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Charles D. Griffiths Pennsylvania
The last 30 years have been marked by dramatic changes in federal, state, and local governments. The reasonable demands of a growing society and the additional complexities of a nation becoming increasingly urban have forced governments at all levels into new pursuits and into increasingly complex, sophisticated, and necessary duties. A most important tool for governments at all levels during this time of change has been the Advisory Commission on Intergovernmental Relations. Its nonpartisanship, the fact that it was not driven by any particular ideology, its fairness, and its expertise made it the most reliable and credible resource. Good government at all levels in the United States has benefited from the splendid work of the ACIR. One of my greatest pleasures in the public service has been to serve as a member of the Commission. Joseph P. Riley, Jr. Mayor, Charleston, South Carolina
percent up to 16 percent) pulled their can federalism. Unlike the situation rates down into the high single-digit that prevailed over the first 150 years, range. the national government is no longer constitutionally restricted to a narrow The Death of Revenue Sharing area of governance. Now, a “deregu lated” federal government can move The federal revenue sharing pro into virtually any domestic area and gram passed away slowly. By freezing compete for policy leadership. Unlike the outlays year after year, a fairly hos the more recent past (the 1950s and tile Congress made sure that this aid 1960s), however, Washington no longer program would twist slowly in the infla possesses a towering fiscal advantage tionary winds. Pushed by the Reagan over the state and local governments. Administration, the Congress finally Thus, federal, state, and local governput an end to its revenue sharing with ments must now compete head on for local governments in 1986—six years the political and fiscal support of feder — after lopping off the state portion. alism's ultimate arbiters-the voters/ A brief epitaph for the federal taxpayers. Over the last decade, states revenue sharing program might read as and localities have fared better in this follows: competitive struggle than most stu dents of federalism would have pre1964- first proposed to reduce an dicted a couple of decades ago. expected federal budget surplus The current state of competitive 1972—finally pushed through a re federalism is not without its sharp critluctant Congress ics. Those critics with a liberal point of view emphasize the equity problem1986-sacrificed on the Gramm that fend-for-yourself federalism does Rudman-Hollings altar of fiscal poorly by those who are least able to discipline fend for themselves-poor people and The rise and fall of federal reve- poor governments. Many federalists nue sharing serve as sharp reminders (joined by many state and local offiof the remarkable turnabout in the fis- cials) paint a grim scenario of things cal fortunes of Washington and the to come-a constitutionally unconstate-local sector over the last two dec- strained but financially strapped Conades. In the mid-60s, the massive fiscal gress is likely to be pushed by special inadvantage enjoyed by the national gov terests to make ever-increasing use of ernment triggered the demand for unfunded mandates and in this process revenue sharing to redress this inter- transform elected state and local offigovernmental fiscal imbalance. By the cials into Washington's hired hands. mid-80s, towering federal budget defi Neither concerns about inequities cits prompted the Congress to zero it nor fears of power grabs can obliterate out. a striking reality: A deregulated ConThe fall-off in federal aid flows gress has not created a highly centraland the wipeout of revenue sharing ized national state-the Orwellian have caused a sea change in the expec outcome that many had predicted. On tations of state and local officials- the contrary, 50 years after the collapse when forced to search for "new of most of the constitutional and politimoney,” they look to their own re cal constraints on the Congress, the re silient states and localities are very sources. much alive, and most of them are doing A Summing Up quite well. It is the national governCompetitive Federalism ment that is experiencing a consider able degree of fiscal distress-a Three disparate developments, chronic budgetary ailment caused by the Garcia decision, federal tax reform, Washington's habit of biting off more and the revenue sharing wipeout-all expenditure commitments than its have one thing in common. In each in revenue dentures can chew. John Shannon was ACIR executive direc- ous push forward. Several considerations suggest tor from 1985 to 1988.
The Alabama League of Municipalities and its member cities and towns are very appreciative of the work of the ACIR. Research reports produced by ACIR over the past 30 years have proven to be most valuable to our state. We wish the ACIR much success in future projects for the mutual benefit of all levels of government. Perry C. Roquemore Alabama League of Municipalities Page 3
Edward C. Farrell New York State Conference of Mayors and Other Municipal Officials
It has been a pleasure for the County Supervisors Association of California to work with the ACIR over the last three decades, from its historic study and effort on general revenue sharing to many current excellent reports and surveys. Keep up the good work. Larry E. Naake of California
In my 21 years of public service, I have had numerous opportunities to use the research done by ACIR. Without ACIR, I don't know where I would have gone for the help. ACIR has proven to be invaluable. Robert H. Miller South Dakota Municipal League
of several representative constituents cluded from the minimum wage and of the Council of State Govern- overtime requirements individuals emments—the Clearinghouse on Licen- ployed in bona fide "executive, professure Enforcement and Regulation, the sional, and administrative" positions. National Association of State Person- The immediate problem was crenel Executives, and the National Asso ated on April 12, 1988, when the ciation of State Treasurers. wage-hour administrator, the Labor Clearinghouse Department official charged with the administration of the FLSA, issued an on Licensure Enforcement and Regulation (CLEAR) opinion letter taking the position that a "probation officer" did not qualify for State agencies are improving their the administrative exemption because regulatory efforts, to ensure that only the duties of the position amounted to professions and occupations that really the “production work” of the departrequire licensure are licensed. The ment. states are working more closely with The Department of Labor's nareach other to reduce interstate mobil row interpretation of the “administraity of incompetent and unethical licen- tive" exemption, based on standards sees. Still, the federal government ap- established in private industry, poses a parently has decided to make decisions serious and costly threat to state and for us and impose more requirements local governments. It appears that the on states that are already faced with impact of this decision on other state staff and financial restrictions. State occupational positions could be subregulatory agencies should not be stantial. Nine southeastern states have forced by the federal government, us estimated that the loss of the exemping unreasonable grant-in-aid mandate tion for probation officers and similar requirements, to implement regula- job categories would affect more than tions that are not directly related to 35,000 employees and add costs of betheir statutory responsibilities. Should tween $500,000 and $15 million to their payrolls. duced to 50 administrative units of the of State Treasurers federal government. The association's position echoes that of Justice Sandra Day O'Connor National Association regarding the impact that the South of State Personnel Executives Carolina v. Baker (1988) case has on In the past several years, four ma state and local governments' ability to jor pieces of legislation have had an ad- repair the nation's transportation netverse impact on state personnel man work, rebuild schools and colleges, and agement, both administratively and enhance our deteriorating infrastrucfinancially. The Drug-Free Workplace ture. The states'chief financial officers have resolved to: tion to fight for intergovernmental and the Fair Labor Standards Act tax immunity and lead an effort to (FLSA) rulings have all imposed in work with members of Congress to creased administrative burdens on the inform their constituents and their states, in addition to an enormous states of the loss of reciprocal tax immunity, and monetary burden. The last case cited highlights how Support an amendment to the Washington is taking an increased role U.S. Constitution to restore interin state governance. One subject not governmental tax immunity in oraddressed by the Congress in the 1985 der to protect the continued soveramendments to the Fair Labor Stan eign status of state and local dards Act was the interpretation of so governments. called "white-collar" exemptions as If we expect to make progress, it they apply to state and local govern will be important for the state and local ment positions. Those exemptions ex (continued on page 28)
Since the formative years of the Commission, county government in North Carolina and this association have found invaluable the research, information, and leadership provided by the ACIR. On several occasions, we have utilized in our work the model legislation prepared by the ACIR. We have also found the statistical abstracts particularly valuable as we analyze the intergovernmental fiscal system in North Carolina compared to other states. C. Ronald Aycock North Carolina Association of County Commissioners Page 4
Resources, Regulation, and Realism: Small Governments in the Federal System
The National Association of The irony is that the conse- O Different compliance or reporting Towns and Townships (NATT) repre- quences-from an environmental and requirements or timetables that sents more than 13,000 units of general liability standpoint—increase, and the take into account the resources purpose local governments across the federal government loses credibility in available to small entities; United States. These mostly small, the process. mostly rural communities are typical of This situation is not limited to the Tiering of regulations according to the majority of the nation's 39,000 local Environmental Protection Agency. It population size; and governments; in fact, 72 percent of is true that environmental laws and O An exemption from coverage of general purpose governments in the regulations, because of their scope and the rule, or any part thereof, for United States have populations of less cost, have the highest visibility right small entities. than 3,000, and half are under 1,000. now, but the same problem is evident These localities are significantly in Department of Labor regulations, Publication of the actual Reg Flex different from their urban and subur- Justice Department rules, revenue rul statement itself may be less important ban counterparts in terms of staff and ings from the Internal Revenue Serv- than the process by which the analysis resources; for the most part, they have ice, and most federal loan and grant is conducted by federal agenciesfew paid staff accountants, lawyers, or formulas, which ignore the reality of which requires agencies to take a hard professional managers. There are no local government resources. look at the implications of their proenvironmental engineers on the pay posals. This process is vital. It requires roll (there may not even be a payroll), The Promise of Reg Flex rulemakers to think ideas through and in many cases there is not even a from the point of view of a small govcomputer. And these places are the The Regulatory Flexibility Act of ernment: Would this approach work? overwhelming majority of the localities 1980 (Reg Flex) continues to be a very Could they afford to do it? Could they in the federal-state-local partnership. valuable, cost-effective tool that can be do something else and accomplish the used throughout the federal govern same-or nearly the same-regulatory The Need for Realism ment. At the moment, however, it is es- objective? in Federal Regulations sentially being ignored, especially with In effect, Reg Flex shifts the burSince most of America's govern- regard to small governments. We den from localities to the federal govments are small and have limited re- strongly recommend that Reg Flex be ernment-a refreshing innovation and sources, it stands to reason that federal enforced and strengthened. one that recognizes the vastly superior policy developed for “state and local There are several reasons for this resources of the national government governments" should be designed with recommendation: First, it is impossible when contrasted to local governments . this reality in mind. Instead, legislation for an organization such as NATƏT to If one measures this process against and regulations are written with the as put out all the separate regulatory the alternative—that small governsumption that there basically is no dif- "fires" – to address each proposal indi ments don't do anything at all because ference between a community of 500 vidually, generate data, research, and they can't comply– then the requireand a municipality of 500,000, that their present appropriate alternatives. But ments of the Regulatory Flexibility Act resources are the same. As a result, re- even more importantly, the Congress become particularly significant. sponsibility for program implementa- has instructed the regulatory agencies NATT's Suggestions for Reg Flex tion and funding is given to units of lo- to do that job through Reg Flex, which cal government without a realistic places the Congress clearly on record We have several suggestions for assessment of whether they are able to as supporting flexibility and creative improving the Reg Flex process and comply. Thus, current policy creates approaches in rulemaking for small making it more realistic. First, a major problems rather than solving them. governments. loophole in the law should be closed, For example, local officials are anxious The act establishes as a principle of that in Sec. 605(b), which provides that to address environmental concerns regulatory issuance that agencies an agency head may stipulate, without through regulations that will work. should "endeavor to fit regulatory re- providing any evidence, that the proHowever, as currently structured, quirements to the scale of the govern- posed rule would have no “substantial many regulations give us communities mental jurisdiction,” and to that end impact on a significant number of small that remain unprotected-because requires them, when publishing any entities.” This option is exercised altheir governments cannot bear the fi- proposed rule, to do both an initial and most as a matter of course, often benancial, technological, or administra- a final Reg Flex analysis. Without going cause small governments are not even tive burden for accomplishing what is into detail on specific requirements of considered by the agency. It is our bemandated. Risk is higher-because the the legislation, there is clear direction lief that, given the number of small perception of risk is gone. And local of- that the analysis must discuss: governments, the “significant number" ficials, who are mostly volunteers to criterion is almost always satisfied and begin with, are directed by federal law O Significant alternatives to the rule that the "substantial impact” would to do what is impossible or suffer the that would minimize economic im- emerge if cost impact analyses were consequences. done for small government budgets. Page 5
ACIR Membership 1959-1989
Appointed 1959 1959 1959 1962 1962 1964 1964 1967 1967 1967 1967 1969 1969 1971 1973 1975 1976 1977 1978 1978 1980 1981 1981 1983 1983 1986 1989
Private Citizens Farris Bryant, Chairman (Florida, D) Dorothy 1. Cline (New Mexico, D) Price Daniel (Texas, D) Alexander Heard (Tennessee, D)Howard (Bo) Callaway (Georgia, R) Robert E. Merriam, Chairman (Illinois, R) Edward C. Banfield (Massachusetts, D) Robert H. Finch (California, R) John H. Altorfer (Illinois, R) F. Clifton White (Connecticut, R) Richard W. Riley (South Carolina, D) Bill G. King (Alabama, D) Abraham D. Beame, Chairman (New York, D) Mary Eleanor Wall (Illinois, D) Eugene Eidenberg (Washington, DC, D)Robert B. Hawkins, Jr., Chairman (California, R) James S. Dwight, Jr. (Virginia, R) Mary Kathleen Teague (Washington, DC, R) Daniel J. Elazar (Pennsylvania, R) Mary Ellen Joyce (Virginia, R) United States Senators Sam J. Ervin (North Carolina, D) Karl E. Mundt (South Dakota, R) Edmund S. Muskie (Maine, D) Charles H. Percy (Illinois, K) Ernest F. Hollings (South Carolina, D) William V. Roth (Delaware, R) William Hathaway (Maine, D) Lawton Chiles (Florida, D) James R. Sasser (Tennessee, D) Dave Durenberger (Minnesota, R) Carl Levin (Michigan, D) Charles S. Robb (Virginia, D) U.S. Representatives Florence P. Dwyer (New Jersey, R) L.B. Fountain (North Carolina, D) Wilbur D. Mills (Arkansas, D) Frank Ikard (Texas, D) Eugene J. Keogh (New York, D)Al Ullman (Oregon, D) Clarence J. Brown, Jr. (Ohio, R) James C. Corman (California, D) Richard Vander Veen (Michigan, D) Charles B. Rangel (New York, D) Barney Frank (Massachusetts, D) Robert S. Walker (Pennsylvania, R) Ted Weiss (New York, D) Sander Levin (Michigan, D) Jim Ross Lightfoot (Iowa, R) Larkin Smith (Mississippi, R)Members of the Federal Executive Branch Robert B. Anderson (Secretary, Treasury, R) Arthur S. Fleming (Secretary,Health, Education and Welfare, R) James P. Mitchell (Secretary, Labor, R) C. Douglas Dillon (Secretary, Treasury, R)
Appointed 1959 1959 1959 1972 1973 1975 1977 1977 1979 1981 1988 1989
Abraham A. Ribicoff (Secretary, Health, Education and Welfare) 1961 Arthur J. Goldberg (Secretary, Labor, D) 1961 Anthony J. Celebrezze (Secretary, Health, Education and Welfare, D) 1962 Robert C. Weaver (Secretary, Housing and Urban Development, D) 1962 Orville L. Freeman (Secretary, Agriculture, D) 1965 Henry H. Fowler (Secretary, Treasury, D) 1965 Farris Bryant (Director, Office of Emergency Planning, D) 1967 Ramsey Clark (Attorney General, D) 1967 Price Daniel (Director, Office of Emergency Planning, D) 1967 Robert P. Mayo (Director, Bureau of the Budget, R) 1969 George H. Romney (Secretary, Housing and Urban Development, R) 1969 Robert H. Finch (Secretary, Health, Education and Welfare, R) 1969 George P. Shultz (Director, Office of Management and Budget, R) 1970 Kenneth R. Cole, Jr., (Assistant to the President for Domestic Affairs, R) 1972 Caspar W. Weinberger (Secretary, Health Education and Welfare, R) 1973 James T. Lynn (Director, Office of Management and Budget, R) 1975 James M. Cannon (Assistant to the President for Domestic Affairs, R) 1975 Carla A. Hills (Secretary, Housing and Urban Development, R) 1975 Thomas B. Lance (Director, Office of Management and Budget, D) 1977 W. Michael Blumenthal (Secretary, Treasury, D) 1977 Juanita M. Kreps (Secretary, Commerce, D) 1977 James T. McIntyre (Director, Office of Management and Budget, D) 1978 Moon Landrieu (Secretary, Housing and Urban Development, D) 1979 G. William Miller, Secretary, Treasury, D) 1980 Samuel R. Pierce (Secretary, Housing and Urban Development, R) 1981 James G. Watt, Chairman (Secretary, Interior, R) 1981 Richard S. Williamson (Assistant to the President for Intergovernmental Affairs, R) 1981 Lee L. Verstandig (Assistant to the President for Intergovernmental Affairs, R) 1983 William P. Člark (Secretary, Interior, R) 1984 Raymond J. Donovan (Secretary, Labor, R) 1984 William E. Brock, III (Secretary, Labor, R) 1985 Mitchell E. Daniels, Jr. (Deputy Assistant to the President; Director, Office of Intergovernmental Affairs, R) 1985 Edwin Meese, III (Attorney General, R) 1985 Gwendolyn S. King (Deputy Assistant to the President; Director, Office of Intergovernmental Affairs, R) 1987 Andrew H. Card (Special Assistant to the President for Intergovernmental Affairs, R) 1987 Ann McLaughlin (Secretary, Labor, R) 1988 Richard L. Thornburgh (Attorney General, R) 1988 Debra Rae Anderson (Deputy Assistant to the President; Dir tor, Office of Intergovernmental Affairs, R) 1989 Samuel K. Skinner (Secretary, Transportation, R) 1989 Karen Spencer, Special Assistant to the President for Intergovernmental Affairs, R) 1989
Appointed 1959 1959 1959 1961 1962 1967 1973 1975 1976 1977 1982 1983 1983 1985 1987 1989 Page 6
Members of the Advisory Commission on Intergovernmental Relations October 1989 Private Citizens Governors Daniel J. Elazar, Philadelphia, Pennsylvania John Ashcroft, Missouri George A. Sinner, North Dakota Mary Ellen Joyce, Arlington, Virginia Vacancy Vacancy Mayors Dave Durenberger, Minnesota Donald M. Fraser, Minneapolis, Minnesota Carl Levin, Michigan Arthur J. Holland, Trenton, New Jersey Charles S. Robb, Virginia William H. Hudnut, III, Indianapolis, Indiana Robert M. Isaac, Colorado Springs, Colorado Members of State Legislatures Sander Levin, Michigan John T. Bragg, Deputy Speaker, Ted Weiss, New York Tennessee House of Representatives Vacancy David E. Nething, North Dakota Senate Ted Strickland, Colorado Senate Elected County Officials Harvey Ruvin, Dade County, Florida, County Commission Director of Intergovernmental Affairs Sandra Smoley, Sacramento County, California, Board of Supervisors Richard L. Thornburgh, Attorney General James J. Snyder, Cattaraugus County, New York, County Legislature Page 7
