After the economic boom of the 1990s, all levels of government
are now experiencing serious fiscal challenges, and are likely to face
even more fundamental ones in the future. In the short term, revenues are
down, while

other developments, such as higher demand for health and long- term care
services, health care price increases, and unexpected homeland security
threats, have greatly increased spending demands. In addition, certain
longterm trends, such as the aging of the population, will continue to put
spending demands on federal and state governments, while other trends,
such as increasing global interdependency and advancing technology, will
likely affect traditional sources of government revenues by reducing tax
bases.

Current and projected fluctuations in resources have had serious
repercussions for the entire intergovernmental system. The federal budget
has moved from unprecedented federal surpluses of the late 1990s to
deficits. The Congressional Budget Office (CBO) now projects federal
deficits of $246 billion in fiscal year 2003 and $200 billion in fiscal
year 2004 as the baseline before further policy actions. 2 Along with a
decline in revenues, spending demands have increased. Within the past year
alone, the impact of the terrorist events of September 11, 2001, required
the

federal government to take on greater responsibilities, health care costs
continued to grow at double- digit rates, and the war on terrorism has
increased defense needs.

Over the longer term, the retirement of the Baby Boom generation will
place greater demands on federal programs like Social Security, Medicare,
and Medicaid if they remain unchanged. Under most scenarios, rapidly
escalating and unsustainable deficits will emerge over the next several
decades absent structural changes to the spending or revenue side of the
federal budget (see fig. 1).

2 The March 2003 budget outlook under CBO*s adjusted baseline assumes
discretionary budget authority for 2003 will total $751 billion and grow
with inflation thereafter.

Figure 1: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows With GDP and the Tax Cuts Do Not Sunset

40 Percent of GDP

30 Revenue

20 10

0 2000 2015 2030 2050 Fiscal year

All other spending Medicare and Medicaid Social Security Net interest
Source: GAO*s January 2003 analysis.

The need to fund mandatory programs such as Social Security, Medicare, and
Medicaid* as well as increased spending for defense and homeland security*
will heighten tensions with other domestic spending priorities, such as
education, the environment, physical infrastructure, and housing and
community development. State and local officials worry that

heightened federal funding pressures could mean that state and local
governments will be faced with using more of their own resources to meet
service demands. As greater expectations and spending pressures are being
placed on states and localities* including new federal initiatives such as
raising educational

standards, enhancing homeland security, implementing election reforms, and
rising Medicaid costs* they are experiencing significant, recurring
revenue shortfalls that are negatively affecting their budgets. For
example, fiscal year 2002 personal income tax collections missed states*
targets by 13 percent and corporate income taxes were nearly 22 percent
lower than

projected. Revenue declines are generally attributed to factors such as
the economic downturn, the steep stock market declines, the events of
September 11, 2001, and tax cuts in certain states.

In response, 37 states reduced their fiscal year 2002 budgets by over $12
billion. This shortfall translated into reductions in aid to local
governments, hiring and salary freezes, cuts in infrastructure projects
and discretionary programs aimed at low- income individuals and families,
and even acrossthe- board spending reductions. Many states have also taken
other actions like tapping *rainy day funds,* using tobacco settlement
funds, or raising *sin* taxes. Further, as states have exhausted many of
their options, they are now faced with taking more dramatic actions to
balance their budgets, such as reductions in entitlement coverage and
income tax increases. For fiscal year 2004, projections released by the
National Association of State Budget Officers (NASBO) suggest that states
will face a fiscal gap of over $80 billion.

Participants* Discussion Participants agreed that fiscal stress on all
levels of government are greatest during periods of economic downturn like
the current one, when revenues are down. Participants noted that the
current economic downturn has been even worse than past ones* perhaps the
most severe in the postwar period. While increased spending demands and
declines in revenues are being felt at every level of government, some
participants observed that state and local governments do not have the
flexibility to weather a downturn like this one because, unlike the
federal government, many are precluded from having an operating deficit.

Near- term Fiscal Stress Some participants observed that recent fiscal
stress has undermined the ability of states and localities to uphold their
share of the intergovernmental partnership in key policy areas in which
the federal government has a stake, including Medicaid, education,
discretionary programs for low- income individuals and families, and
infrastructure projects like roads, bridges, and improvements in public
buildings. This has repercussions not only for state and local
governments* ability to help the federal government achieve national goals
but also for those vulnerable populations that rely on government for
needed assistance and services.

Some participants further recognized that actions taken by states and
localities to close deficits* tax increases and deep spending cuts* could
serve to undermine an economic recovery overall, thereby offsetting at
least some of the economic stimulus provided by other federal fiscal and
monetary policy actions.

While most participants acknowledged the severe effects of the economic
downturn on state and local budgets, some pointed out that certain state
and local choices during prosperous economic periods significantly
contributed to their current budget crisis. Although in recent years
states have tried to build up reserves and *rainy day funds,* they also
made choices, such as cutting taxes and increasing spending, during the
prolonged economic boom of the 1990s. For example, between 1990 and 2000
state spending grew twice as fast as federal domestic spending. Once the
economic boom was over, some participants noted that the tax

structures and spending commitments they had entered into were no longer
sustainable. States have quickly used up much of their savings and are
taking or contemplating even more dramatic actions, such as increasing
income taxes and reducing spending levels, even in entitlement programs.
Some participants noted that states would not be in as serious a crisis

today if they had resisted pressures for large tax cuts and spending
increases and saved more during the 1990s. One participant observed that
states would have needed much larger reserves than they accumulated to
avoid deficits stemming from a downturn similar to that faced in the early
1990s* a downturn which now seems less severe in its fiscal impact than
the current period.

Participants also commented that the federal government has contributed to
the fiscal challenges of state and local governments by placing greater
responsibilities on them for achieving national goals and objectives. For
example, state and local governments are now being asked to improve
educational performance to meet national standards and enhance

homeland security preparedness. In addition, they are responsible for
paying for the rising costs of health care and long- term care needs for
the aged and disabled through Medicaid. For example, a participant
observed that Medicaid has grown from about 10 percent of total state
budgets in

1987 to 20 percent today. Additionally, several participants observed that
recent federal tax cuts could further diminish the tax bases of other
governments, particularly states, since most states* tax bases are linked
to the federal tax base.

Policy Options Following the participants* discussion about the nature and
causes of the mismatch between spending and revenues in periods of
economic downturn, participants talked in detail about options for
addressing a mismatch. Many participants discussed the need for short-
term federal aid to help the state and local sector weather this downturn.
However, it was also recognized that states and localities can do their
share in the future by building up *rainy day funds* and constraining
unsustainable tax cuts and

spending increases, and working towards greater economy and efficiency
across programs during healthy economic periods.

