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History of the Local Government Fund

Looking at the history of the local government fund means looking at how the state has handled collection and distribution of a number of local taxes starting as early as the 1920s. For the next 60 years, the state collected on behalf of local governments a patchwork of 11 separate taxes, ranging from income tax to alcohol tax. Collectively, this process became known as State Aid to Subdivisions. Each of the 11 taxes had its own complex distribution formula spelled out in separate pieces of legislation.

Many of the taxes were collected locally, remitted to the state treasurer for processing then sent back to the local governments based on the calculation for each tax. Not only was each tax calculated differently, the timing for collection and distribution also varied from annually to quarterly to monthly. The system was an administrative nightmare for both state and local officials.

Adding to the complexity of this revenue stream was the fact that the General Assembly would often divert a portion of the revenue derived from the 11 individual taxes to the state's general fund when the state needed additional revenue. The state then redistributed the remainder of the revenue to local governments based on the statutory formulas. From FY74 to FY91, legislators fully funded the formulas only twice - FY75 and FY85. In FY91, local governments received only 78 percent of the revenue from Aid to Subdivisions.

By the 1980s, the inconsistent formula funding levels were coupled with the reality that several of the taxes had "flattened out." Revenues collected from some of the taxes were not growing at the same rate as the overall economy. All of these factors resulted in unpredictable revenues for local governments and severely hampered them from effectively planning for capital expenditures, service expansions and budgetary needs.

In 1991, the General Assembly set out to simplify Aid to Subdivisions. Using suggestions from the SC Advisory Commission on Intergovernmental Relations, the legislature proposed establishing a Local Government Fund.

According the SC ACIR report, "The goal was not to substantially increase the base amount distributed to local governments, but rather to simplify the system by eliminating the patchwork of funding sources. Simultaneously, this proposal is designed so that local governments will be entitled to state shared funds that will grow annually at the same rate as the General Fund, a reasonable level of growth that the General Assembly should be able to fund. Basing the Aid to Subdivision funding on the growth of the general fund will ensure that local governments are allocated funds on an annual basis that fluctuate at the rate similar to that of the total state budget. Local governments will experience the same economic "booms" and "busts" that affect the state budget ... Under this proposal, as the [state] budget grows, so will state aid to local governments."

With this new Local Government Fund, the revenue from seven tax sources: banks, beer, wine, gasoline, motor transport, alcohol (mini bottle) and income taxes, go directly to the state general fund. Instead of local governments receiving revenues directly from these seven tax sources, the state calculates the amount of revenue local governments receive based on 4.5 percent of the previous year's state general fund base revenue. This percentage represents the amount of revenue local governments received from these seven taxes in 1990. According to state law, legislators must set aside the revenue for the LGF before making other state budget commitments, guaranteeing a consistent revenue stream to municipalities and counties annually.

County governments receive 83.278 percent of the LGF, and municipal governments get 16.722 percent. This represented the percentage of Aid to Subdivisions distributed between county and municipal governments in 1990.

The state treasurer distributes revenue from the LGF quarterly to cities and counties. The amount distributed to cities and counties from their respective portions of the LGF is calculated on a per capita basis determined by the last official census figures. This means a city/town's distribution is based on its percentage of municipal population. As some cities/towns" populations grow, their share of the LGF increases causing a corresponding decrease in non-growing cities/towns.

To bar against midyear cuts to the LGF, the law requires the Budget and Control Board to approve such cuts by majority vote in a separate vote from state government cuts. No cut is permitted that would send less revenue back to the counties and municipalities than they received in the previous year. Finally, legislators can make changes to the Local Government Fund only by separate legislation dealing solely with the LGF.

Even with these provisions in place, the General Assembly still looked to these local taxes when it needed additional revenue. Over the years, legislators have adjusted the definition of the base revenue on which the distribution is computed, in effect moving revenue from the General Fund before calculating the amount sent to local governments. For example, legislators took debt service and funds for school aid "off budget" in 1998, thus reducing the base from which the LGF is calculated.