The last meeting of the Advisory by Section 5122 of the Omnibus Trade ginia, have urged state groups to take Commission on Intergovernmental and Competitiveness Act of 1988 to as- action on ACIR's 1989 recommendaRelations was held in Washington, DC, sist state and local governments in tions on state constitutional law. In a on January 26. Following are highlights their efforts to enhance business com- letter signed jointly by Stephen L. from the agenda and Commission ac- petitiveness by spreading the word Schechter of New York and A.E. Dick tions. about the many creative steps being Howard of Virginia, these commissions taken by those governments. communicated ACIR's findings and International Competitiveness Roundtable recommendations to state chief jusNational Conference tices, law school deans, state humaniThe issues of the nation's competi- on State Taxation ties councils, state social studies countiveness in the world economy and in- and Regulation of Banking cils, and others. tergovernmental policy formulation Chairman Robert B. Hawkins, Jr., ACIR's report State Constitutional were discussed by the Commission dur gave the welcoming remarks at the Law: Cases and Materials will be reing its review of the 1990-1993 research opening of this national conference on printed this summer with a supplemenagenda. One outcome of this discus state taxation and regulation of bank- tary update in order to meet the needs sion was a roundtable on competitive- ing, held in Washington, DC, on De- of law schools that are now offering ness, held in conjunction with the Jan cember 13, 1989. More than 160 peo- courses on state constitutional law. uary 26 meeting of the Commission. ple, representing 37 states, attended The panel was invited to make pre the conference, cosponsored by ACIR Study of State-Local sentations on the topic of “U.S. Com and the National Conference of State Fiscal Relations In Hawaii petitiveness in the World Economy.” Legislatures, Multistate Tax CommisParticipating in the roundtable were: ACIR staff and a group of consulsion, and National Center for Policy tants recently completed a comprehenPaul M. Meo, Chief of the Internation Alternatives. Papers from the conferal Trade Division of the International sive study of fiscal relations between ence will be published this summer. Bank for Reconstruction and Develop the state and the four county government (The World Bank); Lee 0. Governors Speak Out ments in Hawaii. The study was perSmith, Executive Director of the New formed under a contract with Hawaii's Governor George A. Sinner of second Tax Review Commission. York State Industrial Cooperation North Dakota was quoted in the WashCouncil; Robert P. Strauss, Professor ington Post as asking House Speaker the history of the Aloha State's fiscal The report on the study reviews of Economics and Public Policy and Di Thomas S. Foley on February 27 at rector of the Center for Public Finan system, estimates the relative revethe National Governors' Association nue-raising abilities and public-service cial Management at Carnegie-Mellon “ needs of each of the counties, and evalUniversity, Pittsburgh; and Alice M. Meeting, “Can't Congress please let us run the states?” Many governors also Rivlin, Senior Fellow in the Economic uates the vertical and horizontal bal ance of the system. The report also Studies Program at the Brookings In- expressed concern about the accumu lation of funds in the federal highway includes an appraisal of the property stitution, Washington, DC. (See page 5 and airport trust funds. Governor John for the roundtable report.) tax in Hawaii, a discussion of the potenAshcroft was quoted in the same story tial for development fees and exactions Clearinghouse Report as saying, “There's no stomach on the in the state, and an analysis of a wide The Commission approved publi- part of Missourians to ante up again for range of policy options for improving cation of the report Scope and Design of highways when the federal govern- Hawaii's intergovernmental system. the Clearinghouse for State and Local ment is hoarding dollars they've alInitiatives on Productivity, Technology, ready paid.” Governors Sinner and and Innovation, including findings and Ashcroft are members of the ACIR. recommendations. The report will be State Constitutions published in April. ACIR assisted the U.S. Depart- Two of the country's most active ment of Commerce in designing the state bicentennial commissions on the Clearinghouse, which was authorized U.S. Constitution, New York and Vir Page 8
Research and Development Activities (R&D). Technological progress is the chief force behind obsolescence and the force for increasing the demand for new capital that embodies cost-reducing innovations or capacity to create new products. As several studies have shown, R&D outlays are related directly to the pace of technological process and the ability of the nation to compete in world markets. 20
Public Capital. Not alone in its findings, a recent and especially thorough report to the President and the Congress on the status and economics of the nation's physical infrastructure found public infrastructure-e.g., roads, water and sewer systems, airports, bridges-to be highly complementary to the private capital base and an important contributor to the productivity of the private sector. At the same time, however, the report also concluded that there is a growing imbalance between public and private capital that "limits the growth of the economy and the (nation's] ability to compete in world markets. "21 A Stable Economy. Fluctuations in exchange rates and swings in the domestic business cycle make it difficult for businesses to be managed and production processes to be planned. Accordingly, a more stable economy would provide an environment for productivity gain. Stability is a yardstick against which the 1980s measures up quite well. Entering with double-digit inflation, the 1980s has been a period that has sustained the second longest economic expansion in U.S. history.
Third, particularly when it comes to productivity, many of the solutions are inherently intergovernmental. A review of the fundamentals of the issue discussed above attests to this. Although the responsibility for providing for a stable economy and promoting national savings rests primarily with the federal government, actions needed with respect to nearly every other issue noted above are intergovernmental in nature. The solutions, therefore, must also be designed in the intergovernmental arena. Accordingly, one of the tasks of ACIR in coming years will be to participate in the design of that policy agenda. Notes This discussion focuses on tradable goods and services. Concerns such as the distribution of income and wealth, infant mortality rates, and the quality of social services, while certainly important and replete with economic implications, are not addressed directly here. For this discussion, see Herbert Stein on "Economic Leadership," American Enterprise, January/ February 1990. The term "competitiveness” has become a catchall phrase for a series of recent economic events relating to the U.S. position in the international economy. Despite its common use in the popular (as well as some academic and other policy) discussions, it is rarely clearly defined. 3 France (11.8 to 15.9 percent), Italy (10.4 to 15.6) and Canada (6.4 to 10.4). For a discussion, see Barry P. Bosworth and Robert Z. Lawrence, "America in the World Economy," The Brookings Review, Winter 1988/89, pp. 39-48. Data provided by International Trade Division of the World Bank, February 1990. The data relating to the current account and the nation's net debtor status are from Stephen A. Meyer, “The U.S. as a Debtor Country: Causes, Prospects, and Policy Implications," Business Review, Federal Reserve Bank of Philadelphia, November/December 1989, pp. 19-31 and Table 1. Meyer also provides a glossary and a discussion of what it means to be a “net debtor” nation. Economic Report of the President, 1988. February 16, 1988. Meyer, p. 22, and Bosworth and Lawrence, pp. 39-40. 8 Economic Report of the President, 1988, p. 67. The business productivity growth rate, which is measured in terms of output per hour for all persons, increased by an annual rate of 3.2 percent for 1948 IV to 1966 IV, 2.0 percent for 1966 IV through 1973 IV, and 0.7 percent from 1973 IV to 1981 III. By saving, or abstaining from spending, the nation as a whole frees up real resources of land, labor, and capital for investment spending. The higher a nation's income, the greater its ability to save and, thus, invest. 10 Between 1980 and 1985, the value of the dollar increased by 50 percent. That rise, which was reversed between 1985 and mid1988, fostered a significant drop in export prices. Since mid1988, the dollar has appreciated. For a primer on this and other factors that determine the trade balance, see Ramon Moreno, “A Fading Export Boom?" Weekly Letter, Federal Reserve Bank of San Francisco, December 15, 1989. 11 Which is what did occur in the early history of the nation. The nation's railroad system was developed in the 19th century largely as the result of foreign financing. For many states, the capital inflow is a critical part of development even today. A recent report by the Hawaii Office of State Planning (Foreign Investment in Hawaii, Office of Planning. Honolulu, 1989) is explicit in its conclusion that "investment in the economy is essential to the growth and diversification of our economic base.” For further discussion, see State Policy Reports, Vol. 7, Issue 17, 1989, pp. 10-11. 12 Meyer, p. 22, Table 2. 13This example is taken from Robert E. Litan, Robert Z. Lawrence, and Charles L. Schultze, “Improving American
The Intergovernmental Dimension As the United States approaches the 21st century, there can be little doubt that the present concern about the link between the nation's position in the world economy, the degree of its competitiveness, and the outlook for living standards is a legitimate one. This is especially true given the two major failings of the domestic economy: excessive consumption and faltering productivity. Within this context, three key points must be mentioned. First, the international economy and the economic behavior of foreign competitors is not the real source of the problem. American productivity and living standards are not diminished by improvements abroad. The problem is at home, not in Japan, the European Community, or the developing nations of Southeast Asia. In fact, U.S. living standards will be enhanced if those economies grow and our trade with them increases. Economic competition is not a zero-sum game. Second, many of the sources of the saving and productivity concerns are subject to policy manipulation. The range of these policies extends from such issues as the burden of governmental regulatory policies on American producers, the persistence of poverty, improving education, providing increased incentives for saving, and pursuing policies to promote capital formation, public as well as private. Page 9
In sum, I envision significant pressures on state and local government in the 1990s resulting from European integration. Whether we can respond effectively to make our state-local regulatory and fiscal environment more uniform in order to meet this challenge is the question I hope the Commission revisits in this decade.
other structural matters. The ACIR can provide leadership in these matters. One issue is to match financing methods with the nature of services that are provided by the state and local governments. This means at the local level: (1) financing municipal services by the property tax and user fees, and (2) financing the local share of education with a local income tax, and the state share with a state income or sales tax. For states it means, state aid for tax exempt property and either revenue sharing to address commuter problems or enabling local government to impose commuter taxes. Second, there is a need to sort out state and local responsibilities. This means (1) state assumption of much of the costs of courts, (2) a more substantial state role in paying for the foundation costs of education, and (3) the phasing out of unfunded state mandates. Third, there is a need to take up the old issue of how to consolidate governments. This is something that was permitted in Pennsylvania's 1967 Constitution, but for which the legislature has never authorized legislation. Finally, we not only have to make our institutions more homogeneous at the state and local level, we also need to improve the quality of our public outputs. I have several suggestions here, which are perhaps unusual: First, the public sector, including the federal government, needs to think in terms of an analogy to shareholder reports, so the people really know what they are getting for their taxes. Second, since I expect there to be greater state aid to local government in the future to balance out disparities, at least in the area of education, there is going to be a great need to create political recognition for raising state funds and giving them to local government. I like to call this giving credit to the state elk hunters for bringing home the elk to their local, elk-eating officials. Third, there is a need for state and local governments to reward public managers for success in risk-taking and to penalize them for failure. This involves a wholly new attitude toward public servants. In the area of education, if we expect our principals to be more productive managers and to take risks, then they need to be paid better for their successes and they need to be fired for their failures. Finally, we need to improve campaign financing, the quality of our political leadership, and the ethical base of public service. Maybe I am jaded, coming from western Pennsylvania, but when our local school board in Pittsburgh started handing out Visa cards to defray "administrative expenses" of board members, I felt that they had gone too far. The problem of local corruption or questionable ethics is not just a problem of one part of the United States. It is a part of local government in many states. If we are going to improve the quantity and quality of public outputs, we must change the way we finance our elections. do something with salaries to make public servants better paid for the work they do, and then finally insist on a higher ethical standard. In order to achieve greater homogeneity in our state and local institutions, we need to address periodically the areas in which states should cooperate, and build ways on a continuing basis for the states to do so. The states may have
State and Local Initiatives on Productivity, Technology, and Innovation: Enhancing a National Resource for International Competitiveness The Omnibus Trade and Competitiveness Act of 1988 established in the U.S. Department of Commerce a Clearinghouse for State and Local Initiatives on Productivity, Technology, and Innovation. The act recognizes that many state and local governments are “acting boldly and pragmatically" to address the competitiveness issue. ACIR assisted the Department of Commerce in determining appropriate roles for the Clearinghouse that would be of greatest support to state and local competitiveness initiatives. After a year of research and consultation, ACIR recommended an overall design and a series of priority activities for the Clearinghouse. This volume includes:
O ACIR's findings and recommendations on the setup, operations, and funding of the Clearing house; O ACIR's design report to the Department of Commerce; sections, on a survey of trends in state policies clearinghouses, and program developers and ad- ministrators in the fields of productivity, technol- ogy, and innovation. Page 10
have collapsed because of the third world debt problem, and many of the economies to the south of us have had severe problems. The immigration by those people hasn't been an act of free will, it's been an act of economic survival. It's not clear to me that the influx of millions of immigrants helps our competitiveness particularly. It encourages employers to follow low-wage strategies instead of increasing investment in equipment and R&D, and I don't think that we want to compete in the world economy based on wages. The problem is to solve the third world debt issue so that the economies to the south of us can rebuild and strengthen themselves and people can find employment opportunities in their own homelands rather than being forced to come to the United States. Meo: You asked us a demand question, a pull question, but there is a push question as well. Look at Mexico. The excellent changes in Mexico's economic policy are not fully understood. Mexico has essentially said it's determined to become a major economic actor in this hemisphere in the 21st century. I begin to have hope that they will be able to generate jobs and have a much more open economy in the future. A derivative and very important part of that will be United States openness to this highly competitive situation developing in Mexico. Strauss: I'm sort of bemused by this discussion, living in Pittsburgh, and watching steel and auto decline because they were in part high-wage industries that ceased being price cutters. We are talking about fundamental economic forces. One of the economic benefits of having illegal immigrants—who I think ought to be legal—is that given their skills there's a broader supply of labor and it's kept wages in those industries relatively low, which has had a beneficial effect on prices. There are linkages among markets that are indisputable. If you say we should restrict immigration, we should bid up wages, we will find that we can't compete in certain areas in world markets. Meo: I think this is the guts: Are they going to produce future automobiles in Puebla or Pittsburgh? If you bring the Pueblans into Pittsburgh, you can keep the wage rates down relatively and probably make Puebla less attractive for Honda, which is snooping around. If you do a sector deal with the Mexicans, and if you continue with the legal requirements for immigration, you'll make it more attractive for those jobs to be generated in Puebla. There are these trade-offs, if you will, everywhere. Ruvin: Would you say that immigration is a topic that needs to be looked at in terms of its ramifications on our competitiveness, that our immigration policy is something that does affect our competitiveness and that we need to further evaluate the manner in which it affects competitiveness? Meo: It is something that you should look at because not very widely known is the implication of the U.S. position in the Uruguay round. The U.S. wants a right of establishment in some service areas. They do not believe that a bank can have free service exchange unless it can open a branch office in, for example, India, and it has pushed this at the Uruguay round: the right of establishment would be negotiable. The Indians, of course, respond by seeking a similar right of establishment for construction, for example. If you
take one establishment right, you must at least talk about the other one. Depending on results of the round in the future-I don't believe this issue will be resolved in the near future-how much of immigration is part of your trade or your competitive policy is going to be an issue. Snyder: Several months ago, in Brussels, I went by a building that I was told holds 8,000 workers who are part of the European Economic Community, which everybody is excited about. And I suspect that most people in our country have never heard of it, let alone are excited about it. How does the World Bank see the impact of the EC on our economy? Meo: I'm surprised that the vast majority of Americans don't realize how the European community, the 12, works, and, more importantly, the deals the EEC has with EFTA, for example, and the East Germans. For example, today an East German has a better trade relationship with the EEC than the United States, which is fascinating when you remember who belongs to whose pact. The EFTA economies, Scandinavia, Switzerland, and Austria, have free trade in all manufactured goods with the EEC. The EEC is the world's largest exporter. It probably will soon have the world's largest GNP. It is slightly below the United States, at excessive exchange rates. If they go to a single monetary act as well, it will likely be a very strong competitor for the dollar, and the U.S. ability to borrow and influence financial markets will be strongly diminished. There also are implications for the United States in the fact that the European Communities' Commissioner is the consulting chairman of the Eastern European aid groups, i.e., they have a strong interest and have accepted the leadership in undertaking the reconstruction of the economies of Eastern Europe. One would presume they would view with some sympathy further trade arrangements and deals in that area. This has a major impact on the United States. The authorities are fully aware of it, of course; the United States spends a lot of time looking at these things. Snyder: It is amazing that those countries have accomplished what they have, in view of their history, that they have been able to come together to the point where the Japanese are more concerned about them than they are us. Strickland: What is the prospect of coming to a common rate of exchange or a common dollar in the near future? Meo: I suspect it may take a little longer. Some of the southern group of EEC countries have just entered the market, so it's going to be an interesting challenge. The EEC commissioned an econometric study of the impact on the EEC 12 of the single integrated market act. The estimate, which most people feel is probably conservative, is that it will give them a boost of about 3 to 5 percent of their GNP. Every year for the past three years, the bank has had to up its estimation of EEC growth rates. It's a very favorable economic expansion. Fraser: Moving this into the social or public policy area, I've been watching the growing poverty in my community, and, as far as I can tell it's linked to the internationalization of our economy. We see industrial jobs moving to low-wage areas, some out of the country. In effect, our labor is having to compete with third world labor. As I reflected and thought of totally porous boundaries, I've assumed that over time we would become a mirror image of the third world or of thc other industrial countries, but that we lack some of the basic support systems that they provide to their people. My impression is that the internationalization of our economy is leading to growing inequity in the United States. Is that accurate?