Participants then discussed specific actions that the federal government
could take to assist states in remedying any fiscal mismatch. A key option
discussed centered on federal financial aid during economic downturns.
Participants noted that federal aid would help implementation of state and

local intergovernmental programs while also reducing the likelihood that
states would make spending and tax choices that might undermine federal
efforts to revive the economy. Participants then offered a few examples of
the form that such aid could

take. Examples mentioned included an enhanced federal Medicaid matching
share and greater funding for homeland security preparedness. Others
discussed a form of general revenue- sharing or countercyclical aid to be
available during economic downturns. According to a few participants, key
considerations that probably would need to be addressed prior to creating
any countercyclical aid or general revenue- sharing program include: 1)
the triggers for starting and ending the aid, 2) the

formulas used to distribute the aid, 3) the conditions, if any, to be
attached to the aid, and 4) the overall level of support to be provided.

Most participants also acknowledged that increased federal assistance
would likely result in larger federal deficits. While it is generally
agreed that running deficits during downturns is not harmful to the
economy in the near future, they noted that the federal government may
find it difficult to limit increased aid to the period of economic
downturn. In addition, a few participants worried that setting a precedent
for federal aid could create a disincentive for states and localities to
save for rainy days when the economy is strong. In response, one
participant noted that a condition of

federal aid could be that states would be required to have significant
*rainy day funds* or reserves before triggering financial aid. Longer-
term Structural Factors The symposium discussion then moved to longer-
term structural factors

that could also be contributing to the fiscal mismatch between spending
and revenues. Most participants acknowledged that structural long- term
forces, such as changes in the global economy and the aging of the
population, are in part responsible for the mismatch that states are

experiencing. For example, the aging of the population will create
significant demands for Medicaid long- term care services, placing
increasing fiscal pressures on states* ability to fund their share of the
program. On the revenue side, state revenue systems have not kept up with

rapid technological developments in the economy. State sales taxes in
particular do not adequately capture services* the largest growth sector
of our knowledge- based economy* nor do they effectively tax the
increasing numbers of Internet and mail order sales. States have also
faced challenges in capturing income generated by increasingly global
corporations.

The current intergovernmental grant system was another structural factor
that participants identified. This system is largely categorical in nature
as most funds are provided through defined programs offering little
flexibility

for adapting to unique state and local needs. Some participants argued
that federal grants are not always provided in areas where state and local
spending needs are greatest or funding gaps are most serious. It was
further noted that the trend in favor of categorical grant programs is not
exclusive to the federal government, as state policy makers have shown a
tendency to do the same thing with regard to grants to local governments.
(For more information on federal grants, refer to app. V.)

Some participants then debated the pros and cons of consolidating the
hundreds of categorical grants into a series of block grants in several
policy areas related to the core services of government. Some state and
local interests contend that they would accept greater accountability

requirements, such as national performance goals, from the federal
government in exchange for greater funding flexibility. Major areas
identified as possible targets for consolidation include education, health
care, employment and training, the environment, and physical

infrastructure. However, other participants expressed concern about block
grants as past experiences have shown that increased state and local
flexibility has often been accompanied by federal funding cuts. The
Congress also tends to provide less funding for these broader purpose
programs over time. For example, the consolidation of several categorical
grants into the social services block grant in the 1980s resulted in an
overall decrease in total funding to states for those services.

Other participants raised concerns about whether block grants could
constrain the federal government*s oftentimes legitimate need to fill gaps
in areas where state and local governments have not been providing
sufficient funding. One example offered centered on federal education
funding, which had been largely targeted at low- income and special needs
students

while state and local education funding for the most part was aimed at the
general student population.

One participant highlighted the emergence of a new model for
intergovernmental grants, referred to as performance partnerships. As
implemented by agencies like the Environmental Protection Agency, the goal
of a performance partnership is to provide states with greater flexibility
in shifting federal funds among categorical programs while establishing
more rigorous state accountability for federal performance goals and
measures.

Participants emphasized that solutions to these challenges need to be
addressed collaboratively. Earlier in the day, David Broder of the

Washington Post framed this critical issue in his introductory remarks.
(See app. III for a summary of the introductory remarks.) In his view, the
fiscal policy making process at the national level has a fundamental
weakness: even though actors at all levels of government are increasingly
focusing on common goals and jointly funding and implementing programs,
decision making still proceeds along compartmentalized lines.
Specifically,

Mr. Broder said the federal government frequently acts in isolation of
state and local needs and impacts, often taking credit for new benefits
while shifting costs and burdens of making hard fiscal choices to states
and localities, who operate under more constrained fiscal rules.
Accordingly, many participants agreed with Mr. Broder that a forum is
needed in the national fiscal debate where officials at all three levels
of government can

have serious, collective, and ongoing discussions about national goals and
resources.

2. Intergovernmental Financing of Health Care, Particularly Long- term
Care for the Elderly and Disabled

Background The division of responsibility between federal and state
governments for the health and welfare of citizens has traditionally
differed for particular

clientele. The federal government has been primarily responsible for
assistance and health care for the elderly and the disabled through
programs like Medicare, Social Security, and the Supplemental Security
Income. Financing and administering programs targeted at children and

families have largely been a shared responsibility between federal and
state governments.

These established roles have become blurred under the Medicaid program.
Although the program is widely perceived as providing health care for
lowincome families and children, in recent years the program has become
the main source of financing health and long- term care for the elderly
and disabled* over 60 percent of Medicaid spending is now devoted to care
for these groups. The program has also assumed responsibility for
financing the Medicare premiums for low- income elderly (known as dual
eligibles). Eighty- two percent of projected Medicaid expenditure growth
reflects increases in the cost of caring for aged and disabled
beneficiaries, and states share this burden with the federal government,
paying an average of 43 percent of the total costs.

The burden of funding health and long- term care for the aged and disabled
has been growing as a share of both federal and state budgets. For
example, Medicaid spending already comprises a large portion of most state
general fund expenditures* an average of 15 to 20 percent. In the short
term, spending growth has been fueled by factors such as overall health
care cost growth, particularly in prescription drugs, and increasing costs
of long- term care services. In response, most states have either taken or
are now contemplating a mix of cuts in Medicaid coverage, increased
copayments, and eligibility reductions. In the future, demand for Medicaid
services, particularly long- term care, will grow even more as Baby
Boomers begin to age. As a result, Medicaid is expected to encompass even
higher percentages of federal and states budgets* estimates show Medicaid
will

be approximately 26 percent of states* total budgets in 5 years and 33
percent 10 years from now. 3 (See fig. 2.) The President*s Fiscal Year
2004 budget proposes new flexibility for states in serving nonmandatory
Medicaid populations* federal funds would be increased in the near term,
but the open- ended federal commitment for financing Medicaid would be
capped. The impact of this proposal on state budgets and health care
services is being debated.

