Summary: Two major issues surrounding renewal of the Revenue Sharing Program are the states' fiscal need for revenue sharing funds and the potential modifications to the distribution formula to better target funds to local governments. Also of interest is the degree to which state and local governments are complying with the Program's audit requirements. To determine states' needs for revenue sharing funds, GAO studied the fiscal condition of nine states. Consistent with the national trend, general operating fund revenues in the nine states rose during the past 5 years, generally keeping pace with inflation. While all of the states expected revenue growth, all have enacted tax cuts or other tax relief since 1977. The expenditure growth rate of most of the nine states has also accelerated. In general, the states were fiscally healthy and, the prospects for continued health were considered good. Predicting the impact on states of losing revenue sharing funds is difficult. Proponents of continuing state government inclusion in the program argue that loss of the funds would result in cuts in state assistance to local governments for functions such as education or public welfare. Officials in five of the states studied said they would expect minimal or no reduction in state aid to local governments, but that there could be cuts in state services, tax increases, and reductions in state participation in federal grant programs. While difficulties would obviously be created, the healthy fiscal conditions in most states would enable them to withstand the loss of the funds. GAO feels that the revenue sharing distribution formula is basically sound and provides a reasonable approach in allocating funds. However, various formula constraints and allocation procedures used in making payments to local governments lead to widespread inequities which appear correctable. Eliminating the tiering process in the distribution system has the greatest and most consistent potential for minimizing the inequities. Since the enactment of more stringent auditing standards, state and local governments have greatly improved their auditing efforts. However, uncertainties exist concerning the extent of ultimate compliance with the audit requirements. GAO believes state and local governments should be given an opportunity to develop appropriate standards of their own, rather that using the Revenue Sharing Program as a vehicle for effecting standardized accounting practices.