There are other consequences as well. According to Julius Wilson, the loss of blue-collar jobs is contributing to the accelerating rate of single-parent families. That's having consequences in our cities: a very rapid growth in non-marriage families, and the growth of gangs. There's a whole spill-out of social pathology that seems to tie back somewhat to the internationalization of our economy.
Smith: We've had a tremendous loss of manufacturing jobs in the five boroughs of New York City. A lot of those jobs were held by members of the minority community. There is no doubt that the blue-collar sector of the economy has been hit hardest by international competition and that people who lack skills and education, the people for whom there hasn't been sufficient public investment made, are going to fall behind. The point that Alice Rivlin made about public sector investment is really essential. If we are going to have the people capable of producing high value goods able to create wealth, we have to give them more training, more education, more preparation. And I think that the internationalization of the economy has contributed directly to the growing inequality.
Rivlin: I think it's the wrong emphasis in the sense that it suggests that internationalization is basically bad for the economy. I think not; it's basically good. We do have a higher standard of living because we trade with the rest of the world, and if we cut ourselves off, it will be worse. We are moving more and more toward a service economy, not just because of internationalization but for many reasons, and that's happening all over the world. We need to recognize that getting productivity up in the service industries is what our future standard of living really depends on. Not that manufacturing doesn't matter, but we are actually doing quite well in manufacturing productivity, and that's part of the problem: fewer people are working to produce the same output in manufacturing. We need to turn our attention now to how to give the people who work in service industries the basis for higher productivity. That is not something that could be changed by closing our borders to either goods or people.
ments, then you will not grow. There will not be as big a pie to divide up. That seems to be fundamental. We have reduced what we're doing in public universities and in private universities. But that's not the only problem. New York has done some very interesting things in the area of vocational education, trying to refashion it into science and technology education. We have to invest in new ideas and recognize that ideas are transmitted now in a matter of months rather than years-some of our foreign competitors come to our markets and get our ideas before we take them to production. The issue is our people and our ideas, and that's how we'll grow. Hawkins: Dr. Strauss, I see a contradiction between what you're saying now and in your statement. In one sense, you say we need less heterogeneity at the local level, we need metropolitan consolidation, but isn't that the management strategy of the 1950s rather than of the informational age of the 1980s? Strauss: We could afford not to do it in the 1950s because we were in a different economic position. We dominated world markets then. The economic assumptions facing our economy are very different. Hawkins: But what can we gain from metropolitan consolidation? Political leadership? More efficient public service delivery? Strauss: Yes. And less harassment, corruption, and intermingling with the private sector so that it can go about its business. I wouldn't minimize this issue. Time is a fixed resource. When the private sector has to spend inordinate amounts of time understanding a zoning law or a tax structure, it will go to State Y instead of State X. We behave in our own private lives the same way. We look for convenience as well as quality. And with 82,000 local governments, we've got a ways to go. Elazar: Isn't that an argument for more competition among local governments rather than less competition? If businesses are going to go where they can find a better deal, why would you want to consolidate and create the situation of local government monopoly? Strauss: There's obviously going to be a trade-off between the number of people you want to do business with and the best price. Hawkins: But isn't there an inherent contradiction? Economists extol the virtues of competition in the private sphere, but when it comes to the public sphere, they say we need a big public monopoly. Strauss: My point is, for example, I come from a county with 132 municipal governments and 1.4 million people. That makes little sense. Hawkins: We did cconomy-of-scale studies in California in 1973. Look at Los Angeles County. According to tried and true methods of your profession, they should have had diseconomies of scale in every public good they produced. But the county was right at the mean because it has to compete with 80 little cities. (continued on page 23)
Strauss: Heavy industry-autos and steel, for example, was able to pay high wages because they dominated their domestic and, to some extent, international markets. That's gone. There's downward pressure on wages. We need to create a safety net that works so that income security provides modest living with dignity. We also need to ensure that there are employment and retraining opportunities for adults, and that we invest in our young people. The United States is going to prosper in the future by the quality of its ideas and its people. Without ideas and people and products, you cannot make profits, you cannot pay high wages. If you don't invest in people and in the creation of innovation in federal, state, and local govern
President Bush Reaffirms Federalism Executive Order
President George Bush has reaffirmed his support for President Ronald Reagan's Federalism Executive Order No. 12612 (October 26, 1987). In a February 16, 1990, memorandum to the heads of all executive branch departments and agencies, the President stressed that the principles of this order are central to my Administration." The order requires the federal departments and agencies to prepare federalism assessments of proposed legislation and regulations that would have major implications for state and local governments. This requirement is meant to minimize federal intrusion into areas of government for which the state and local governments have responsibility.
Anthony Commission Issues Final Report
After studying the impact of federal tax changes and mandates on the nation's A broadening of the definition of public purpose bonds to include facili-
Federal Court Reform Could increase State Costs
Watch for the April 2 report of the Federal Courts Study Committee created by Congress in 1988. The committee sees a need for drastic federal court reform. In light of federal budget constraints, the committee is likely, among other things, to recommend ways to reduce the caseloads of federal courts by (1) narrowing access to federal courts, (2) channeling certain cases to administrative tribunals, and (3) diverting cases to state courts. The committee may recommend, for example, the elimination of most diversity jurisdiction cases (see Intergovernmental Perspective, Spring 1989), thus increasing state court caseloads. Major factors driving reform are the dramatic increases in appeals cases and drug prosecutions. Appeals from district court decisions, for instance, have increased from one in every 42 cases 40 years ago to about one in every eight cases today. Drug prosecutions now account for about 25 percent of the total federal criminal docket, 44 percent of all federal criminal trials, and 50 percent of all criminal appeals. Some federal judges now spend 70 percent of their time on drug cases. One result of federal court reform is likely to be more work and costs for state courts.
Federal Mandate Costs
Governor Ned McWherter has issued a report on “The Impact of Federal Mandates on the State of Tennessee.” The governor estimates that state costs incurred from existing federal mandates will increase from $11.6 million in FY 1987 to $127.8 million in FY 1995—an amount equivalent to a 1/4 cent sales tax increase or a 5-cent gas tax increase in the state. Michigan also has issued a report on the “Current Impact of Unfunded Federal Mandates and Reductions.” The cost to the state of Michigan of current unfunded mandates is expected to increase from $45.7 million in FY 1990 to $89.7 million in FY 1991. When reductions of federal funding are added in, the costs increase to $64.0 million in FY 1990 and $124.7 million in FY 1991. The report notes that the FY 1990 cost of $64.0 million is larger than the FY 1990 general budget of 8 of the state's 19 departments.
Federal Aid Still Shifting from Places to Persons
The U.S. Department of Health and Human Services now accounts for 47 percent of all grant dollars disbursed by the federal government. Other federal departments and agencies are far behind: Transportation, 14 percent; Housing and Urban Development, 11 percent; Agriculture, 9 percent; Education, 9 percent; Labor, 5 percent; Environmental Protection Agency, 2 percent; and all others, 3 percent. This is a dramatic shift from 1960, when transportation represented 43 percent of the total and health represented only 3 percent.
Foreign Aid Coming to the U.S.?
At the request of the governors of Arkansas, Louisiana, and Mississippi, the Japanese Export-Import Bank is considering making low-interest loans to underdeveloped areas in those states. Generally, these loans are reserved for third world nations. The potential projects being considered-mostly industrial parks—have a total estimated value of $3 billion.
Federal Court Applies VRA to State Judicial Districts
Last December, a three-judge federal appeals court handed down a decision that applies the Voting Rights Act to judicial election districts. The court ruled that new district lines or the addition of judges must be precleared under Section 5 in those states where state legislative and local election districts are required to be cleared. This is the first time that the act has been applied to judicial districts.
Will States Limit Congressional Terms?
Proposals to limit congressional terms have sparked interest in some state capitols. Initial proposals have called for an amendment to the U.S. Constitution to limit the number of terms that can be served by members of Congress, but some states are considering whether an amendment is necessary. Article I of the U.S. Constitution specifies the length of House and Senate terms and certain other qualifications, but not numbers of terms. Consequently, states may be able to limit the number of terms served by members of Congress by statute or state constitutional amendment. Opponents of a limit argue that in a democracy the people should be free to elect whomever they wish as often as they wish, and that term limits will reduce the experience and expertise needed for an effective Congress.
Who Will Enforce Fair Housing?
Under the 1988 Fair Housing Act, HUD has written regulations that require state legislatures to reenact their fair housing laws to match the new federal act word for word, and to provide substantially more unreimbursed legal assistance than in the past if they want to retain their enforcement powers in this field. Currently, 38 states and 84 local governments are certified by HUD to handle housing discrimination cases. It appears that many of these governments will not be able or willing to be recertified under the new rules. If that happens, 3,500 cases per year could be shifted to HUD, the Justice Department, and the federal courts. ACIR has had informal contact with the U.S. Conference of Mayors and the National Association of Regional Councils, which have begun to look into this situation.
Reilly Seeks Omnibus Environment Law
EPA Administrator William K. Reilly, in a speech to the Natural Resources Defense Council on November 27, 1989, advocated a single new environmental law that would encompass the existing nine major statutes and emphasize pollution prevention and risk reduction. According to Reilly, “Under the existing environmental programs, each with its own statutory mandate, we have no mechanism-indeed we have no authority-to compare environmental risks across programs and to concentrate on those areas where we can realize the greatest benefits for human health and the integrity of natural systems."
Will Chemical Industry Seek
The chemical industry is monitoring environmental legislation in such trendsetting states as California, Florida, Georgia, Illinois, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, and Texas, where many environmental protection innovations are originating. The industry believes that such innovations increase the complexity and costs of doing business. Therefore, as the states seize more initiative on environmental matters, industry pressure for uniform federal standards may rise.
Slow Glow for Nuclear Waste Dump
The decision to build a nuclear waste repository in Nevada, which the Congress thought it had settled in 1987, appears to be stretching out to an indeterminate date. Nevada is resisting the federal move on environmental grounds, and the federal government is suing the state to allow the project to move ahead. The facility was originally scheduled to open in 1998, but even the most optimistic estimate now does not contemplate operation before 2010. The White House has agreed to appoint a civilian waste negotiator to work with Nevada under a provision of the 1987 act that has never been used.
Bloomingdale's Wins One on Bellas Hess
Legislation is under consideration to overturn the 1967 Bellas Hess decision, which held that mail order houses could not be required to collect state and local sales and use taxes on mail-order sales for states in which their only business presence is distributing catalogs and other ads. Congress has yet to act. In 1985, ACIR recommended that Congress enact legislation to negate Bellas Hess. ACIR estimates that in 1988 the total revenue loss to the states was $2.4 billion. This has spurred many states to pass laws to reduce the loss of tax revenues due to Bellas Hess. State legislative action has, in turn, generated court challenges. The most recent state court decision on the issue comes from Pennsylvania where, in 1985, the Department of Revenue ordered Bloomingdale's By Mail to register and begin collecting use tax on sales of merchandise in the state. On two separate occasions, Revenue Department employees who purchased merchandise from By Mail were able to return those items at an in-state Bloomingdale's store. The Department contended that such customer contacts went beyond those protected by Bellas Hess. The Pennsylvania court disagreed, reasoning that Bloomingdales' By Mail has insufficient nexus with Pennsylvanians because “Bloomingdale's stores in Pennsylvania do not solicit orders on By Mail's behalf nor act as its agents in any fashion and By Mail does not solicit orders for Bloomingdale's."
North Dakota Wins One on Bellas Hess
Chicago-based Spiegel, Inc., has agreed out of court to start collecting the 6 percent use tax on sales to North Dakota residents. With the support of the Multistate Tax Commission, the state had initiated a lawsuit to require Spiegel to collect the tax. Had the lawsuit been fully litigated, it could have been an important test of state laws enacted to bypass Bellas Hess. Spiegel indicated that the Page 11
Southeastern Interstate Sales Tax Compact
costs of litigation would have been greater than the sales tax revenues to be paid.
State Taxation of Pensions Crosses State Lines
Court Says States Can Tax
California has begun to tax the retirement incomes of former residents who states, and could reach into low-tax states, where many retirees locate, as well as foreign countries. The National Association of Retired Federal Employees has warned its half-million members to watch for expansions of the source-tax concept. Nevada, where many Californians retire, has become so concerned about this new tax that it has passed a law prohibiting California tax collectors from placing liens against property in Nevada to enforce the source tax. On January 17, the U.S. Supreme Court ruled unanimously that states may apply their general sales taxes to religious organizations' sales of religious books and articles. The Court's ruling in Swaggert Ministries v. California was confined to whether the taxation of sales of religious articles violates the U.S. Constitution's First Amendment guarantee of freedom of religion. The Court said that it does not. Jimmy Swaggert Ministries, which challenged the California tax on nearly $2 million in sales during the 1970s, also had tried to challenge the state's tax on its mail-order sales, arguing that the organization's connection with California was too remote for the state to have constitutional authority to apply its tax (the Bellas Hess issue). However, because the California courts had refused on procedural grounds to rule on this aspect of the case, the Supreme Court said that it did not have the jurisdiction to rule on it. Since 1987, the National Governors' Association (NGA) and the National Asso- ciation of State Budget Officers (NASBO) have worked to implement a pilot Single Administrative Grant (SAG) program. Under SAG, the federal govern- ment would award a single grant to states to administer AFDC, Food Stamps, and Medicaid. The pilot project, highlighted in the 1991 federal budget (“Advancing States as Laboratories"), is expected to begin in October 1990. Meetings will be held between NGA, NASBO, OMB, and other federal representatives to resolve basic issues in the federal version of the SAG Memorandum of Understanding (MOU). NASBO's 1988 MOU had proposed a SAG amount based on the historic ratio of federal administrative payments to benefit payments under the three programs. Under the federal proposal, the SAG amount would be fixed at a state's FY 1989 administrative expenditures, adjusted for changes in prices. Several other issues need to be resolved before negotiations with individual states can take place to begin the project.