3 National Association of State Budget Officers September 2002 estimates.

Figure 2: State Spending by Function as a Percent of Total State Spending
After 1, 5, and 10 Years After 1 year After 5 years After 10 years

21.8% 33.6%

20.8% 26%

20.6% 18.3%

11.2% 10.5% 2.2%

29.2% 26.5%

9.4% 31.6%

8.8% 3.7%

2.0% 8.1% 3.4%

1.8% 7.3%

3.1%

Medicaid Elementary and secondary education Higher education Public
assistance Corrections Transportation All other Source: National
Association of State Budget Officers.

Note: Assuming current growth rate for Medicaid and current average growth
for all other categories.

Health care spending creates stress at the federal level as well. Combined
federal/ state spending for Medicaid grew at an annual average of 11
percent between 1980 and 2000. Over the longer- term, federal spending on
health care will be the fastest growing element of spending* federal
outlays for Medicare and Medicaid are projected to nearly triple as a
share of GDP over the next 75 years.

Participants* Discussion This discussion began with the majority of
participants emphasizing concern over Medicaid spending growth.
Specifically, everyone was in agreement that Medicaid spending has grown
rapidly in the past 2 years and will continue to do so because of rises in
costs related to health care services, particularly prescription drugs,
and greater demands for long

term care. Moreover, it was noted that other national trends, such as the
aging of the population and the retirement of Baby Boomers, would create
even greater demands for health and long- term care services over the next
several decades, and consequently drive spending upward. There was
unanimous agreement that funding health care costs for a growing aging
population is clearly one of the biggest shared challenges for all levels
of government and that the country is on the cusp of a crisis in health
care and long- term care.

There was general agreement that states are not well positioned
financially to meet the future demands related to Medicaid, and that
current arrangements may not be sustainable in the future. While all
levels of government will be faced with very large health and long- term
care demands once the Baby Boomers retire and age, there was general
agreement that the burdens will fall heavily on states. Participants
observed that this not only has consequences for states but for
beneficiaries of the program. Due to state balanced budget requirements,
program benefits and policies will be affected by cyclical fiscal shocks
which will prompt episodic series of cuts, constraints, tax increases, and
cost shifts to providers and beneficiaries. Indeed, all participants
agreed

that we are seeing this now. For example, many states have lowered payment
rates to providers, eliminated optional services like dental care, and
tightened eligibility requirements.

As a result, participants agreed there is a pressing need to reevaluate
intergovernmental financing of health care for the disabled and aged, who
account for the majority of costs. Several participants representing state
governments argued that if the federal government took over responsibility
and related costs for Medicaid long- term care, this alone would address
the states* fiscal problems, allowing states to more easily finance most
other spending priorities. The same participants justified this argument
by observing that funding states* share of Medicaid long- term care costs
is clearly the biggest spending demand in the future, as it will
increasingly

absorb state resources. Other less daunting options for assisting states
in financing health and longterm care for the aged and disabled were also
presented by some participants. One option discussed was increasing
flexibility in grants to help states better tailor funds for the
particular needs of their aged and disabled populations. Another option
advanced by a few participants involved enhancing the federal share of
Medicaid matching funds on a temporary or permanent basis.

Financing the long- term care of the aged and disabled constitutes a
longterm fiscal challenge that will increasingly destabilize the finances
of all levels of government in our system. While participants concluded
that current financing arrangements have created unsustainable fiscal
burdens for the states, they also acknowledged that increasing federal
fiscal responsibilities would add further stress to the longer- term
federal budget outlook that is already confronted with the burdens of
sustaining funding for Medicare, Social Security, as well as its current
share of Medicaid.

Accordingly, participants agreed that this situation calls for a serious
dialogue involving stakeholders from all levels of government regarding
the appropriate roles of governments in caring for the aged and disabled.

3. Current Tax Structures at All Levels of Government and
Interrelationships Between Them

Background The revenue challenges facing state and local governments stem
from cyclical fluctuations in the economy, which states historically have
been able to overcome, as well as long- term structural characteristics.
These problems could serve to undermine the longer- term fiscal viability
of state and local revenue systems in a global economy. In the short term,
the economic downturn has resulted in the rapid decline in revenue from
taxation on personal income, corporate profits, and capital gains.
Further, the forces that drove income and economic growth may not be
repeated on

the scale of the late 1990s. Similarly, the federal government has
experienced quick declines in tax revenues (see fig. 3).

Figure 3: Federal and State Revenue Trends 15

Real year- over- year quarterly percent change 10

5 0 -5 -10 -15

1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1

State tax revenue Federal revenue Source: State tax revenue from
Rockefeller Institute/ NASBO. Federal revenue from Bureau of Economic
Analysis, Department of Commerce.

In addition, certain long- term structural forces are serving to erode the
traditional revenue bases of states. State and local sales taxes, for
instance, are levied on the retail sales of products. However, as the
service economy grows as a share of total revenues, the economy of the 21
st century is increasingly geared toward providing services that are not
captured by the sales tax in most states. States also have difficulty
imposing this tax on the

growing market of remote sales from mail orders or the Internet. Because
of the complexity of dealing with thousands of taxing jurisdictions each
with its own tax rates and base, the U. S. Supreme Court has held that,
absent authorization from the Congress, state or local governments cannot
require out- of- state vendors to collect sales or use tax unless the
vendor has a physical presence in the state. Buyers are actually required
to pay sales taxes directly to their states, but they rarely do and the
policy is effectively not enforced. While no one has developed a reliable
estimate of

the amount of tax revenue losses on all remote sales, the losses will
increase as remote sales increase. Moreover, states face growing
difficulties in tapping sources of individual and corporate income* as
financial transactions and corporations have become more global.

State and local governments have taken some actions to modernize and
coordinate their tax systems. For example, the Streamlined Sales Tax
Project has laid the foundation for coordinating sales tax administration
and methods of collection across the nation. This project is intended to
simplify and make the sales and use taxes more uniform for all types of
retailers by providing common definitions across states. If states
simplify and standardize their tax systems, this could reduce the
administrative burden of tax collection on remote vendors, and may help
facilitate congressional action to provide states with the authority to
require remote vendors to collect the sales tax.

Participants* Discussion Participants agreed that there is a pressing need
to look at the tax structures of all three levels of government
collectively, and for policy makers at all levels to better understand the
relationships between them.

They agreed that the U. S. economy is becoming increasingly interconnected
and global as American companies conduct business across state and
national boundaries. Economic globalization creates a need for greater
legal, financial, and regulatory uniformity among units of government
within and outside the United States.

Participants representing state and local interests worried that the
effects of the global economy place states and localities in a precarious
position, driving greater centralization of authority at the federal
level, and eroding available state and local revenues. Currently,
industries must deal with a

patchwork quilt of state and local tax systems and regulatory policies,
which impede the ability of multinational and interstate businesses to
operate efficiently and effectively across jurisdictions. Economic

globalization has spurred efforts by business to promote greater legal,
financial, and regulatory uniformity among units of government. The
federal preemption of Internet sales taxation is but one example of a
growing trend affecting many areas of state and local authority.
Accordingly, the key question considered by most participants was what

redesign of our tax structures is appropriate for the modern economy so
that the needs and interests of states, localities, and the federal
government are respected?

