For almost 20 years, South Carolina cities and towns depended on the Local Government Fund as the stable and consistent revenue source it was intended to be. However, the years from 2008 until 2012, now known as the Great Recession, changed all that. Beginning in 2009, this formerly stable revenue source has not only seen declines due to a declining economy, but it has also been underfunded. Today, the formula that determines the distribution of the dollars is also being challenged.
When the SC General Assembly created the Local Government Fund in 1991, the goal was to simplify the distribution formula of tax dollars collected by the state on behalf of local governments. From as early as the 1920s, cities and counties received revenue from a variety of taxes. The formulas the state used to distribute these taxes to local governments were complex. Not only was the distribution of each tax to cities and counties calculated differently, but the timing of when each was collected and distributed also varied from annually to quarterly to monthly.
The new Local Government Fund simplified the many formulas into one easy calculation. Each year, cities and counties received an amount equal to 4.5 percent of the previous year's state General Fund base revenue.
In 1991, the first year of the Local Government Fund, this new calculation meant revenue for local governments equaled the amount they received from the individual taxes collected by the state on behalf of local governments during the prior year. The division of tax dollars between county and city governments in 1991 also represented the same percentage of tax dollars distributed between county and city governments in 1990.
County governments would receive 83.278 percent of the Local Government Fund, and municipal governments 16.722 percent. The new calculation provided a relatively stable source of revenue for cities and counties from 1991 to 2008 except for the General Assembly moving certain types of revenue out of the state General Fund. This included adjustments such as moving the sales tax revenue on autos from the General Fund to the Department of Transportation to fund infrastructure needs. This reduced the calculated amount of the Local Government Fund.
As the state's economy grew, the new formula guaranteed cities and counties would share with the state and its agencies the accompanying growth in tax revenues. Of course, as the economy declined, cities and counties would also share the burden of reduced revenues. This was the case during the Great Recession, and municipal officials understood this decrease.
However, in addition to the expected decline in the Local Government Fund based on the decline in the state General Fund base revenue, the General Assembly also made additional cuts to the Local Government Fund during that same time. Now that state revenues have increased post-Great Recession, the General Assembly has restored only some of the funding cuts. For FY 2015, the state budget provides for only 74 percent funding of the Local Government Fund.
In 2015, the General Assembly seems primed to debate a new formula for funding the Local Government Fund. Ensuring dependable revenue for cities and towns to support the effective delivery of municipal services is one of the Municipal Association's five advocacy initiatives this year. The Association will work closely with members of the General Assembly to ensure a fair and equitable formula for future years.