Single Administrative Grants Forthcoming? Page 12
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Significant Features of Fiscal Federalism, 1990 Edition, Volume I, M-169, 1990, 152 pp. Local Revenue Diversification: Rural Economies, SR-13, 1990, 60 pp. Local Revenue Diversification: Local Sales Taxes, SR-12, 1989, 56 pp. State Taxation of Banks: Issues and Options, M-168, 1989, 48 pp. A Catalog of Federal Grant-in-Aid Programs to State and Local Governments: Grants Funded FY 1989, M-167, 1989, 40 pp. Residential Community Associations: Questions and Answers for Public Officials, M-166, 1989, 32 pp. Changing Public Attitudes on Governments and Taxes: 1989, S-18, 1989, 40 pp. State Constitutions in the Federal System: Selected Issues and Opportunities for State Initiatives, A-113, 1989, 136 pp. A-112, 1989, 128 pp. Architectural Barrier Removal, A-111, 1989, 136 pp. 1986 State Fiscal Capacity and Effort, M-165, 1989, 128 Hearings on Constitutional Reform of Federalism: Statements by State and Local Government Association Representatives, M-164, 1989, 56 pp. Papers from a Policy Conference, M-161, 1988, 160 pp. State Constitutional Law: Cases and Materials, M-159, 1988, 480 pp. State Regulation of Banks in an Era of Deregulation, A-110, 1988, 36 pp. Metropolitan Organization: The St. Louis Case, M-158, 1988, 176 pp. Interjurisdictional Competition in the Federal System: A Roundtable Discussion, M-157, 1988, 32 pp. Local Revenue Diversification: Local Income Taxes, SR-10, 1988, 52 pp. Organization of Local Public Economies, A-109, 1987, 64 pp. Is Constitutional Reform Necessary to Reinvigorate Federalism? A Roundtable Discussion, M-154, 1987, 39 pp.
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State and Local Initiatives on Productivity Technology, and Innovation
The Omnibus Trade and Competitiveness Act of 1988 included a provision to establish in the U.S. Department of Commerce a Clearinghouse for State and Local Initiatives on Productivity, Technology, and Innovation. In introducing this proposal, Senator Dale Bumpers of Arkansas noted that many state and local governments are “acting boldly and pragmatically” to address the competitiveness issue. His proposal was a modest one to assist state and local governments in their efforts to enhance business competitiveness by spreading the word about the creative steps being taken by those governments, as well as about related activities of the federal government. The Department of Commerce asked the Advisory Commission on Intergovernmental Relations to help develop strong relationships with state and local governments and to assist in designing appropriate roles for the new Clearinghouse that would be of greatest support to state and local competitiveness initiatives. The Commission staff conducted a year of research and consultation with state and local governments, appropriate federal agencies, and a range of private-sector organizations. The Commission recommendations supporting the new enterprise were made to the Commerce Department on September 28, 1989, and the report is to be published this Spring. The Commission's key finding is that many of the functions envisioned for the Clearinghouse by the Congress are being performed by a variety of state, local, and federal agencies, and some private sector units. It is essential therefore, that the Clearinghouse establish a nonduplicating niche, linking the other actors together into a readily accessible and highly utilized network and enhancing their operations.
Assisting Businesses to compete Internationally competitive businesses must be state-of-the-art, highly productive, farsighted, and wise to the ways of international markets. Many businesses achieve these characteristics by themselves, but others need help in doing so. They may need help to acquire new technologies, install flexible manufacturing processes that can be more responsive to quickly changing markets, obtain favorable financing (whether it be seed capital, venture capital, or permanent capitalization), develop adequate management capacity, understand export markets, have access to trained labor pools, obtain space to expand, and enjoy good labor-management cooperation, a favorable business climate, and adequate patent protection. Any given business may need only one or a few types of assistance, but, in the aggregate, the business community-especially the sector consisting of smaller businesses- is likely to need all of these forms of assistance if it is to achieve its full potential for succeeding in increasingly demanding domestic and international markets. Many state and local governments offer business assistance programs such as business incubators, venture capital, seed capital, foreign investment, research parks, export marketing services, vocational and technical training, higher education, and joint industry/academic research and development resources. At the same time, the federal government offers assistance in (1) commercializing federal research findings, (2) disseminating published federal research results, (3) making federal laboratories available for testing and for joint research and development projects
State Technology Programs-Lessons
... it is clear that there are major flaws in the way many states are conducting their technology strategies. The most serious problems appear to be the following: Too few states have done their homework by per- forming serious strategic audits. Such audits are a necessary first step if strategic plans are to be devel- oped on the basis of accurate, in-depth information about what is happening in state economics and where state innovation systems are failing. Too few states have developed wholesaling strate- gies which give them leverage over investment de- cisions in the private sector. Too many state technology dollars have gone into physical infrastructure-new buildings, new labo- ratories, and new research parks-rather than in- tellectual infrastructure. States have focused too much of their attention on technology development, and too little on technology transfer and technology deployment. Serious commercialization strategies and technology transfer organizations are rare, as are active, comprehensive technology deployment programs. Even rarer are significant programs designed to encourage the new labor-management relations needed to get the most out of computer-driven production technologies. Most state strategies consist of independent programs run at the state level rather than comprehensive programs run at the regional level. Few state programs are aggressively measuring performance and outcomes, and even fewer are funding on that basis.
Few states are working with industrial sectors and regional clusters within their boundaries to improve their competitive edge. Few states are working aggressively to change the culture of academia. The most popular technology program model, the industry-university research center, appears seriously flawed. In most programs, academia is clearly in the driver's seat, and business is not intimately involved in defining the research agenda. As a result, too little technology transfer is taking place. These problems are not overwhelming, and they should by no means call into question the validity of state efforts to stimulate technological innovation. They are simply the price we pay for experimenting. The important conclusion is not that our experiments have been flawed, but that if we are to truly take an experimental attitude, we must continue to learn from our mistakes and to refine our experiments. The lessons provided in this book are an attempt to help with that process. They should not be taken as final conclusions, but as the collected wisdom, at this point in time, of many of those who have been involved in this burst of experimentation over the past five years. They are not intended to offer conclusions about particular programs, but to suggest the right questions to ask as policymakers try to evaluate the effectiveness of their programs. Reprinted from: David Osborne, State Technology Programs: A Preliminary Analysis of Lessons Learned (Washington, DC: The Council of State Policy & Planning Agencies, November 1989). Available for $10.00 per copy from CSPA, 400 North Capitol Street, Suite 285, Washington, DC 20001.
with industry and academic institutions, and (4) supporting small business development. In addition, several national clearinghouses assist businesses in finding information about federal, state, and local initiatives for productivity and technology improvements. These include a repository of information on state technology extension services at the National Institute of Standards and Technology, the joint information program of the National League of Cities and Public Technologies, Incorporated, the NTIS Center for Utilization of Federal Technology, the Department of Commerce Productivity Center, the NASA technology utilization centers, the Federal Laboratories Consortium, the Small Business Development Centers, the Technology Applications Information System of the Strategic Defense Initiative Organization, and the Catalog of Federal Domestic Assistance. One recent survey suggests that state governments have taken the lead in providing assistance to help U.S. manufacturers obtain and use technologies, modernize their manufacturing processes, and improve their productivity and profitability. Of the $620 million identified by the National Governors' Association and the National Institute of Standards and Technology as being spent on such programs in 1988, state governments provided 48 percent of the funding, the federal government provided 26 percent, and the remain
ing 26 percent came from a combination of industry, university, and local government sources. Some sources of business productivity and technology assistance provide only passive information dissemination. Examples are program catalogs and directories, passive clearinghouses, newsletters, and articles. Other sources of assistance provide brokering services; that is, they attempt to match businesses with information and assistance sources directly related to identified needs. Examples include interactive clearinghouses, public economic development agencies, and private technology and management improvement brokers. Still other sources of business assistance provide hands-on help. Examples include federal laboratories, university research units, joint ventures among industries (including industry/federal and industry/university consortia), business assistance offices, job training and education units, and financial institutions. Any given business may need only one type of assistance, but it is important to have all three types of assistance available for those businesses that may need them.
Gaps in Business Assistance Despite the seeming surfeit of information sources on productivity and technology innovations, deficiencies exist in serving business needs. Many businesses and the state, local, and federal officials attempting to serve them are unaware of the varied information sources and assistance resources available. Furthermore, it is not always easy to obtain this information.
For example, an evaluation of 19 directories of technology and productivity programs shows substantial information overlap, but also some gaps. In large part, these limitations reflect differences in objectives and targeted audiences. Some directories are designed primarily as “phone books.” They list contact information for a broad array of programs, with little or no descriptive information. Other directories identify state programs within a particular category, such as capital assistance programs or university-based technology centers. Still other directories review initiatives for a selected a number of states. Although the directories, taken as a whole, provide a good picture of the activities in the federal and state governments, few people have access to all of these sources, and they contain very little information about local government initiatives. Another limitation of directories is that they get out-of-date quickly, as states create new programs and dismantle or restructure old ones. State and local officials frequently resist resurveys because of the administrative burdens involved in completing extensive questionnaires. Such resistance is strongest when the survey comes from a far-off federal agency with little promise of returning benefits to the respondent. The other major deficiency in assisting businesses to become more competitive in international as well as domestic markets is that technology and productivity innovations have not been analyzed adequately. Most clearinghouses and directories are largely or completely descriptive. They give little guidance to a potential imitator as to what works best and the conditions under which success can be attained. Some of the best known programs have been evaluated, and the National Conference of State Legislatures maintains a computerized file of legislative audit evaluations, but there is relatively little agreement about how such evaluations should be performed or their validity. In addition, there has been little evaluation across groups of programs of similar types. Thus, it is difficult to advise the Congress, state legislatures, city and county governing bodies, and others about what works best, where, and under what conditions. Although the Omnibus Trade and Competitiveness Act of 1988 prohibits the Clearinghouse from evaluating individual state and local initiatives unless requested to do so by the program's sponsor, the law clearly anticipates the Clearinghouse providing policy analysis that could help elected officials to choose better programs for future support. This could be accomplished by peer reviews of groups of programs, focusing on the "lessons learned" rather than on comparisons and ratings of individual programs (sce box on page 30). To assist others in evaluating their own programs, or programs under their official purview, the Clearinghouse should develop, through broad consultation processes, sound evaluation criteria to be applied sensitively by others who will assess productivity and technology innovations objectively.
Benefits of the New Clearinghouse Experiences of earlier clearinghouses provide lessons for establishing the new clearinghouse in the most beneficial way. Some clearinghouses that have emphasized the accumulation of very large amounts of disparate information in a single data bank have become too difficult to maintain, too impersonal in their operations, and too remote from the sources of hands-on assistance that a business often needs to cope with specific problems. Often, requests for information are difficult to frame in terms that elicit an appropriate response from the system, and, frequently, the response produces an overwhelming flood of information, most of which turns out to be irrelevant. Cooperation from data suppliers usually wanes after the initial start up, and maintenance costs grow too high. In short, a series of smaller, decentralized, relatively specialized clearinghouses operating close to the information sources that they rely on have proved to be more successful than the larger, more diffuse efforts. With this decentralized format, many constituents can benefit from the new Clearinghouse for State and Local Initiatives on Productivity, Technology, and Innovation. State and local governments want more timely information about each others' programs, as well as analytical guidance about which ones work best. In addition, they want more readily available information about sources of federal assistance. At the same time, federal agencies charged with responsibility for promoting the commercialization of federal research to assist the national economy could use this Clearinghouse to help market their inventions and research findings more effectively to a broader range of state and local governments and the businesses dealing with them. The Congress expects assistance from the Clearinghouse in helping it determine the best ways to reinforce state and local efforts to enhance the competitiveness of American businesses and stimulate the growth of the nation's economy.
Next Steps To help move this effort along, ACIR adopted a series of recommendations at its January 1990 meeting urging the U.S. Department of Commerce to put the Clearinghouse into operation quickly, proposing that many existing clearinghouses affiliate with this new effort, suggesting that a variety of related federal agency efforts be focused on support of those affiliates, and urging the President and the Congress to consider a modest increase in the Clearinghouse budget. These four recommendations reflect the Commission's conviction that it is in the national interest, and relatively inexpensive, for the federal government to encourage and reinforce state and local initiatives aimed at improving American businesses' capacity to compete successfully in world markets.