A basic problem raised by most participants is that changes in the global
economy have made the design of current tax systems increasingly obsolete.
Specifically, the fragmented sales tax system is not designed to capture
services, the biggest growth sector of our knowledge- based

economy, nor can it effectively tax a significant portion of sales made by
remote sellers through the Internet or mail orders.

For the most part, participants agreed that some tax reform is needed at
the state and local levels, stating that some standardization of tax
policy across states should be on the table. Participants representing
state and local interests pointed to the Streamlined Sales Tax Project as
a move in the right direction* one that responds to the demands of the
global economy. If adopted by the states, the project promises to reduce
burdens experienced by national and multinational businesses by
harmonizing sales tax bases, rates, and rules across the states.

Because most state tax systems are closely linked to the federal tax code,
participants felt that federal policy makers also need to better address
the effects of any tax- related decisions on other levels of government.
Specifically, due to the linkage of federal and state income tax bases,
changes made by the federal government to reduce taxes could also serve to
reduce state tax revenues. Some participants noted that in recent years
federal tax policy changes have been made without adequately considering
the effects on state and local governments. According to some
participants, states have already felt the negative impacts from recent
tax policy changes, which have exacerbated their current fiscal crisis.
Although state tax bases can decouple from the federal tax base, this
would likely increase enforcement burdens for the states and compliance
burdens for taxpayers. Participants argued that no forum or formal
mechanism exists for federal policy makers to consider the impact of their
own tax policies on state and local tax systems. One participant suggested
establishing a formal process for estimating the effects of proposed
federal tax policy changes on state and local governments.

On a final note, participants related that in many instances the taxing
authority at the state and local levels also has been restricted by either
the legislature or the public through voter initiatives. This situation
has put policy makers in a bind in responding to fiscal crises. In states
with tax limitations, one of the few options during this downturn is to
cut program services at a time when those most in need are even more
vulnerable. Participants observed that there is a strong antitax,
antigovernment feeling among a large segment of the population and this
sentiment needs to be

reflected in the dialogue about intergovernmental issues, particularly
with regard to the ability of state and local governments to fund their
shares of intergovernmental programs. One participant suggested that
public officials at all levels of government need to better understand why
the public has these feelings and attempt to address the root causes of
public disaffection with government.

4. Consider Reassessing the Assignment of Responsibilities

Background In recent years, state and local interests have reported that
their program and fiscal responsibilities are not matched with adequate
resource

capacity. State and local governments have assumed many new program
responsibilities in areas such as education, health care, welfare, and
homeland security. At times, states have assumed added responsibilities
through greater devolution of federal programs; other new responsibilities
have come in the form of mandates and other requirements placed upon them
by the federal government. Welfare reform is a key example of devolution,
in which states lobbied for and received significant new authority to
implement innovative and tailor- made approaches to training and
employment. States have also sought and received greater program

responsibility and flexibility from the federal government through program
waivers* particularly in Medicaid and the State Children*s Health
Insurance Program.

At the same time, many new responsibilities have been placed upon states
and localities by the federal government. For example, within the past 2
years, the federal government has required states and localities to begin
meeting new educational standards, carry out significant upgrades to
voting systems, and improve their ability to respond to public safety
threats. To carry out these program responsibilities effectively, state
and local governments must have substantial administrative capacity* e.
g., adequate information technology systems and staff with sufficient
skills* in addition to fiscal resources. While states and localities have
improved their administrative capacity over the past several decades,
there are still major capacity differences among these governments.
Further, the recent

economic downturn and related reductions in revenue collections, as well
as long- term forces, such as globalization, that are reducing some state
and local tax bases, could challenge their ability to carry out their
current and added responsibilities.

Some students of the federal system have observed that each level of
government has unique comparative advantages over certain kinds of service
and program areas. Paul Peterson, for instance, suggests that
intergovernmental competition gives states and localities incentives to

reduce tax and regulatory burdens to attract stronger tax bases. 4
Accordingly, state and local governments arguably have strong incentives
to promote education and economic development programs that can enhance
prospects for local investment in their economies. However, this argument
also suggests that competition may undermine state and local support for
other policy areas, such as social welfare, in which strong government
programs could be viewed as discouraging economic activity and growth.

Some observers believe that the growth of federal roles and
responsibilities over time has blurred these distinctions. The federal
government has come to subsidize and influence traditional areas of state
and local control such as education and criminal justice, while also
mandating increasing state and local fiscal responsibilities for such
social welfare areas as health and

long- term care. The result is the intergovernmentalization of nearly
every domestic responsibility, which has prompted tensions across
governments and confused accountability for program results. Observers
like Alice Rivlin have proposed a sorting out and reallocation of
intergovernmental roles and responsibilities. 5 Under this scenario, state
and local governments would assume primary responsibility for areas where
they enjoy a comparative advantage* such as education and housing* while
the federal government would assume national responsibilities for policies
and financing for areas, such as health care, to better promote national
standards and services.

4 Paul E. Peterson, The Price of Federalism (Washington, D. C.: The
Brookings Institution, 1995). 5 Alice Rivlin, Reviving the American Dream
(Washington, D. C.: The Brookings Institution, 1992).

Participants* Discussion Across the board, participants were in agreement
that state and local governments have assumed a growing number of new
program

responsibilities, and simultaneously the funding burdens that accompany
them. While states and localities have assumed some program
responsibilities by choice or by agreement with federal policy makers,
participants also identified what they saw as a troubling trend.
Specifically, they stated that in recent years the federal government has
continued to mandate costly new responsibilities on state and local
governments, by law

or regulation. Participants quickly agreed that there is a definite
disconnect between the responsibilities that state and local governments
have in key program areas and the fiscal and administrative resources
needed to carry out those responsibilities. In addition, participants
emphasized that along with these mandates comes the requirement that
states and localities bear the responsibility of achieving national goals
and priorities. Some

participants summed up this phenomenon as national dominance without
direct national delivery. According to many participants, the disconnect
between responsibility for

achieving national goals and needed resources is most pronounced in policy
areas such as education; health care for the poor, aged and disabled; and
homeland security. The main problem, according to some participants, is
that the federal government has not given states and localities adequate
funding to achieve federally imposed responsibilities and expectations in

such critical policy areas. Accordingly, states and localities are
increasingly being forced to choose between using scarce resources to
achieve national goals as mandated by the federal government and funding
their own local policy priorities. As a result, local priorities often get
crowded out in a system where federal or national goals encumber a growing
share of state and local budgets. Further, many participants observed that
while the disconnect between resources and responsibilities is largely
structural in nature* too many responsibilities that are not matched with
a sufficient revenue base or enough federal funding* it has been
exacerbated by the current, prolonged fiscal crisis.