Bruce D. McDowell is director, Government Policy Research, ACIR. This article is drawn from a report adopted by the Commission on January 26, 1990. Page 13
Thus, although the “gressivity” argument probably leads to less concern today regarding reduced state and local reliance on business taxation than at the time of the last ACIR report on interstate tax competition, there is, nonetheless, a good case to be made for state/local taxes on business. Ideally, the “fair share" amount of the tax would be related to the sum of the benefits received by business owners and factor suppliers. Efforts to use tax incentives to attract mobile industry are still generally in disfavor. Current research on interjurisdictional competition is still generally critical of individually negotiated tax packages designed to lure new industry or to retain existing industry. Some of the standard criticisms apparently still hold, and, in some cases, these criticisms have been buttressed by additional research. Dick Netzer's analysis of the explicit efforts by states and localities to influence location decisions of attracting business firms through tax incentives concludes that such activity is likely to have a negative-sum effect until all jurisdictions are offering equal incentive packages, at which time these efforts at economic development collectively have a zero-sum effect. He comes to this conclusion from the assumption that tax incentives merely shift economic activity around, and, in many cases, shift the activity from its most productive use to a less productive use.21 Larry Ledebur and William Hamilton take another tack in their criticism of state and local tax concessions to business. They have done cost-effectiveness studies for a variety of such incentives, where the benefits measuredare those received by the firm in question, and the costs are the opportunity costs borne by the subsidizing government. Ledebur and Hamilton conclude that tax concessions are not cost-effective. State and local government revenues forgone through tax expenditures are greater than benefits derived from recipient firms. It is unlikely that any form of tax concession can be cost-effective.22 Ledebur and Hamilton's criticism of tax incentives used to attract mobile businesses is even more condemnatory than Netzer's. According to Netzer, tax incentives are a waste of resources from society's point of view; according to Ledebur and Hamilton, tax incentives are likely to be a waste of resources for the jurisdiction offering them, too. A few analysts note instances in which special tax incentives can be sensible. For example, Nonna Noto describes the process a community must go through in an economic crisis. She points out the high economic and psychic costs incurred by households forced to uproot themselves in the search for new jobs. When all these costs are accounted for, the benefits of special tax concessions may exceed the costs. Noto points out further that rigorous analysis must be done to determine when, if ever, targeted tax concessions might be preferred to general tax cuts. The old consensus focused on the inequities of favoring a mobile firm over an immobile one. However, if firms differ in the benefits they can offer to communities in which they can potentially locate, it is not clear that their tax liabilities should not differ also.23
A wealth of theoretical and empirical research has added to our understanding of interjurisdictional competition. Compared to ten years ago, some conclusions about the effects of interjurisdictional competition have changed. Most significantly, some of the potential benefits of competition among state and local governments have been recognized. Notes U.S. Advisory Commission on Intergovernmental Relations, Interstate Tax Competition (Washington, DC: March 1981). Interstate Tar Competition, p. 1. 3 Interstate Tar Competition, pp. 9-12. Charles E. McLure, Jr., “Tax Competition: Is What's Good for the Private Goose Also Good for the Public Gander?" National Tar Journal 39 (September 1986): 346. Albert Breton, “Towards a Theory of Competitive Federalism," European Joumal of Political Economy (Special Issue) 3 (1987) 322. See Daphne A. Kenyon, “Interjurisdictional Tax and Policy Competition: Good or Bad for the Federal System?" various drafts, and “Competitive Federalism: A New Look at Interjurisdictional Tax Competition,” prepared for delivery at the 1988 annual meeting of the American Political Science Association, Washington, DC; and Daphne A. Kenyon and John Kincaid, “Rethinking Interjurisdictional Competition," Multistate Tar Commission Review, October 1988. Charles Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy 64 (1956): 416-424. The Tiebout model stipulates an infinite variety of communities, each offering a different package of public services and taxes. On the assumption that all private goods are available at the same price, the individual selects his/her site in a manner that balances marginal site costs (e.g., housing costs plus taxes) with higher marginal evaluation of the public service package. Frederick D. Stocker, presentation at session on “Business Fiscal Incentives Problems and Issues” at Conference on Business Tax Incentives and State Economic Development, sponsored by the Midwestern Legislative Conference of the Council of State Governments and the National Tax Associ ation, Chicago, Illinois, May 13-14, 1988. 9 There are cases where federal intervention is called for. A state should not be allowed, for example, to establish a toxic waste a dump on top of a neighboring jurisdiction's underground water supply. Similarly, the federal government must enforce civil rights laws, the commerce clause of the Constitution, antitrust statutes, and the like. 10See Michael Wasylenko and Therese McGuire, “Jobs and Taxes: The Effect of Business Climate on States' Employment Growth Rates,” National Tax Journal (December 1985): 497-511. 11 Breton. Others caution, however, that the extension of the individual preference approach used in analyzing the demand for private goods may be based on familiarity with the tools of microeconomics, and that it is difficult to demonstrate that in fact a relationship exists between the taxes whereby government services are financed and the demand of any one individual for public services. See Werner Z. Hirsch, The Economics of State and Local Government (New York: McGraw Hill, 1970), Chapter 2. 12These circumstances are discussed any standard public finance textbook. See, for example, Vincent Ostrom, Robert Bish, and Elinor Ostrom, Local Government in the United States (San Francisco: Institute for Contemporary Studies, 1988), Chapter 5. 13 John Shannon, “Intergovernmental Competition: Where There Is an Expenditure Will. There Is a Revenue Way," prepared for the U.S. Advisory Commission on Intergovernmental Relations-Urban Institute Conference on Interjurisdictional Tax and Policy Competition, March 23-24, 1988. *Parris Glendening. "Protecting Citizens through Appropriate Cooperation and Limited Competition,” U.S. Advisory Commission on Intergovernmental Relations, Interjurisdictional
Concluding Note Over the last decade, interest in the effects of competition among state and local government has remained intense. Page 14
Finance gate continuing policy issues. The first in man Walzer and Nancy Baird. Illinois a series of annual overviews, this volume Institute for Rural Affairs, Western IlFINAL REPORT OF THE ANTHONY outlines general immigration trends and linois University, Macomb, IL 61455, COMMISSION ON PUBLIC FINANCE. policy proposals, focusing on major his 1989. 98 pp. Government Finance Officers Associ torical features; provisions, implementa- This report is based on a survey of ation, 180 North Michigan Avenue, tion, and effects of the reform act; and Suite 800, Chicago, IL 60601, 1989. 58 more than 1,400 township supervisors. recent trends in legal immigration and It calls attention to the needs of rural refugee admissions. governments and illustrates ways that After a two-year study of the im public officials have worked to find sopact of recent federal tax law changes Infrastructure lutions. The authors point out that on state-local finance, the Anthony CAPITAL PROJECTS: New Strategies for public services in rural areas are Commission recommended specific Planning, Management, and Finance. threatened by property tax base deimprovements in the law that would al clines and poor local economic perlow state and local governments to proEdited by John Matzer, Jr. Interna formance. Population losses, increasvide revenues for infrastructure and tional City Management Association, would strengthen the federal-state-lo777 North Capitol Street, NE, Washing age of residents, and low local income compound the fiscal issues. cal partnership. Citing the reality that ington, DC 20002, 1989. 228 pp. the era of substantial federal support This book brings together material Mandates for many state and local projects has that can help local managers and public COPING WITH MANDATES: What Are ended while state and local govern- works directors solve infrastructure ments' access to the tax-exempt bond problems. It shows what some local gov The Alternatives? Edited by Michael Fix market has been reduced and made ernments have done to implement and Daphne A. Kenyon. Urban Instimore costly, the commission encour- sound planning and priority setting pro tute Press, 2100 M Street, NW, Washages the Congress to reexamine a num- cesses, monitor and assess the conditionington, DC 20037, 1990. xiv, 110 pp. ber of provisions in the Internal Reve- of existing facilities, and implement sys $22.75 (cloth). $11.50 (paper). nue Code that go beyond their stated tematic maintenance programs. The The issue of mandates-regulapurpose of preventing abuses. book includes case studies, charts, tions that one government imposes on checklists, forms, and other practical another-is complex. Mandates are a STATE-LOCAL FISCAL INDICATORS. tools that can be incorporated into local federal-state issue, but they also affect By Steven D. Gold and Judy A. Zelio. capital improvements programs. state-local relations. Mandating has National Conference of State Legisla become an important concern to tures, 1050 17th Street, Suite 2100, Den- Intergovernmental Relations policymakers. This volume examines ver, CO 80265, 1990. vii, 103 pp. $25. mandates in terms of their history and REFORMING STATE-LOCAL RELA recent federal and state experience in This compendium demonstrates the TIONS: A Practical Guide. By Steven D. responding to complaints from local judiversity in spending and taxing patterns Gold. National Conference of State risdictions. The contributors place the among the states and attempts to place Legislatures, 1050 17th Street, Suite mandate issue within three larger conthat diversity in perspective. The authors 2100, Denver, CO 80265, 1989. xxiv, selected a limited number of indicators 159 pp. $20. texts: policy goals of intergovernmenof key relationships and analyzed them tal regulation, the inevitable tensions in terms of population, personal income, This book is intended to provide in the federal system, and the evolving state officials and others with a concise assessment of regulation as a policy and other demographic or economic discussion of policies that can be adopted tool. The volume also describes and asmeasures. This volume is a companion to Reforming State Local Relations: A sesses the effectiveness of cost estito improve state measures affecting local mates and mandate reimbursement, Practical Guide. governments. It takes its direction from Force on State-Local Relations. The Immigration philosophy underlying the recommenda- The Presidency INVENTING THE AMERICAN PRESDOORS: Evaluating Immigration Reform their policies toward local governments IDENCY. Edited by Thomas E. Cronin. and Control. By Frank D. Bean, Georges because of fundamental changes taking University Press of Kansas, Lawrence, Vernez, and Charles B. Keeley. Urban place in the federal system. The task KS 66045, 1989. xiii, 404 pp. Institute Press, 2100 M Street, NW, force recognized that no “grand design” The framers of the Constitution Washington, DC 20037, 1989. xiv, 138 for state-local relations can be devel- wanted a more authoritative and decipp. tempts to identify the major issues that sive national government, yet they In 1988, the Rand Corporation and the states may consider. were keenly aware that the American the Urban Institute established the Pro people were not about to accept too gram for Research on Immigration Local Government much centralized power vested in one Policy to follow the five-year implemen person. The challenge was to invent an tation process of the 1986 Immigration ADMINISTRATION AND FINANCE executive office that would be strong Reform and Control Act and to investi- OF ILLINOIS TOWNSHIPS. By Nor- enough to provide effective governance without threatening the new re Page 15
ACIR to Study State Support for ACIR Intergovernmental Roles local governments as a group in each of in Criminal Justice the state's 23 counties. The report in The Commission would like ACIR is undertaking a major study cludes a comparison of the estimates of to thank the following states for of the roles of local, state, and federal relative needs for public services with their recent financial support: legislators and chief executives in the actual spending patterns, an illustra- Alaska, Arizona, Arkansas, Caladministration of criminal justice. tive adjustment of the estimates for ifornia, Colorado, Connecticut, Vivian E. Watts, former Secretary differences in unit input costs, and a Delaware, Florida, Hawaii, Inof Transportation and Public Safety for discussion of the fiscal capacities of the diana, Kansas, Kentucky, Marythe Commonwealth of Virginia, is servcounties combining the estimates of land, Minnesota, Montana, New ing as project director. representative expenditures with the Hampshire, New Jersey, New In a resolution by NACO's Jus- yield of a representative tax system cal Mexico, North Carolina, North tice and Public Safety Steering Comculated by the state's Department of Dakota, Ohio, South Carolina, mittee, passed by the association in Fiscal Services. Tennessee, Virginia, Washing ton, and Wisconsin. 1989, NACo formally recommended The study, performed under a conthat ACIR be commissioned to un- tract with Maryland's Commission on dertake this study. ACIR has entered State Taxes and Tax Structure, was diinto an Interagency Agreement with rected by Robert W. Rafuse, Jr., Visit- State ACIR's to Meet the National Institute of Justice in ing Senior Fellow at ACIR. The other in September the U.S. Department of Justice for authors of the report are Laurence R. Each year, a growing number of the primary funding of the 18-month Marks and Carol E. Cohen. state ACIR's meet to compare notes study. and help each other to improve their The key goals of the study will be President Appoints programs. The next national meeting to help state and local elected officials New Commissioners of these 27 state organizations will be develop a better understanding of hosted by the Rhode Island ACIR in criminal justice, make better policy de- President George Bush appointed Newport, Rhode Island, Monday and cisions, and develop better mecha- four new members of ACIR in May and Tuesday, September 24-25, 1990, at the nisms for coordination and cooperaJune. Sheraton Islander. Last year's meeting tion in administering the system. Victor H. Ashe is mayor of Knox- was in Ohio, and the 1991 meeting will ACIR's work on the criminal jus- ville, Tennessee. He is chairman of the be in New Orleans, Louisiana, in midtice system goes back two decades, Parks and Recreation Subcommittee of September. starting with Making the Safe Streets Act the U.S. Conference of Mayors. Work: An Intergovernmental Challenge Booth Gardner is governor of Wash(1970), followed by State-Local Rela- ington. tions within the Criminal Justice System Joseph A. Leafe is mayor of Nor(1971), model criminal justice legisla- folk, Virginia. tion as part of the State Legislative Pro- Stan Stephens is governor of Mongram (1975), Safe Streets Reconsidered tana. (1977), and Jails: Intergovernmental Di- John Ashcroft, governor of Mismensions of a Local Problem (1984). souri, Robert M. Isaac, mayor of Colo rado Springs, Colorado, and David E. Study of Local Spending Nething, Senator, North Dakota Senin Maryland ate, have been reappointed to the ACIR staff recently completed a Commission. study of expenditures in FY 1988 by local governments in Maryland. The report on the study presents estimates of representative expendi Page 16
State and Local Initiatives on Productivity, Technology, and Innovation: Enhancing a National Resource for International Competitiveness
The Omnibus Trade and Competitiveness Act of 1988 established in the U.S. Department of Commerce a Clearinghouse for State and Local Initiatives on Productivity, Technology, and Innovation. ACIR assisted Commerce in determining appropriate roles for the Clearinghouse that would be of greatest support to state and local competitiveness initiatives. This volume includes: O Three guides to published directories, national clearinghouses, and program developers and administrators in the fields of pro ductivity, technology, and innovation O Four research papers, with extensive reference sections, on a survey of trends in state policies and programs, the transfer of based business and funding of the Clearinghouse A.114 1990 $25 Page 17
Table 1 Program Activities
Referrals to Local Export Services
• • • • • International Newsletters
• International Joint Ventures
AMONONONWAOO ANNOANNwaveNAANNNewne Number of Foreign Offices
Alabama Alaska 2 Arizona Arkansas California Colorado 2 Connecticut 2 Delaware 2 Florida 4 Georgia Hawaii Idaho Illinois Indiana lowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota 1 Ohio 4 Oklahoma 5 Oregon 3 Pennsylvania 3 Puerto Rico 2 Rhode Island 2 South Carolina 2 South Dakota Tennessee 0 Texas 2 Utah 3 Vermont 2 Virginia 5 Washington West Virginia 4 Wisconsin Wyoming 2 Page 18
Japan. In recognition of the vast trade and investment opportunities available in Japan and throughout the Pacific Rim, 38 states have set up offices in Japan. Trading with Japan is not easy. We have learned over the years that governors can help open doors, give assurances, lend credibility, untangle bureaucratic red tape, and initiate special arrangements. Official and cultural exchanges often must precede business relationships. NGA and the National Governors' Association of Japan have exchanged visits since 1962, long before trade with Japan reached today's level of significance. Last November, governors of seven American states and six Japanese prefectures met in Washington, DC. The meeting, which focused on “Coping with Change in the Economy and the Environment," was the 20th of its kind between U.S. and Japanese governors. Each time we meet, we learn from each other and renew our commitment to strengthening the bilateral relationship. Mexico. The opportunities in Mexico are enormous. With Mexican President Carlos Salinas de Gortari's decision to privatize major industries and lower barriers to investment and trade, Mexico's modernizing economy of 85 million people presents tremendous trade potential. Last November, I had the honor of leading a 31-member trade mission from Wisconsin to Mexico. Measured in dollars of sales per day, this unquestionably was the single most successful of the eight foreign trade missions I have led. At the time, I initiated a sister-state relationship between the state of Wisconsin and the state of Jalisco. When this is established, perhaps by the end of this year, I am told this will be the first state-to-state agreement with Mexico (although city-to-city agreements are common). Jalisco, like Wisconsin, is a dairy state, with forestry, tourism, and high-tech manufacturing. Its capital, Guadalajara, is the second largest city in Mexico. Wisconsin's Department of Development also is considering setting up an office in Mexico that would cover trade with Latin America and the Caribbean. Wisconsin would be only the fourth U.S. state to open an office in Mexico, so there is a considerable amount of untapped potential there. While in Mexico, I proposed that a North American Common Market comprising the United States, Canada, and Mexico be considered. With a combined population of more than 350 million, such a market not only would be an opportunity for American businesses but it also would help us compete with an economically integrated Europe and with Asia. This concept continues to be a subject of discussion and debate at the national level of the three countries, and many other factors beyond trade would need to be addressed. In the meantime, states can continue to pursue the emerging trade opportunities with our neighbor to the South. Multilateral Trade Negotiations For more than 40 years, the General Agreement on Tariffs and Trade (GATT) has been the major institution responsible for reducing trade barriers around the world. Governors are interested in the Uruguay Round because we are concerned about the future of our states' farmers and bankers, our economic development programs, our regulatory schemes, and our state purchasing practices and procedures. These are just some of the areas that will be affected by the outcome of the GATT negotiations. In fact, the potential effects of a broad-reaching international agreement raise a number of questions.
For example: Agriculture. What will be the future of U.S. farm price supports? How will the wheat, corn, soybean, dairy, and sugar farmers be affected by changes in domestic programs? How might they benefit from increased access to European and other markets? What about the effects on state economies of lowering barriers to trade in fisheries and forestry products? Services. What will happen to traditional state regulation of banking, insurance, legal and accounting services, and telecommunications under a new multilateral system of rules? How might firms in our states benefit from greater access to emerging markets in Asia and Latin America that now block most imports of U.S. services? Government Procurement. How will states' purchasing practices and contract bidding procedures be changed? Will state laws be summarily preempted by an international agreement? Government Subsidies. How might state and local incentives to encourage economic development and attract investment be modified by a multilateral trade agreement? Foreign Investment. On the other side of incentives, will state options to place performance requirements or other conditions on investors be curtailed by a GATT agreement? The answers to these and many other questions will affect state governments in profound ways. As the negotiators get closer to a final agreement, it will be important for states to determine priorities and consult closely with U.S. negotiators to ensure that state interests are not severely compromised. As chairman of Ambassador Carla Hill's Intergovernmental Policy Advisory Committee, I am trying to do just that. Together with the 14 other governors on the committee, I hope to be able to provide U.S. negotiators with specific information about state concerns, especially in five areas of interest: agriculture, services, subsidies, investment, and procurement. An effective multilateral framework governing trade, along with the range of individual or regional initiatives under way, translates into tremendous opportunity for American companies to expand their business transactions with the rest of the world. Governors' trade strategies must be designed to respond to challenges and opportunities whatever the context, regional or global, bilateral or multilateral. Conclusion As the 21st century dawns, change has become a way of life. Coping with change has become part of the definition of our jobs as governors. We have many tools at our disposal. Through promoting trade and investment, improving America's education system, enhancing the nation's basic infrastructure, encouraging innovation, and taking advantage of specific opportunities around the world, governors can shape an effective state response to changes in the state, national, and global economies.
Tommy G. Thompson is governor of Wisconsin. He is chairman of the National Governors' Association Committee on International Trade and Foreign Relations. He also chairs U.S. Trade Representative Ambassador Carla Hill's Intergovernmental Policy Advisory Committee. Page 19
Davis Decision: One Year Later
Governors Lose Veto over National Guard Training Missions
Courts Study Proposes Better
In March 1989, the U.S. Supreme Court found in Davis v. Michigan that states Virginia, and Wisconsin). Whether a remedy is still needed in several other states is uncertain due to ongoing disagreements between certain retiree groups andstate tax officials regarding the applicability of Davis. In a unanimous decision handed down on June 11, 1990, the U.S. Supreme Court upheld the President's authority under the Montgomery Amendment to send State National Guard units on training missions abroad. Despite objections from several governors, who cited the militia clauses of the U.S. Constitution, which reserve to the states the right to train National Guard units, the Court found that the 1986 federal law prohibiting governors from vetoing U.S. orders to place National Guard troops on active duty for training purposes is consistent with federal constitutional authority over military affairs under the supremacy clause. The case is Perpich v. Department of Defense. The Federal Courts Study Committee, which issued its report in April, has proposed more than 100 changes in the administration and operation of the federal court system. Among the recommendations are several that deal directly with state courts and federal-state court relations. Federal officials with authority to prosecute drug cases should not bring Congress should limit federal jurisdiction based on diversity of citizenship to complex multistate litigation, interpleader suits, and suits involving aliens.Congress should amend the Employee Retirement Income Security Act (ERISA) to forbid removal from state to federal courts of cases involving amounts in controversy less than $10,000. Congress should amend 42 U.S.C., Sec. 1997e to direct federal courts in state prisoner suits brought under 42 U.S.C. Sec. 1983 to require exhaus- tion of state institutional remedies for a period of 120 days, if the court or the Attorney General of the United States is satisfied that the remedies are fair and effective; Congress should delete Sec. 1997e(b)'s minimal standards for state institutional remedies. States should consider adopting federal voir dire rules. The Chief Justice and the chair of the Conference of Chief Justices should create a National State-Federal Judicial Council, composed of an equal number of federal and state judges, to recommend ways to im- prove cooperation and efficiency between the two court systems. Page 20
What the Framers Really Said about Foreign Policy Powers
More than 800 local governments passed nuclearfreeze resolutions and helped pressure President Ronald Reagan-the only modern U.S. president to enter office condemning arms control - to launch the START negotiations in Geneva. By refusing to cooperate with the Federal Emergency Management Agency's "crisis relocation planning" in the early 1980s, more than 120 cities helped convince the federal government to cancel its nuclear war civil defense program.2 After divesting more than $20 billion in assets from firms doing business in South Africa, more than 65 cities and 19 states helped persuade the Congress to override a presidential veto and replace the Reagan Administration's policy of “constructive engagement" with limited economic sanctions in 1986.3 Despite nearly a decade of covert efforts to rout the Sandinista government from power in Nicaragua by force, 87 U.S.-Nicaraguan sister-cities, flanked by thousands of grassroots activists, helped keep American opinion firmly against military aid for the contras and overt U.S. military intervention." In 1989, while the Congress was dragging its feet on regulating chlorofluorocarbons (CFCs) and other chemicals threatening the physical integrity of earth's protective ozone layer, 24 American and Canadian cities gathered in Irvine, California, and resolved to begin banning these substances in their own backyards.5 Stunned by these progressive success stories on Main Street, conservative opponents have dusted off their copies of the U.S. Constitution and the Federalist Papers to condemn local initiatives as illegal. George Weigel, director of the James Madison Foundation, contends the municipal foreign policy movement is directly at odds with the views of the Founding Fathers: "Having some experience, on tax issues, with the chaos that came from state and local governments dealing with foreign countries, the Framers of the Constitution of 1787 gave the national government sole power over the design and conduct of foreign relations."6 Writing about "Federalism and Foreign Relations," University of Virginia law professor John Norton Moore has argued that it is abundantly evident in The Federalist Papers (that) one of the purposes of the union upon which our nation is based was to achieve control over the foreign relations of the individual Peter Spiro, a student of Moore's, has repeatedly cited James Madison's words in Federalist 42: “If we are to be one nation in any respect, it clearly ought to be in respect to other nations."8 There is no question that the Founding Fathers wanted to strengthen national power over foreign relations. But strengthening national authority is a far cry from excluding local and state governments from the field. Yet a complete ban on municipal foreign policy is exactly what conservative legal scholars are now calling for in the name of protecting the original intent of the Constitution. Hence, George Weigel talks about giving the federal government sole power over foreign policy. In a 1987 public television show, John Norton Moore pronounced: “The United States Constitution flatly, clearly, and exclusively entrusts foreign policy of the United States to the federal government...."9 And Peter Spiro contends, “As a general proposition, the federal government has enjoyed nearly ex
clusive powers over foreign policy and defense since the dawn of the Republic. Such was the intent of the Constitution.”10 A close examination of the historical record, however, reveals that the Founding Fathers never intended to grant the federal government a monopoly on foreign policy. This is apparent in the plain words of the Constitution, in the history of the document's drafting, and in the Federalist Papers.
Plain Words of the Constitution The Constitution nowhere contains the terms “foreign relations," "foreign policy," or "international affairs." Instead, it grants only a few narrowly defined powers concerning foreign policy to each of the three branches of the national government. Congress may regulate foreign commerce, declare war, set up national defenses, and define and punish violations of international law. The President may command the military, negotiate treaties, and appoint ambassadors—but that's it. In each of these areas, the Congress retains important oversight. Short of a national emergency, the President may not commit the military to a war without congressional support (a provision both the Congress and the President have largely ignored in modern times). Nor can the President complete a treaty or appoint ambassadors without two-thirds concurrence of the Senate. The Constitution provides the federal courts with jurisdiction over just three kinds of foreign policy matters: cases arising under laws passed by the Congress or treaties ratified by the Senate; cases involving ambassadors, the high seas, or international law; or cases "between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.” If the Founding Fathers really intended to eliminate all foreign policy activities from local and state governments, surely they would have said so. Instead, they enumerated a few limitations on state power. States cannot enter into "any Treaty, Alliance, or Confederation" with foreign powers. They also cannot, at least without the permission of the Congress, put duties on foreign goods, keep troops or ships for waging war, or enter "compacts" with each other or with other countries. And any direct conflict with federal laws or treaties is preempted under the Supremacy Clause. None of these provisions, however, contravene what we today regard as municipal foreign policy. Cities remain free to educate, research, pass resolutions, and lobby on foreign policy questions. Provided there is no written federal law being frustrated, cities are free to decide with what countries or multinational companies they will enter contracts or in what entities they will invest their pension funds. Since prohibited "compacts” were later defined by the Supreme Court to be only the most egregious transgressions of national sovereignty (the last violation was found in 1840), 11 virtually all of the cultural exchanges, trade agreements, environmental pacts, and sister-city arrangements entered into by U.S. cities today are permissible. In areas proscribed to the states, such as declaring and fighting wars, the Constitution's words are clear and unambiguous. If the Framers' intentions were so clear with regard to local involvement in international investment, purchasing, communications, and debate, why were they not as explicit?
The Constitution gave states numerous powers that underscored from the outset that they too have some role in national foreign policy: The First Amendment guaranteed the right of all citizens, including governors and mayors, to speak out on foreign policy. The Compact Clause anticipated that state and local governments would meet and negotiate with foreign jurisdictions, even without congressional approval. Likewise, federal courts were granted jurisdiction over controversies between states and foreign countries precisely because communications, relations, and dealmaking between the two entities were expected. And Article 1, Section 8, and the Second Amendment gave states the right to keep and train state militias. Whatever doubt remains about how to allocate various foreign relations powers was resolved by the Tenth Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”, There is no exception for matters of foreign policy. Original Intent of the Framers Even if the plain words of the Constitution do not grant the federal government a monopoly on foreign policy, might this still have been the intent of the Founding Fathers? Recall George Weigel's statement that the Framers gave the federal government “sole power over the design and conduct of foreign relations” because of the "the chaos that came from state and local governments dealing with foreign countries" during the period of the Articles of Confederation. This view, repeated by many historians, is facile and wrong. There is no question that the states were a weak, vulnerable lot under the Articles of Confederation. Lacking the power to take coordinated military or diplomatic actions, to enforce treaties, or to prevent interstate trade wars, the national government had difficulty coping with threats posed by England, France, Spain, and the Indian nations. But the central defect of the Articles was not that the federal government lacked a coherent set of foreign policy powers but that it lacked any coherent power whatsoever. The Articles were such a wholesale repudiation of central control that they failed to create a workable central government. There was no president or executive branch. There was no federal court system to enforce laws. The only authority was a Congress that looked more like a United Nations General Assembly than a real lawmaking body. In foreign and military affairs, the Congress usually required more than a two-thirds vote to act. Profound as the weaknesses in the Articles were, advocates for change still believed in states' rights. Determined never to have another King George III tyrannizing their lives, few sought to monopolize federal power, even in the area of foreign policy. This is why the foreign policy powers enumerated in the Constitution were actually quite similar to those in the Articles. As James Madison explained in Federalist 45, the Constitution consists much less in the addition of NEW POWERS to the Union, than in the invigoration of its ORIGINAL POWERS.”12 He elaborated: “The regulation of commerce, it is true, is a newpower; but that seems to be an addition which few oppose. ...The powers relating to war and peace, armies and fleets, treaties and finance, with the other more considerable powers, are all vested in the existing Congress by the articles of Confederation. The proposed change does not enlarge these powers; it only substitutes a more effectual mode of administering them.”13
The history of the Constitutional Convention also provides little support for the proposition that the Framers had a burning desire to strip states of any role in international affairs. Before and during the convention, the primary discussion item was strengthening federal control of trade, both interstate and foreign. The initial Virginia Plan, which was the starting point for the convention, said nothing about enlarging federal foreign policy powers. James Madison's unofficial notes, the most detailed record of the convention available, reveal that discussions over foreign policy were minor parts of the entire record. For example, the first debate on foreign policy provisions did not occur until June 8, nearly two weeks into the
Conference Scheduled on “The Economic Consequences of American Education"
convention. According to Madison's notes, Charles Pinckney of South Carolina called for stronger congressional powers to preempt state actions by arguing "that if the States were left to act of themselves in any case, it would be impossible to defend the national prerogatives, however extensive they might be on paper; that the acts of Congress had been defeated by this means; nor had foreign treaties escaped repeated violations; that this universal negative was in fact the corner stone of an efficient national Government. ."14 Elbridge Gerry of Massachusetts responded that giving the national government so much power, especially over state the militia, would "enslave the States.”15 By the end of the day, the proposition for granting the national government unlimited preemption power was defeated by a vote of eight to four. 16 Ultimately there emerged a consensus that the defects of the articles-uneven trade regulations, unenforced treaty obligations, a useless national militia, and an incoherent government-needed to be remedied. But these changes hardly added up to a sweeping grant of exclusive federal powers over all matters of foreign policy. The Federalists on Foreign Policymaking After the Constitutional Convention, three of the most articulate supporters of the new document-Alexander Hamilton, John Jay, and James Madison-defended it in series of letter-essays that became known as The Federalist Papers. They argued for strong national foreign policy powers because America needed “uniformity and concert in the plans and measures” to secure “common safety,"17 because national foreign policy experts “will best understand the extent and urgency of the dangers that threat»18 and because "perfect secrecy and dispatch (by these experts] are sometime requisite."19 These arguments only underscored the importance of lodging some foreign policy powers in the federal government, some of the time. Hamilton and Madison argued explicitly for giving the national government only a few, very special powers in international affairs. In Federalist 17, while discussing the appropriate distribution of legal powers between the states and the federal government, Hamilton wrote that “commerce, finance, negotiation and war seem to comprehend all the objects ... [that] ought in the first instance to be lodged in the national depository.”20 In other words, Hamilton believed that the only legitimate areas of federal foreign policy power were international trade, investment, treaty making, and war making. These four categories warranted federal involvement “in the first instance,” not necessarily in all instances. In Federalist 23, Hamilton reiterated the limited "purposes to be answered by the Union": “The common defence of the members—the preservation of the public peace as well against internal convulsions as external attacks-the regulation of commerce with other nations and between the states-the superintendence of our intercourse, political and commercial, with foreign countries."21 The term "superintendence" suggests that Hamilton wanted national supervision over our political and economic relations abroad, not national autonomy or monopoly. In Federalist 41, Madison broadened Hamilton's categories of legitimate foreign policymaking, but only slightly.
The U.S. Advisory Commission on Intergovern. mental Relations (ACIR), Lehigh University's Mar. tindale Center and Department of Economics, and the Lee Iacocca Institute will sponsor a conference, October 19-20, 1990, at Lehigh University, Bethle. hem, PA, that will focus on the problems of the economic consequences of American education. Conference topics and speakers include: Toward More Effective K-12 Education: Inter- John Bishop, Cornell University The Economic Consequences of Undereduca- tion-Henry M. Levin, Stanford University o Evaluating Current Proposals-Gary Burtless, The Brookings Institution Howard Glennester, London School of Economics o The Willingness to Reorganize: Labor Contract Implications-Samuel Bachrach and David versity o Financing Education in Canada - Judith McDo nald, SUNY, Binghamton Please contact the Martindale Center for registration information and hotel accommodations clo Rosemary Krauss, Drown Hall 35, Lehigh University, Bethlehem, PA 18015-3144, phone: (215) 758-4771.
Among the important "objects” for greater federal control were "security against foreign danger," "regulation of the intercourse with foreign nations," and "restraint of the States from certain injurious acts."22 Like Hamilton, Madison talked about intercourse with foreign nations being regulated, not being dictated. Thus, when Madison wrote his oft quoted line in Federalist 42, “If we are to be one nation in any respect, it clearly ought to be in respect to other nations,”23 he was pleading for federal supervision of foreign relations, not for federal autonomy. And he was specifically referring to powers to regulate the intercourse with foreign nations, to wit, to make treaties; to send and receive Ambassadors, other public Ministers and Consuls; to define and punish piracies and felonies committed on the high seas, and offences against the law of nations; to regulate foreign commerce. ..."24 His list was as narrow as the plain words in the Constitution. Madison's categories of legitimate federal foreign policy powers bear little relationship to what states and cities are doing today. Many cities have agreements with jurisdictions abroad, but none rise to the level of a formal "treaty.” Cities may send representatives abroad and talk with foreign representatives coming to the United States, providing that there is no pretense that they are representing the U.S. government. It is up to the national government to define piracies, maritime felonies, and international law; few states or cities have attempted to do this. And cities can engage in foreign commerce, as long as they follow duly legislated national regulations. Nowhere in the Federalist Papers can one find arguments for granting the federal government broad, sweeping foreign policy powers with words like monopoly, sole, or exclusive.
Like many, Columbia University international law expert Louis Henkin strongly criticized the ruling: "What the Constitution says about foreign affairs provides little basis for the Court's doctrine. . . . Nor is there support for Zschernig in the history of the Constitution in practice."29 For more than two decades, courts have tried to apply Zschernig, and the result has been a judicial mess. In 1969, a California court struck down the state's buy-American statute because it intruded on U.S. foreign policy, while a New Jersey court upheld a similar statute eight years later 30 In 1989, the Maryland Court of Appeals upheld Baltimore's anti-apartheid divestment statute because its effect "on South Africa is minimal and indirect," while this April a federal court in California struck down Oakland's nuclear-free-zone ordinance because it “cannot help but conflict with the federal government and Constitution.”31 State-federal relations in international affairs have thus become a crapshoot turning not on any defensible principles of democratic decisionmaking but on the whims of judges. In this sense, Zschernig unleashed judicial activism at its worst. It substantially expanded the power of courts in an area that the Framers intended to leave to the political branches of government. What business does a judge, typically having no experience in foreign policy, have telling local, state, and national governments how to run their international affairs? Were Hamilton, Madison, Jay, or any of the other Framers alive today, they would recognize the folly of what conservative judges and commentators are trying to do. For despite all their talk about centralizing power the Federalists respected states' rights. And they were political realists. They would have recognized how many of today's international affairs are inextricably enmeshed in local affairs: runaway military budgets mean cuts in federal revenue sharing; poverty in Mexico means continued illegal immigration; global warming means more deadly hurricanes and tornadoes; and Japanese trade policies mean more local factory closings. The Framers would have appreciated how profoundly undemocratic and unwise it would be to banish creative local efforts to address these international problems.32 If the nine justices of the Supreme Court are truly faithful to the "original intent" of the Founding Fathers, as many of them claim to be, they should consider rescinding Zschernig and returning the job of setting guidelines for proper state actions to where it belongs-the Congress. If a local initiative is so threatening to national security that it cannot await congressional action, the President can always issue an executive order. But if neither the Congress nor the President can muster the political support to pass laws banning certain kinds of municipal foreign policies, courts should no longer arrogate to themselves the right to overrule them. At a time when nations around the world are rejecting the tenets of totalitarianism and giving local authorities new freedoms to cope with ever more complex global problems, it would be tragic if American democracy moved in the opposite direction.