The participants* discussion addressed the capacity of the state and local
sector to carry out these national responsibilities. Some participants
noted that fiscal and administrative capacity continues to vary widely
across states and localities, resulting in varying degrees of program
performance, quality of service delivery, and level of services provided.
Many noted that

the current fiscal crisis has added to this problem as state and local
budget cuts undermine their administrative capacity and services* e. g.,
hiring and salary freezes and cuts in technology improvements. A few
participants

argued that effective and consistent implementation of national goals and
intergovernmental programs could be promoted by federal initiatives to
help overcome disparities in fiscal and administrative capacity among
state

and local governments. Participants indicated that the mismatch between
responsibilities is greatest at the local level. They observed that, over
the past 15 years, county and city government responsibilities have
expanded. Mandates from both the federal and state governments have hit
local governments the hardest and they often have the least fiscal and
administrative capacity or authority to address them. Further, some
participants observed that the

increased responsibilities of local governments have not been met with
increased financial support from either the federal or state governments,
or added authority to raise revenues. Most participants agreed that policy
makers at the federal and state levels must find a better way to balance
differences between local governments, and recognize the particular
challenges faced by those jurisdictions with the least resources and the
weakest tax bases.

The District of Columbia was highlighted as a vivid example of the many
fiscal and administrative capacity concerns that had been raised by
participants throughout the day. From a city*s perspective, states have
all

the power, the federal government has all the money, and cities have all
the problems. Participants observed that there are major variations in
fiscal and administrative capacity among local governments in the
Washington,

D. C. metropolitan area. These same participants discussed the unique
needs of the District of Columbia, indicating that it must carry out state
and local responsibilities, as well as the challenges associated with
being the Nation*s capital. The District is uniquely constrained because
it has city and state responsibilities without full state autonomy or
revenue- raising authority, along with bearing the challenges of being the
capital city. 6 Another increasingly prominent trend* preemption of state
and local

authority* was identified among participants as being especially
problematic and placing state and local governments in a precarious
position (see fig. 4). The most striking example is related to the federal
restriction on Internet taxation. Further, participants noted the growth
of federal preemption across a wide range of traditional state and local

6 GAO plans to issue a report on the structural fiscal issues of the
District of Columbia in May 2003.

functions varying from health care to law enforcement. Some participants
attributed increasing federal preemption to the demands of the global
economy for greater regulatory uniformity. 7 Figure 4: Number of Federal
Preemption Statutes Enacted Per Decade

130 Number

120 1999

est.* 110

100 90 80 70 60 50 40 30 20 10

0 Before 1900-

1910- 1920-

1930- 1940-

1950- 1960-

1970- 1980-

1990- 1900 1909

1919 1929

1939 1949

1959 1969

1979 1989

1999 Year

Civil Rights and other Health, safety, and environment Commerce and
transportation Banking, finance, and taxation Source: U. S. Advisory
Commission on Intergovernmental Relations, Federal Statutory Preemption of
State and Local Authority: History, Inventory, and Issues (Washington, D.
C., 1992), p. 7.

Participants concluded by discussing options for addressing the mismatch
between the resources and responsibilities of state and local governments.
One option that generated a lively discussion was sorting out
intergovernmental functions, in light of growing concerns about fiscal and
management capacity. Alice Rivlin*s proposals, as laid out in Reviving the
American Dream, were suggested as a possible basis for such a sorting out

7 See U. S. General Accounting Office, Regulatory Programs: Balancing
Federal and State Responsibilities for Standard Setting and
Implementation, GAO- 02- 495 (Washington, D. C.: March 20, 2002) for more
background on regulatory programs.

of responsibilities. Along these lines, the participants talked about
making health care a federal responsibility and delegating other
responsibilities, such as education and physical infrastructure, entirely
to states. However, most participants warned that any attempts at sorting
out should be taken

slowly and tested in certain policy areas. Some noted that the tradeoffs
associated with broad sweeping realignments are complex and prompt deep
concerns and resistance among many stakeholders.

Participants suggested that long- term care would be a good candidate for
sorting out roles and responsibilities. The growing demand and costs for
these services have been major drivers of state fiscal stress. Moreover,
the cyclical nature of state budgeting subjects long- term care, along
with other state funded services, to episodic cuts during economic
downturns. Benefits and service levels vary significantly across the
nation, reflecting the primary role played by states in determining
program policies. While diversity and choice are the hallmarks of a vital
federal system, an increasingly aging nation may come to place a higher
value on uniformity

and standardized benefits for long- term care across the nation. For
social security and disability programs, financing and delivery of
benefits has long been a primary federal responsibility, reflecting
national expectations for

uniform treatment for these potentially vulnerable populations. If the
federal government assumes greater responsibility for financing long- term
care, it may also be necessary to rethink current federal responsibilities
for financing other programs delivered by state and local governments in
order to free up sufficient resources at the national level. One
participant observed that, in the early 1980s, states had the

opportunity to achieve such a fundamental resorting of roles* when the
federal government offered to assume full financial responsibility for
Medicaid in exchange for states taking on welfare (known as *Swap and
Turnback*). States rejected this offer and many participants representing
state governments indicated that they now regret this decision.

Participants agreed* at the very least* that more intergovernmental
coordination and collective policy making are necessary so that key policy
decisions are not made in isolation, and policy makers understand the
burdens that their actions might place on the fiscal and administrative
capacity of another level of government. This call for greater
coordination

and collaboration is a theme that ran throughout the day and underscores
all of the top intergovernmental challenges.

Discussion of Need for A significant portion of the day focused on a
perceived need raised by all

an Ongoing Dialogue participants regarding the lack of a focal point and
forum for a

comprehensive discussion of intergovernmental issues. Participants and
Possible

generally agreed that since the demise of the Advisory Commission on
Framework Intergovernmental Relations (ACIR) there has been a void in this
area. Background ACIR was an independent intergovernmental agency
established in 1959 to improve the ability of federal, state, and local
governments to work

together cooperatively, efficiently, and effectively. ACIR was created
with a recognition that each level of government had an important and
distinct role to play in formulating and administering policies. It was
comprised of appointed and elected officials from all three levels of
government. The ACIR was charged with several responsibilities: to bring
together representatives of federal, state, and local governments to
address common problems; to provide a forum for discussing the
administration and coordination of federal grant programs; to provide
research and make recommendations to the executive and legislative
branches on the allocation of government functions; and to recommend
methods of coordinating and simplifying tax laws and administrative
practices to achieve a more balanced relationship between the levels of
government. Over the years, ACIR conducted research on a variety of
subjects related to the federal, state, and local governments. For
example, it studied and commented on law enforcement, transportation
policy, welfare, and environmental protection, as well as a host of other
policy issues. Throughout the 1980s, congressional support for the ACIR
declined for a number of reasons. The loss of consensus on many policy
issues and the federal budget deficit were among the factors contributing
to loss of support in the Congress. Several controversial reports in the
1990s

heightened calls for its termination and it was abolished in 1996.
Participants* Discussion Most participants agreed that there is a need for
a national focal point to

address intergovernmental issues. They observed that the biggest void has
been in the lack of consistent data collection and analysis. ACIR used to
collect data and publish results regularly on state and local fiscal
policies and conditions. According to participants, sophisticated analysis
of policy issues from an intergovernmental perspective is also sorely
missed. For example, an institutional focal point could help policy makers
sort through issues and options for federal aid to states during
downturns; such a focal

point could also highlight the intergovernmental implications of federal
tax policy changes.