Contemporary Meaning and Judicial Distortion For most of U.S. history, the judicial branch respected the division of powers laid out by the Founding Fathers. While many courts waxed passionately about preserving national foreign policy powers, it was understood that, absent a federal law to the contrary or an infringement on commerce, states and localities were free to do whatever they wished in international affairs. Until 1968, states and localities took advantage of this freedom, often with policies more challenging to national authority than today's municipal foreign polices.25 If the federal government disliked any particular state or municipal initiative, there were two constitutionally prescribed ways it could stop it: enforcing an existing law or passing a new law. In the 1947 case of Clark v. Allen, the U.S. Supreme Court was asked to assert a new power and strike down a piece of California legislation affecting international affairs that did not contravene a specific national law.26 Upholding the statute in question, the justices dismissed the argument that the national government possessed some unwritten foreign policy power as "farfetched.”27 In 1968, however, the Court reversed course in the case of Zschernig v. Miller and declared for itself the power to invalidate any municipal foreign policies with “a direct impact upon foreign relations [that] may well adversely affect that power of the central government to deal with [foreign relations problems."28 Moreover, the Court declared that it would exercise this power even when the U.S. Department of State was willing to tolerate local initiatives (as was true in the Zschernig case).
Michael Shuman, an attorney, is president of the California-based Center for Innovative Diplomacy and currently writing a book on The Legality of Municipal Foreign Policy
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Strobe Talbott, "Buildup and Breakdown," Foreign Affairs, 62:3, Chronology 1983, p. 605. “Civil Defense Plan on Relocation Out," New York Times, March 4, 1985. Peter J. Spiro, “State and Local Anti-South Africa Action as an Intrusion upon the Federal Power in Foreign Affairs,” Virginia Law Review 72 (May 1986): 824-27. * Liz Chilsen and Sheldon Rampton, Friends in Deed: The Story of the US-Nicaraguan Sister Cities Movement (Madison: Wisconsin Coordinating Council on Nicaragua). Carla Rivera, “24 Cities Create Group to Protect Ozone Layer," Los Angeles Times, July 23, 1989. George Weigel, "Calhoun's Heirs," Bulletin of Municipal Foreign Policy 2 (Winter 1987-88): 7. John Norton Moore, “Federalism and Foreign Relations,” Duke Law Joumal 248 (1965): 248. 8 Peter J. Spiro, “Taking Foreign Policy Away from the Feds," Bulletin of Municipal Foreign Policy 2 (Spring 1988): 18. “Municipal Foreign Policies Make Prime Time,” Bulletin of Municipal Foreign Policy 1 (Summer/Autumn 1987): 10. 10Spiro, “Taking Foreign Policy Away from the Feds," p. 18. 11 Holmes v. Jennison, 14 Pet. 540 (1840). 12 Jacob E. Cook, The Federalist (Middletown, Connecticut: Wesleyan University Press, 1961), p. 314 (emphasis in original). 13 Ibid. (emphasis added). 14Page Smith, The Constitution: A Documentary and Narrative History (New York: Morrow Quill, 1980), p. 135. 15Ibid., p. 136. 16 Ibid., p. 137. 17Cook, pp. 149-50 (Hamilton). 18Ibid., p. 149. . 19Ibid., p. 434 (Jay). 20Smith, pp. 105-06 (emphasis added). 21Ibid., pp. 146-47. 22Ibid., p. 269. 23Ibid., p. 279. 24 Ibid. 25 For example, in 1794 the Senate ratified the widely criticized Jay Treaty because several states, including New Jersey, had threatened to secede if it was not ratified. This and other incidents are documented in Richard J. Barnet, The Rockers' Red Glare: When America Goes to War (New York: Simon & Schuster, 1990). 26331 U.S. 503 (1947). 27Ibid., p. 517. 28389 U.S. 429, p. 441 (1968). 29Louis Henkin, Foreign Affairs and the Constitution (Mineola, New York: Foundation Press, 1972), p. 476 (note 51). 30 Compare Bethlehem Steel Corp. v. Board, 276 C.A. 20 221 (1969) with K.S.B. Technical Sales v. North Jersey District Water Supply Commission of the State of New Jersey, 75 N.J. 272 (1977). 3' Board of Trustees v. Mayor and City Council of Baltimore, 562 A2d 720 (1989); and "Court Rules U.S. Outweigh City's." San Francisco Chronicle, April 27, 1990. 32For a fuller argument about the policy rationales for the federal government not to suppress municipal foreign policy, see: Michael H. Shuman, “Dateline Main Street: Local Foreign Policies,” Foreign Policy 65 (Winter 1986-87): 154-74; and Shuman, "Spiro's Impossible Quest against Democracy,” Bulletin of Municipal Foreign Policy 2 (Spring 1988): 7-13.
ACIR developed the Representative Tax System (RTS) and the Representative Revenue System (RRS) to improve on available measures of state fiscal capacity and effort. These measures show state and local government capacity to collect tax as well as nontax revenue. With 1988 State Fiscal Capacity and Effort, ACIR – in conjunction with Price Waterhouse - continues its tradition of providing information on the relative economic well-being and fiscal performance of the states. Why measure state fiscal capacity? To facilitate comparative fiscal analysis, by state and by revenue base To provide perspective on economic trends To aid in designing federal grant formulas Why use the RTS and RRS? They measure governments' potential abilities to raise revenues relative to a national average They are comprehensive, measuring all major tax sources and a substantial portion of nontax sources that contribute to a government's ability to raise revenue They are the only indicators that measure fiscal capacity on a revenue-by-revenue basis They capture states' opportunities for tax exportation by estimating actual tax and nontax revenue bases and applying average tax rates used by many federal and state policymakers and analysts 1988 State Fiscal Capacity and Effort- Contains tables and graphs on RTS and RRS bases, arranged both by revenue base and by state capacities Compares RTS and RRS with other capacity measures
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The strategy was pursued with brilliant success by the anti-apartheid movement. Impatient with Washington's hesitancy to take dramatic action, cities and states around the country passed their own sanctions laws long before the Congress passed the Comprehensive Anti-Apartheid Act over President Ronald Reagan's veto in 1986. It was these local measures that spurred the initial corporate exodus from South Africa. In fact, to the extent that federal legislation is less restrictive of American corporate ties to South Africa than many local anti-apartheid laws, Washington has continued to play second fiddle on the issue. More direct federal sanctions aside, the prospect of losing billions of investment dollars from divesting pension funds and hundreds of millions in state and local procurement contracts, hardly made profitable, but small, South African operations worth the effort to U.S. firms. It is not only our policy toward South Africa that threatens to be hobbled. Seeking to repeat the success of the anti-apartheid movement, groups pushing other single-item agendas have, understandably, followed suit. At least 12 states have enacted laws that aim to restrict dealings with U.S. companies in Northern Ireland (despite full-court, on-the-scene lobbying by the British government). Chicago and Oakland, among others, have declared themselves “nuclear-free zones," banning the transshipment, deployment, or production of nuclear military products within their city limits. A bill was recently introduced in the California Assembly that would restrict investment in companies doing business in post-Tiananmen China. Pitfalls and Shortcomings of Local Activism This brand of local activism distorts the foreign policymaking process in several ways: 1. It is power without responsibility. If Los Angeles or Cambridge acts on a foreign policy issue, it does so without considering the consequences of its action on the rest of the nation. These consequences are potentially catastrophic. Imagine if Michigan, swept up in anti-import hysteria, banned all state procurement from firms doing business in Japan. It is inconceivable that Japan would not take some retaliation. Say it stopped all purchases of textiles. North Carolina would hardly be pleased, and yet it would have no recourse (except in the Congress or the courts) against its sister-state's restrictions. Local leaders are more likely to act in response to the politics of the moment, unbridled by any consideration of what is best for the country or for the future. 2. It is power of the minority imposed on the majority. Local activism may result in de facto overrepresentation of groups able to harness the financial might of major city and state governments. Wherever corporate behavior can be targeted as the means to the policy end, as a New York City or California goes, so goes the nation. Add academic communities (and impressive university portfolios) and you have already created a “hassle factor” for companies that far transcends the investment or purchasing dollars at risk. Voters in those cities and states that have shown an inclination to interfere in the foreign policy realm (on the South Africa issue, those in the Northeast and West) thus prevail over those who are more cautious or conservative (those, for instance, in the South), which they would not be able to do in Congress or the White House. Turning the tables, pit a liberal
administration in Washington against reactionary local holdouts, and the opposite may come to pass. This in fact happened on a smaller scale during the 1960s, when a handful of smaller southern and midwestern communities enacted licensing laws aimed at blocking the sale of East Bloc goods. 3. It is power based on incomplete information. Cities and states (as yet) have no embassies in foreign countries; unlike Congress or the White House, they cannot tap into the sort of complete analysis that comes only with a fully developed apparatus for diplomatic reporting (i.e., the U.S. Department of State). The objects and results of local foreign policies are likely to suffer correspondingly. State and local authorities, for instance, might not be able to gauge the likelihood of retaliation by a foreign country subjected to some sort of disadvantage. Nor are they necessarily capable of assessing political realities in the country concerned. Even if localities enjoyed perfect access to public information and expert foreign policy advice (after all, they still have genuinely local responsibilities to attend to), by no stretch of the political imagination could such data flows be extended to cover the classified forms of analysis and intelligence that often provide the foundation for decisionmaking in the area. 4. It is power without flexibility. As the endgame of apartheid plays itself out, there will come a time at which sanctions should be loosened or lifted by way of rewarding the white regime for its own dismantlement and putting the country back on its economic feet for the future. A bold stroke in this respect would be possible were Washington still running the show. As it is, the process will be slow and painful, involving the dozens of cities and states that have anti-apartheid measures on their books, thus diminishing the potential for U.S. influence over South Africa. Corporations will not return to South Africa until a substantial majority of these measures has been repealed, of which there is no immediate prospect. (Purists have in fact been demanding the tightening of local sanctions even as the Pretoria government makes evident its commitment to a new order.) Local activism is potentially disruptive even where the local and federal positions on any given issue are identical. Drawing the Constitutional Line At some level of local action, these points are irrefutable. The only question is where the line should be drawn between acceptable and unacceptable local foreign policies, and how those actions which cross it can be prevented. The U.S. Constitution sets the line. It is Washington's responsibility to enforce it. First among many, the Founding Fathers were highly conscious of the threat posed by a foreign policy fragmented among the states. As John Jay wrote in Federalist 4, only the national government “can harmonize, assimilate, and protect the several parts and members, and extend the benefit of foresight and precautions to each. . . . It will regard the interest of the whole, and the particular interests of the parts as connected with that of the whole.” If foreign powers “find us... destitute of an effectual Government, each State doing right or wrong as to its rulers may seem convenient," he went on, "what a poor pitiful figure will America make in their eyes!” This view was echocd by Madison (“If we are to be one nation in any respect, it clearly ought to be in respect to other nations.") and Hamilton (“The peace of the whole ought not to be left at the disposal of a part."). These views are reflected Page 22
state legislature how to exercise its judgment, the Congress is off base. I surprised my Republican colleagues when I strongly opposed an amendment providing for mandates on homosexuality and child pornography. I opposed it because it said that the Congress should cut out the money to states if they don't comply with these mandates. I said to my colleagues that it is not our money we are generously sharing with the states. It is money raised from taxpayers in those states. When you talk about imposing your judgment on a state legislature, why don't you run for the legislature and represent those views in that body? I took the lead when the Administration's anti-drug program started off proposing that, to get federal drug money, states would have to implement drug testing for all inmates and arrestees in prisons, which Senators Biden and Hatch pointed out would probably cost states $800 million. I was relieved to be able to gut the proposal by offering the amendment to substitute a $5 million testing program to apply in federal prisons. That was a classic example of the federal government being way off base. But, to jump back to child care, the federal SSBG and other dollars that go into child-care in Missouri have built a very good program. When the ABC (Act for Better Childcare) bill came up, I went back to consult with the child-care providers, child-care consumers, and state regulatory agencies. I developed what I thought was a responsible proposal-essentially a block grant which, in Missouri, would be used to feather out the current cutoff for eligibility for child care. That is, if you go over a minimum dollar a amount, you don't lose all child care, but you give up one child-care dollar, say, for every three or four dollars of additional income. That is a way to encourage the provision of more child-care services. Senators Dodd and Hatch accepted the main part of the proposal, which we drafted on the basis of state experience and state input. Much to the surprise again of my colleagues on the Republican side, I fought for the ABC bill because it is now set up so that programs will benefit from federal assistance for child care. The states will attempt perhaps different approaches to meeting child-care needs, and there may well be different requirements, but the states can demonstrate the successes or the failures of programs in their 50 laboratories.
Pittenger: You mention, Senator Bond, the 16 senators who were governors. Bond: What is the actual number? Pittenger: Sixteen, plus three former lieutenant governors. Bond: Most people forget Hatfield and Thurmond. Pittenger: That is about half of the number who were ex-governors as of 30 or 40 years ago. Bond: Bad trend. Pittenger: There also has been a decline in the number of former state legislators. New Jersey is perhaps not atypical. We have one U.S. Senator who is a former professional basketball player, and another who is a self-made millionaire. Neither has had any experience in state government. Do you think that fact affects the way the Senate looks at issues? Sarbanes: The Senate is more sensitive to state concerns than the tenor of your question would suggest. The two examples that Kit has just given show that a state point of view prevailed, and without too much difficulty. Bond: The ABC bill has been, obviously was very iffy, but the drug bill got blown away because it was a dumb proposal. Sarbanes: Of course, both of us have been in state government and have some sensitivity to the state view. In the case of a colleague who has none of that experience, I don't know how sensitive he or she might be. But the state position is often put very well and very strongly.