Some participants observed that some organizations within specific policy
sectors perform intergovernmental coordination, but it tends to be on an
issue- or program- specific basis. For example, the Environmental Council
of States, the National Association of State Child Care Administrators,
and

the National Association of Medicaid Administrators frequently meet with
their federal counterparts. However, participants commented that the
primary focus of these meetings is not policy research, rather the goal is
usually to better understand each other. Broader based organizations such
as the National Governors Association and the National Council of State
Legislatures represent state interests, but the primary focus of these
organizations is not necessarily to produce systemic research for a
national

audience. Participants also discussed what form such an organization could
take. Time limitations did not allow for a full discussion of the form and
structure of such a focal point. Participants noted the importance of
avoiding some of the difficulties ACIR encountered. For example, it became
increasingly difficult for ACIR to reach bipartisan consensus on issues
with its members and encourage active participation by high- level federal
officials.

Participants contended that, under any circumstance, an essential
component of a future organization would be to ensure it has a
constructive working relationship with state and local interest groups and
others on the front lines of state and local governments. According to
participants, a strong analytical function is also a critical component
and it was agreed that a body of talented analysts could provide
legitimacy to intergovernmental issues. Participants also acknowledged
that the challenge is how to obtain consistent data and a framework for
analysis, and how to fund these efforts. Any organization would likely
need sustained financial support from federal, state, and local or private
sources. Moreover, some argued that continuing federal involvement is
critical to promote a full intergovernmental forum and national attention
to the issues raised.

There was disagreement among participants about whether there is a
sufficient demand at the federal level to create and sustain any forum.
According to some participants, while an intergovernmental focal point is
a

good idea in theory, in practice it is difficult to generate interest at
the

federal level. They observed that these issues would need congressional
sponsorship to get attention. They argued that even without a coordinating
forum, states had some influence on federal policies in the 1990s in the
areas of welfare reform, the tobacco settlement, transportation, and
unfunded mandates reform.

Despite their concerns about prospects for support, participants for the
most part agreed that a new intergovernmental focal point is needed.
Participants observed that the format of such a forum, as well as ways to

generate interest among policy makers, should be the focus of future
discussions among leaders at all levels of government.

In addition, there was unanimous agreement that homeland security is a
great opportunity to start this kind of a dialogue across levels of
government. They observed that policy makers appear to be serious about
the need to enhance federal, state, and local operations to improve
homeland security. Homeland security provides an excellent example of
where effective coordination among all levels of government is literally a
matter of life or death. Because the nation relies on local governments as
the first line of defense, the challenge is to construct financial and
administrative relationships to promote improved local protection
initiatives consistent with national goals and threats. It was noted that
achievements made on this front could spill over into other policy areas.

Appendi x III

Summary of Introductory Remarks Comptroller General David M. Walker opened
the symposium and spoke about challenges facing all levels of government
and the private sector. Mr. Walker began by outlining several long- term
trends that will create shared challenges for all levels of government.
Examples of these trends, which are laid out in GAO*s strategic plan
framework, include the aging of the population, new and diffuse security
threats, and globalization. Furthermore, Mr. Walker provided an overview
of fiscal trends from the federal perspective and described the changing
composition of federal spending over the past 40 years, noting the growth
of mandatory social security and health programs as a share of federal
spending. Looking ahead, he noted that projected increases in mandatory
spending for Social Security, Medicare, Medicaid, and Net Interest will
prompt unsustainable federal deficits, absent reforms to the spending or
revenue sides of the budget.

Since many of these fiscal challenges are shared by states in our system,
initiatives to address these future pressures need to be pursued in an
integrated and collaborative fashion. Whether it be health care reform or
homeland security, our future policy decisions should be framed as
national, rather than strictly federal, responses to problems and issues.
Mr. Walker observed that such a collaborative approach can be informed by
a series of key national indicators designed to measure the nation*s
overall position and progress and the role of various governmental actors
involved in key policy areas. He concluded that partnerships between
levels of government are needed to address the common problems we all
share, and all tools of government should be considered in implementing
these partnerships.

David Broder, a columnist for the Washington Post and keen observer of the
nation*s political scene, began his comments by noting a striking
disjunction between dialogue on federal fiscal issues and the dialogue on
state fiscal issues. Both issues seem to be treated as separate and
distinct in the press and among political leaders whereas, in his view,
the issues are closely intertwined. He said that while federal decision
makers enjoy the privilege of enacting new benefits and programs for their
constituents, state and local decision makers are left with the hard
choices of raising

taxes or reducing spending to implement them. Compounding these pressures,
revenue systems at the state and local level are constrained* the sales
tax is being eroded by the Internet and the service- based economy, while
raising income taxes is not politically palatable. Moreover, while state
and local decision makers are faced with some hard choices to solve their
fiscal crises, he claimed that many recent federal fiscal

decisions may have done more to worsen states* fiscal conditions than to
provide any fiscal relief.

Mr. Broder said he is sure that states and cities will need federal help
to get through their current fiscal crises but wondered if they have
enough leverage in Washington to get the federal support they will need.
Many representatives of state and local interest groups have told him it
is more difficult than it has been in many years to get the attention of
the Congress or the administration on issues vital to state and local
interests. Mr. Broder lamented the absence of an institutional forum in
which overall (federal, state, and local) resources could be measured
against national priorities.

Mr. Broder called for new partnerships to address the fiscal
interrelationship among the levels of government and the need to work
together to address the key challenges facing the nation.

Intergovernmental Relations Symposium Slide

Appendi x IV

Presentation GAO INTERGOVERNMENTAL RELATIONS SYMPOSIUM

Addressing Key Challenges in an Intergovernmental Setting

November 20, 2002

SERVING THE CONGRESS GAO*S STRATEGIC PLAN FRAMEWORK

MISSION GAO exists to support the Congress in meeting its constitutional
responsibilities and to help improve the performance and ensure the
accountability

of the federal government for the benefit of the American people. THEMES

GOALS & OBJECTIVES Provide Provide Timely, Timely, Quality Quality Service
Service to to the the Congress Congress and and the the Security

Federal Federal Government Government to to . . . . . . and

Address Address Current Current and and Emerging Emerging Challenges
Challenges to to the the Well- Well- Being Being and and Preparedness

Financial Financial Security Security of of the the American American
People People related related to to . . . . . .

.. Health care needs and financing

.. Effective system of justice

Globalization

.. Education and protection of children

.. Viable communities

.. Work opportunities and worker

.. Natural resources use and protection

environmental protection

Changing

.. Retirement income security

.. Physical infrastructure

Economy

Respond Respond to to Changing Changing Security Security Threats Threats
and and the the Challenges Challenges of of Global Global Interdependence
Interdependence involving involving . . . . . . Demographics

.. Diffuse security threats

.. Advancement of U. S. interests

.. Military capabilities and readiness

.. Global market forces

Science

Help Help Transform Transform the the Federal Federal Government
Government*s s Role Role and and How How It It and

Does Does Business Business to to Meet Meet 21st 21st Century Century
Challenges Challenges by by assessing assessing . . . . . .

Technology

.. Roles in achieving federal

.. Progress toward results- oriented, objectives

accountable, and relevant government

.. Human capital and other capacity for

.. Fiscal position and financing of the

Quality

serving the public government

of Life

Maximize Maximize the the Value Value of of GAO GAO by by Being Being a a
Model Model Federal Federal Agency Agency and and a a World- World- Class
Class Professional Professional Services Services Organization
Organization in in the the areas areas of of . . . . . .

Governance

.. Client and customer service

.. Process improvement

.. Leadership and management focus

.. Employer of choice

.. Institutional knowledge and experience

CORE VALUES

Accountability Accountability Integrity Integrity Reliability Reliability

Fiscal 2002- 2007

Composition of Federal Spending By Budget Function 1962

1982 2002

17% 31%

34% 25% 32%

50% 23%

6% 21%

11% 9% 19% 13%

9% Defense

Net interest Medicare & Medicaid Social Security

All other spending

Source: Budget of the United States Government, FY 2004, Office of
Management and Budget.

Composition of Spending as a Share of GDP

Assuming Discretionary Spending Grows with GDP and the Tax Cuts Do Not
Sunset

40 Percent of GDP

30 Revenue

20 10

0 2000 2015 2030 2050

Fiscal year Net Interest

Medicare & Medicaid Social Security All other spending

Source: GAO*s January 2003 Analysis

Composition of Spending as a Share of GDP

Assuming Discretionary Spending Grows with GDP after 2003, the 2001 Tax
Cuts Do Not Sunset, and

Social Security Benefits Payable after 2041

40 Percent of GDP

30 Revenue

20 10

0 2000 2015 2030 2050

Fiscal year

Net Interest Medicare & Medicaid Social Security

All other spending Source: GAO*s January 2003 Analysis

Federal and State Revenue Trends 15

Real year- over- year quarterly percent change 10

5 0

State tax revenue -5

Federal revenue -10

-15 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1

Source: State tax revenue from Rockefeller Institute/ NASBO. Federal
revenue from Bureau of Economic Analysis, Department of Commerce.

State Medicaid Spending as a Percent of Total State Spending 22

Percent of total state spending 21 20 19 18 17 16

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: National Association of State Budget Officers (NASBO)

State Spending by Function as a Percent of Total State Spending,

After 1, 5, and 10 Years After 1 year After 5 years

Elementary & Elementary & Secondary

Medicaid Secondary

Education 26%

Education 21.8%

20.6% Medicaid

20.8% Higher Education

Higher Education 11.2%

10.5% Public Assistance Public Assistance

All Other 2.0% 2.2%

Corrections 29.2%

Transportation 3.4%

All Other Corrections

After 10 years

8.1% 31.6%

3.7% Transportation

8.8% Medicaid

Elementary & 33.6%

Secondary Education

18.3% Higher Education

9.4% All Other

Public Assistance 26.5% 1.8%

Corrections Transportation

3.1% 7.3% Note: Assuming Current Growth Rate for Medicaid and Current
Average Growth for All Other Categories. Source: National Association of
State Budget Officers.

Total Outlays for Grants to State and Local Governments (Fiscal Years
1962- 2002)

350 Billions of FY1996 dollars

300 250 200 150 100

50 0

1962 1970 1980 1990 2002 Grants for Payments for Individuals Other Grants
Total Grants

Source: Budget of the United States Government, FY2004, Office of
Management and Budget.

Number of Federal Preemption Statutes Enacted per Decade 130

Number 120

1999

Civil Rights and other

est.* 110

100

Health, safety, and environment

90

Commerce and transportation

80

Banking, finance, and taxation

70 60 50 40 30 20 10

0 Before 1900-

1910- 1920-

1930- 1940-

1950- 1960-

1970- 1980-

1990- 1900 1909

1919 1929

1939 1949

1959 1969

1979 1989

1999 Year

*The 1990- 1991 rate was multiplied by 5 to estimate how many preemptions
might be enacted during 1990- 1999. Source: U. S. Advisory Commission on
Intergovernmental Relations, Federal Statutory Preemption of State and
Local Authority: History, Inventory, and Issues (Washington, D. C., 1992),
p. 7.

Policy Tools and Actors

s Actor

Agencies Locals

Gov't & Exec. States Foreign GSEs

Profits s

Non- Contractor Based

Profits Faith- For Tools

Management

Direct Services Planning

Contracting Grants- in- Aid Strategic Mgmt

Credit & Out Performance Capital

Tax Expenditures Insurance

Human Budgeting Mgmt User Fees

Financial Mgmt Regulations

Acquisitions IT Source: GAO.

Grant Programs to State and Local

Appendi x V

Governments Figure 5: Summary of the Number of Grant Programs to State and
Local Governments: Fiscal Year 2001

Number of Obligations Department or Agency programs in millions)
Agriculture 63 $20,141 Commerce 38 986 Defense 4 66 Education 119 31,928
Energy 5 217 Health and Human Services 158 191,028 Housing and Urban
Development 33 27,443 Interior 62 2,582 Justice 55 4,060 Labor 20 7,559
Transportation 24 40,571 Treasury 1 13 Veterans Affairs 6 483
Environmental Protection Agency 44 3,395 Social Security Administration 1
23 Appalachian Regional Commission 5 102 Corporation for National and
Community Service 6 324 Equal Employment Opportunity Commission 1 30
Federal Emergency Management Agency 11 331 Denali Commission 1 24 National
Foundation on the Arts and the Humanities 8 259

Total 665 $331,565

Source: OMB analysis of data from December Update to the 2001 Catalog of
Federal Domestic Assistance (December 2001). Note: Excludes grants with no
reported obligations.