It also depends on how delegations are oriented. I chair the Maryland delegation in the Congress simply because, of the ten members (two Senators and eight Congressmen), I have been around the longest. When I first came to the Congress, I was critical of the seniority system, but the longer I stick around, the more virtue I see in it. We have an intense working relationship with our state government. We consult closely with them. The delegation works as a unit. We've been able to overcome parti
Governor 23% 26% 16% 16% Other State Executive 10 14 16 State Legislator 42 36 42 34 State Judge 8 8 5 2 Local Official 42 23 No State or Local Office 27 29 32 38 * Percentages do not add 10 100 because some Senators held more than one state or local office. The table, therefore. shows the percentage of Senators who held the indicated state or local office prior to service in the U.S. Scnate. Source: ACIR Staff Compilation, May 1990. Page 23
Education of public-private partnerships organized Mann Reeves, Robert Thomas, Deil by three environmental service areas: Wright, and Joseph Zimmerman. WINNING THE BRAIN RACE: A Bold solid waste, wastewater treatment, and Plan to Make Our Schools Competitive. drinking water. The types and benefits of JUDICIAL FEDERALISM AND REBy David T. Kearns and Denis P. Doyle. partnerships are explained and attributes LATED DEVELOPMENTS: A Decade ICS Press, Institute for Contemporary of successful programs are listed. Each of Change in New Jersey. Edited by StanStudies, 243 Kearny Street, San case study provides information on how ley H. Friedelbaum. 1990. 71 pp. Francisco, CA 94108, 1989. 147 pp. the partnership was formed and implem- STATE CONSTITUTIONAL COMThe authors offer a challenge to ented, as well as the characteristics of MENTARIES AND NOTES: A Quarterly business leaders, policymakers, and the community. The profiles include in- Review. Edited by Stanley H. Friedelcitizens to support a complete re- come, population, time frame and proj- baum. structuring of the education system. ect cost; the decisionmaking process for Edward NcNall Burns Center for State Drawing on the lessons of the market- selecting the private partner; financing Constitutional Studies, Rutgers, Hickplace-competition, market disci- responsibilities of each partner, procure- man Hall, Douglass Campus, New pline, accountability, and performan- ment arrangements; division of imple Brunswick, NJ 08903. ce--they present a six-point reform mentation responsibilities; evaluation; American federalism once again has program that they believe would al- lessons learned and their applicability to become the center of intense interest, if low the public schools to produce the other situations, and contacts. not controversy. During the last halfeducated workforce we need to keep century, the states have effected a revivAmerica competitive. The six points Federalism al that has assured their continuation as are: choice (public schools should viable governments. The adoption of a compete with each other, and stuAMERICAN FEDERALISM: The Third succession of revised state constitutions dents and teachers should be able to Century . Edited by John Kincaid. The Anchoose where they go); restructuring nals of the American Academy of Political Century. Edited by John Kincaid. The An- following World War II provided a posi tive image. The states have come to be (schools should be magnet schools, be and Social Science. Sage Publicationsregarded as important in addressing esopen all year, and be run by teachers 2111 West Hillcrest Drive, Newbury sential needs best left to local resolution. and principals); professionalism Within this revitalized framework, an in(teachers should set their own curricPark, CA 91320, May 1990. 206 pp. $12. terplay between state and federal courts ulums and raise standards); standards This is the fourth volume of The is discernible. The emerging array of (academic standards must be raised Annals since 1940 to be devoted to de- doctrines and ideas, often resulting in and children held accountableno velopments in American federalism creative judicial decisionmaking, ranks promotion without performance); and intergovernmental relations. The among the most impressive by-products values (children should understand volume appears in the midst of tremen- of contemporary federalism. A reawakthe great documents of American cit dous changes in the federal system. A ening of interest in state constitutions, izenship and the ethical, religious, variety of fiscal, economic, social, and largely a development of the 1970s and and moral underpinnings of their cre- political indicators suggest that 1978 1980s, has resulted in a transfer of litiation); and federal responsibility (the can be taken as the benchmark year for gation strategies. State courts and state federal role should remain limited, the latest sea change in modern Ameri- constitutions must be given serious but it should fully fund Head Start can federalism: federal aid to state and consideration. and Chapter One programs and in- local governments peaked; the U.S. The essays in Judicial Federalism and vest additional funds for research). Supreme Court flip-flopped from NLC Related Developments illustrate particular v. Usery (1976) to Garcia (1985); more cases and events in New Jersey. They are Environment than 50 percent of all federal statutes not intended to be a systematic account preempting state and local authority of state patterns or definitive or concluPUBLIC-PRIVATE PARTNERSHIP CASE were enacted in the last 20 years; and sive of constitutional models. STUDIES: Profiles of Success in Providing there has been a dramatic resurgence The new periodical State ConstituEnvironmental Services. Administration of state governments. tional Commentaries and Notes states and Resources Management, U.S. Envi The volume contains articles by that “... apart from the source or ronmental Protection Agency, Washing- Timothy Conlan, Daniel J. Elazar, Earl sources and despite doubts regarding ton, DC 20460, September 1989 (Report H. Fry, Eugene Hickok, John Kincaid, motivations, the vibrancy of state conPM-225). vi, 118 pp. Susan MacManus, Richard Nathan stitutional law and its potential for conThis report examines 23 case studies and John Lago, Michael Pagano, Mavis tinued growth seem assured.” Increas Page 24
more supportive of earmarked taxes, View from the Commission expanded to include services and investespecially taxes for which they have from page 2 ment, as regulations and subsidies for some reasonable expectation of getting agriculture and other sectors are negoa tangible pay-off, such as pothole re tiated through GATT and in bilateral pair. If voters were really convinced increasingly intergovernmental di increasingly intergovernmental di- agreements, and as the United States that an 80 percent increase in school mension of our search for foreign mar commits to fundamental policy changes spending would produce even a 50 per kets and investments. We should con- in a wide range of world forums, intercent increase in student achievement, tinue to expand cooperation and governmental consultation and collabothey would probably support the kind information exchanges between the lo- ration will be critical. of tax increase mandated by the U.S. cal, state, and federal governments on The international challenge is godistrict court in Kansas City. these issues. ing to get tougher. It is going to bring Jenkins also could throw a monkey wrench into state and local finances. If As a former governor, one of the new tests to our federal system. The U.S. courts start ordering tax increases questions that most interests me about United States can compete successfulfor particular school districts while my new job is defining exactly what the ly if our federal, state, and local govstate supreme courts order more appropriate federal role is in a number ernments work together to do what , each does best and if we do not assume equalized spending among districts, of areas. Foreign trade and affairs traschool spending could skyrocket. Pub- ditionally have been the purview of the that the way we've always done busilic officials and private citizens may federal government, but the produc- ness is the way we should continue to also try to use Jenkins to challenge state tive activities undertaken by the states do business. Our trade deficit is testiand local tax limits that block more in the last decade make it clear that the mony to how foolish that would be. funding for their institutional prefer- traditional line is no longer so definite. . ences, thus escalating costs for state and There are many things that the local governments. When the Kansas federal government can do most effecCity remedial process ends, nearly $1 bil tively in the trade arena. Governors, lion of additional funding will have been Charles S. Robb mayors, and county commissioners poured into the school district. Jenkins is a classic case of intergovmay be our best salespeople, but they U.S. Senate, Virginia ernmental collusion to produce govern cannot negotiate rules for trade and ment by remote control. It was primarily investment, they cannot work toward the school district that designed the U.S. favorable exchange rates, they cannot district court's magnet-school district work toward stable political situations Finance Data Diskettes plan. This is why the plan looks like an in potential markets, and they cannot State-Local Government FIeducator's dream, with such amenities as resolve the federal budget crisis, al nance Data. The diskettes developed by smaller class sizes, greenhouses and vi- though they will be dramatically af ACIR provide access to Census finance variums, 15 computers per classroom, fected by the solution. data in a format not previously available, broadcast capable radio and television The federal government also has a and are designed for easy use. State-bystudios with editing and animation labs, special role in these days of change in state data for 129 revenue and 200 expenmovie editing and screening rooms, a Eastern Europe and the Soviet Union. diture classifications, population, and per sonal income are included for state and temperature-controlled art gallery, a The dramatic political changes in those local governments combined, state gov3,500-square-foot dust-free diesel me countries are being followed by ambi- ernment only, or all local governments, chanics room, cosmetology and robotics tious, market-oriented economic pro- aggregated at the state level. instruction, and a $30 million classical grams. Our federal policies should be Format: Lotus 1-2-3 or Symphony Greek athletic academy. It's a wonder directed at helping to stabilize these Price: anyone learned anything in school in the fledgling democracies and ensuring acdays when high-tech education was a $195-five-year set cess for our goods and services to their $90-FY1987 movie projector with a lamp that burned $50-FY1986 economies. Federally sponsored acaout halfway through the year. demic and cultural exchanges also will $25 each-FY1985,1984, 1983 We need desperately to improve A demonstration disk for the Stateeducation and even more desperately help to plant deep roots for long-term Local Finance Data is available for $5. to equalize opportunities for minori relationships with future leaders in ties. But is this really the way to go? these countries. State Government Tax Revenue The federal government should Data, FY1983-87. This diskette makes the state tax portion of the state-local address the issues it is best suited to government finance series available six handle, especially the macro issues months earlier than the full series. Four that deal with maintaining, and in some years of tax revenue data (FY1983-87) Robert B. Hawkins, Jr. cases creating, a level playing field for are included on a single diskette. The revenue fields are basically the same as for our states and localities, for our com the state-local series. The state governpanies and scientists. In addressing those ment tax diskette does not contain any inissues, in creating a strong foundation formation on local governments, nor does for active and successful international it contain any expenditure data. trade, we will need close cooperation Price: $60 (for FY83-87 inclusive) among all our governments. As GATT is Page 25
The last meeting of the Advisory John Stremlau deputy director of proaches. This report provides inforCommission on Intergovernmental the policy planning staff at the Depart- mation to help states improve their Relations was held in Washington, DC ment of State, spoke to the Commis- own accommodations with local govon June 22, 1990. Following are high- sion about the need to reevaluate U.S. ernments on mandate issues. lights from the agenda and Commis- involvement in changing societies. In sion actions. his closing remarks, he stated that “this Survey on Tax-Exempt Senator Jerzy Regulski of Poland, is the most creative period of problems is the most creative period of problems Private-Activity Bonds undersecretary for Local Government of governance and the social contract ACIR, in cooperation with Dennis Reform, briefed the Commission on since the Republic was founded 200 Zimmerman of the Library of Conlocal government developments in his years ago." gress' Congressional Research Service, country. surveyed states to obtain information Boundary Review Commissions: on the state and local government Federal Preemption Roles and Status in 1990 experience with the volume cap on of State and Local Authority The Commission approved publi state and local issuance of tax-exempt The Commission approved a re- cation of a study on boundary review private-activity bonds. The volume cap port on federal preemption of state and commission structures, missions, and was instituted as part of the Tax Reform local authority. This report documents powers, and the degree of controversy Act of 1986. The survey included the increase in number and scope of surrounding their activities. The com questions about the priorities estabfederal preemptions as federal grants missions exist in 11 states. The report is lished by each state to allocate pridecline in proportion to state-local based primarily on telephone surveys vate-activity bonds between state and revenue, and outlines the variety of of the commissions and of the city and local government activities, the volimplementation approaches taken in county associations. The workloads of ume and composition of the bond the preemption statutes. State officials many boundary commissions have allocations, and suggestions for re form of the existing volume cap rules. suggest a need to use federal preemp- moved increasingly toward annexation tion power carefully and to select imple- cases. Some commissions have devel The report, The Volume Cap for Taxmentation techniques that allow states oped new mediating roles, and county Exempt Private-Activity Bonds: State and and local governments discretion in the and city representatives in most of the Local Experience in 1989, was published compliance process. Bea Block, staff states support these bodies. Of the 11 in July. attorney at the State and Local Legal boundary commissions, eight were Center, discussed preemption in U.S. created between 1959 and 1969; three President Appoints Supreme Court cases. have been created since then, the latest New Commissioner President George Bush appointed State and Local Roles Samuel B. Nunez, Jr., to the Commisin International Affairs Mandates: sion in August 1990. Senator Nunez is Cases in State-Local Relations The Commission approved two President of the Louisiana State Senate. reports on state and local roles in The Commission approved publiinternational affairs. State and local cation of an information report on NGA Elects New Chairman governments are looking outward in state mandates. The primary concern Commissioner Booth Gardner, govthis new era of international markets, of local governments is the imposition ernor of Washington, was elected chairworldwide economies, multinational of unfunded mandates, but there also man of the National Governors' Associ. corporations, and people-to-people di- are questions of accountability, public ation at the annual meeting in Mobile, plomacy. State and local international opposition to rising taxes, and the Alabama. activities contrast with the traditional implications of mandates for local notion that foreign affairs is strictly the self-government. In the seven states New USCM President domain of the U.S. government, and studied-Connecticut, Florida, Massawhile there have not been any major chusetts, New York, Ohio, Rhode Commissioner Robert M. Isaac, problems for the federal system or U.S. Island, and South Carolina-there has Island, and South Carolina - there has mayor of Colorado Springs, was foreign policy there are issues of been an effort to work out an accom- elected president of the U.S. Confercoordination and cooperation. These modation with local governments on ence of Mayors at the June conference reports will be available soon. these issues, using a variety of ap- in Chicago. Page 26
man, "holding companies are finding it advantageous or prudent to transfer traditional banking activities and assets (such as data processing and trust operations) to nonbank subsidiaries in order to remove assets from the potential scope of the cross guarantee provisions."16 Unfortunately, the recent decision by the 5th Circuit Court of Appeals striking down the Federal Reserve Board's source-of-strength doctrine precludes the inclusion of bank holding companies in the cross guarantee requirements, at least after the fact. Third, FDIC has long required state banks to conduct certain activities—including securities—in separate subsidiaries in order to take advantage of the doctrine of limited liability. By abrogating that doctrine in FIRREA, the Congress may have compromised the doctrine's future ability to protect the fund. With the passage of FIRREA, the Congress adopted a solution to the holding company structure problem that breaks with its long tradition of deferring to state control over interstate branch banking. The financial health of a depository institution in one state is now directly tied to the condition of its affiliates in other states. Despite the sweeping nature of the cross guarantee provisions, however, other proposed remedies to the abuses created by the bank holding company structure are not adequate. A less sweeping alternative to the strict liability imposed on all affiliated depository institutions under FIRREA might focus on transactions among banks under common control. For example, Section 23B of the Federal Reserve Act prohibits member banks and their subsidiaries from engaging in certain transactions unless the transactions are "on terms and under circumstances,... that are substantially the same, or at least as favorable to such bank or its subsidiary, as those prevailing at the time for comparable transaction with or involving other nonaffiliated companies."17 Such "arm's length" examinations require constant and close scrutiny of each interaffiliate and parent/sub transaction, however. The experience of other federal regulators with arm's length examinations has not been reassuring. For example, the IRS is authorized under section 482 of the Internal Revenue Code to conduct arm's length examinations of transactions among U.S. multinational corporations. Recognizing that business transactions among corporations under common control are not neces
sarily conducted at arm's length and can lead to tax evasion, the Congress gave IRS authority to inject economic reality into intercompany transactions. Using section 482, IRS scrutinizes transactions among commonly controlled corporations, determines whether the parties dealt with each other at arm's length, and, if not, reallocates income and expense among them in order to reconstruct the true taxable income of those affiliates subject to U.S. tax. The section 482 rules of IRS have spawned decades of litigation but no reliable principles to aid either IRS or a taxpayer in determining whether a particular expense or price is one at arm's length. In fact, after decades of conducting costly arm's length examinations, IRS, weary of the battle, is drafting procedures that will remove the necessity of such determinations. Given the inability of IRS, with its team of expert international auditors, to construct and enforce a meaningful arm's length policy, there is no reason to expect federal bank regulators to fare any better. In summary, the cross guarantee provisions of FIRREA appear to be the best interim solution to the holding company problem. In the long run, the Congress and/or the Federal Reserve Board must find a remedy for abuses originating at the bank holding company level. A bill recently introduced by Sen. Donald Riegle contains one such remedy. SB 3103 would require bank holding companies to maintain the capital of their insured depository subsidiaries. The bill also would extend the cross guarantee liability under FIRREA to the nondepository affiliates of insured depository institutions and limit the aggregate liability of nondepository affiliates to 5 percent of the assets of the insured bank at the time of its failure.
Effect on the Dual Banking System and on State Laws State control over branch banking has been an important component of the dual banking system since its inception. Both sections 217(8) and 206(e) limit state control over branch banking. The former section is, however, the more serious intrusion into state authority. Whereas the provisions to override state law in section 206(e) are the result of a decision by the Congress, those in section 217(8) are the consequence of an questionable interpretation by a federal agency. Moreover, they are not limited to failures of depository institutions. If the RTC suspends state
Finance Data Diskettes 1988 Now Available for State-Local Government Finance Data. The diskettes developed by ACIR provide access to Census finance data in a format not previously available, and are designed for easy use. State-by-state data for 129 reve a nue and 200 expenditure classifications, population, and personal income are included for state and local governments combined, state government only, or all local governments aggregated at the state level. Format: Lotus 1-2-3 Price: $225-Six-year set $100-FY1988 $60-FY1987 $25 each-FY1986, 1985, 1984, 1983 A demonstration disk for the State-Local Finance Data is available for $5. State Government Tax Revenue Data, FY1983-87. This diskette makes the state tax portion of the state-local government finance series available six months earlier than the full series. Four years of tax revenue data (FY1983-87) are included on a single diskette. The revenue fields are basically the same as for the state-local series. The state government tax diskette does not contain any information on local governments, nor does it contain any expenditure data. Price: $60 (for FY83-87 inclusive)
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Which statement best describes the trend of federal authority in the second half of the 20th century?
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