Figure 6: The 20 Largest Grant Programs to State and Local Governments:
Fiscal Year 2001 (obligations in billions)

FY 2001 Percent Agency/ Program Obligations of total 1. HHS: Medicaid
$130.2 39.3% 2. Transportation: Highway Planning and Construction 30.7
9.2% 3. HHS: Temporary Assistance for Needy Families 19.1 5.7% 4. HUD:
Section 8 Housing Choice Vouchers 11.4 3.4% 5. Education: Title I Grants
to Local Educational Agencies 8.6 2.6% 6. Agriculture: National School
Lunch Program 6.5 2.0% 7. Education: Special Education - Grants to States
6.3 1.9% 8. HHS: Head Start 6.2 1.9% 9. HHS: Foster Care - Title IV- E 5.1
1.5% 10. HHS: State Children's Health Insurance Program 4.2 1.3% 11.
Agriculture: Special Supplemental Nutrition Program for Women,

Infants, and Children (WIC) 4.1 1.2% 12. HUD: Public and Indian Housing
3.3 1.0% 13. HHS: Child Support Enforcement 3.2 1.0% 14. Transportation:
Airport Improvement Grants 3.1 0.9% 15. HUD: Community Development Block
Grants/ Entitlement Grants 3.1 0.9% 16. HUD: Public Housing Capital Fund
3.0 0.9% 17. Transportation: Federal Transit Formula Grants 2.9 0.9% 18.
Transportation: Federal Transit Capital Investment Grants 2.8 0.8% 19.
HHS: Child Care Mandatory and Matching Funds of the Child Care

and Development Fund 2.6 0.8% 20. Labor: Unemployment Insurance Grants for
State Administration 2.3 0.7%

Subtotal, 20 largest programs 258.7 78.0% Remaining 645 programs:

Programs of more than $50 million but not in the top 20 (190 programs)
66.7 20.1% Programs of $50 million or less (455 programs) 6.1 1.8%

Subtotal, remaining 645 programs 72.8 22.0% Total, 665 programs $331.6
100.0% Source: OMB analysis of data from December Update to the 2001
Catalog of Federal Domestic Assistance (December 2001).

Note: HHS indicates the Department of Health and Human Services. HUD
indicates the Department of Housing and Urban Development.

Figure 7: Trend in the Number of Federal Grant Programs to State and Local
Governments 1980- 2001

Number of funded Fiscal year programs 1980 434 1981 367 1982 303 1983 320
1984 330

1985 335 1986 349 1987 381 1988 415 1989 434

1990 463 1991 513 1992 539 1993 573 1994 593

1995 608 1996 570 1997 583 1998 591 1999 630

2000 653 2001 665 Source: OMB analysis.

(450179)

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a

GAO United States General Accounting Office

Participants discussed key intergovernmental challenges facing all levels
of government and identified the following four as the most significant:

1. Mismatch between current revenues and spending demands.

Increased spending demands and revenue shortfalls during economic
downturns affect states* ability to fund their share of key programs.
Participants discussed the causes of the spending and revenue mismatch,
federal and state options for addressing it, and their respective
advantages and disadvantages. Beyond current shortfalls, participants
focused on long- term structural fiscal pressures that will continue to
test the capacity of the intergovernmental system. Certain structural
forces, such as changes in the global economy and the aging of the
population, will continue to prompt stress on both the revenue and
spending sides of the budget at all levels of government.

2. Intergovernmental financing of health care, particularly long- term
care for the elderly and disabled. Participants agreed that funding health
care costs for a growing aging population is the most significant
intergovernmental fiscal challenge. Medicaid costs will likely continue to
grow at a high rate due to such factors as increasingly high health care
costs and the aging of the population. The discussion focused on the need
to restructure health care financing for the disabled and aged and to
develop a sustainable intergovernmental solution.

3. Current tax structures at all levels of government and
interrelationships between them. Participants agreed on the need to review
the tax structures of all levels of government collectively and for policy
makers to better consider the relationships between them. The

national economy is becoming increasingly interconnected and global as
business is conducted across state and national boundaries* potentially
undermining the capacity of current tax systems to reach transactions in
such an economy.

4. Consider reassessing the assignment of responsibilities. In recent
years, the federal government has continued to mandate new
responsibilities for achieving national goals on state and local
governments, by law or regulation. Participants agreed that the fiscal

and administrative resources of state and local governments vary and may
not be sufficient to fulfill this increased responsibility for national
priorities. One model involves sorting out intergovernmental functions
with the federal government assuming responsibility for functions that are
redistributive in nature, and delegating other responsibilities to states
and localities.

HIGHLIGHTS OF A GAO SYMPOSIUM

Addressing Key Challenges in an Intergovernmental Setting

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 365SP. To view the full report
click on the link above. For more information, contact Paul Posner at
(202) 512- 9573 or posnerp@ gao. gov. Highlights of GAO- 03- 365SP March
2003

Responding to many of the nation*s critical challenges* such as meeting
the health care needs of the poor or countering terrorist threats* has
been the joint responsibility of all levels of government. The
effectiveness of federal programs has increasingly become dependent on
state and local management and resources,

as well as constructive interactions between federal, state, and local
actors, including private and nonprofit actors who are joining with
government officials to carry out national policies and programs. This
increased interdependence among levels of government presents many
challenges. While many policy areas have been nationalized and federally
funded, greater responsibility has been

devolved to state and local governments for implementing programs to
achieve national goals. The intergovernmental system is facing the
complexity of managing programs involving numerous

actors, and the flexibility and capacity of the federal system to respond
to unique local needs is challenged by long- term national and
international trends.

On November 20, 2002, GAO convened a symposium to identify and discuss the
key policy and fiscal issues facing the intergovernmental system. The
invited participants represented federal, state, and local governments,
national associations, public interest groups, and

research and academic institutions.

Page i GAO- 03- 365SP Contents

Contents

Page ii GAO- 03- 365SP

Page 1 GAO- 03- 365SP United States General Accounting Office Washington,
D. C. 20548 Page 1 GAO- 03- 365SP A

Page 2 GAO- 03- 365SP

Page 3 GAO- 03- 365SP

Page 4 GAO- 03- 365SP

Page 5 GAO- 03- 365SP Appendix I

Appendix I Participants Attending the November 20, 2002 GAO Symposium**
Addressing Key Challenges in an Intergovernmental Setting*

Page 6 GAO- 03- 365SP

Page 7 GAO- 03- 365SP Appendix II

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 8 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 9 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 10 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 11 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 12 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 13 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 14 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 15 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 16 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 17 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 18 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 19 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 20 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 21 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 22 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 23 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 24 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 25 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 26 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 27 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 28 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 29 GAO- 03- 365SP

Appendix II GAO*s Symposium on Addressing Key Challenges in an
Intergovernmental Setting

Page 30 GAO- 03- 365SP

Page 31 GAO- 03- 365SP Appendix III

Appendix III Summary of Introductory Remarks

Page 32 GAO- 03- 365SP

Page 33 GAO- 03- 365SP Appendix IV

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 34 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 35 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 36 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 37 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 38 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 39 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 40 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 41 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 42 GAO- 03- 365SP

Appendix IV Intergovernmental Relations Symposium Slide Presentation

Page 43 GAO- 03- 365SP

Page 44 GAO- 03- 365SP Appendix V

Appendix V Grant Programs to State and Local Governments

Page 45 GAO- 03- 365SP

Appendix V Grant Programs to State and Local Governments

Page 46 GAO- 03- 365SP

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