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The Congressional Budget Office (CBO) is studying unfunded federal mandates--especially those involving environmental policy--at the request of the Chairman of the Senate Committee on Governmental Affairs. This memorandum presents preliminary findings from that ongoing study. Terry Dinan of CBO's Natural Resources and Commerce Division prepared the report under the direction of Roger Hitchner and Jan Paul Acton.

The memorandum describes trends in federal aid to state and local governments, discusses the pros and cons of federal mandates, and examines some of the potential consequences of providing federal funding for mandates. It also considers evidence about the costs that the Safe Drinking Water Act imposes on local governments and highlights some of the important methodological issues associated with measuring them. The forthcoming final report will provide more details about those matters and discuss several policy options for minimizing costs.
 
 

SUMMARY AND INTRODUCTION

BACKGROUND ON THE FEDERAL MANDATE DEBATE

THE SAFE DRINKING WATER ACT

PRELIMINARY STUDY FINDINGS

APPENDIXES

A - Descriptions of Unfunded Federal Mandates
B - Final and Proposed Rules as of September 1994 Under the Safe Drinking Water Act
 

FIGURES
1.	Mandates Included in Surveys of U.S. Cities and Counties
2.	Federal Aid Received by State and Local Governments Measured on a Per Capita Basis, 1970-1991
3.	Federal Aid Received by State and Local Governments Measured on a Per Capita Basis, Net of Funds for Public Welfare, 1972-1991
4.	Federal Aid as a Percentage of State and Local Expenditures for Items Other Than Public Welfare, 1972-1991
5.	Trends in Local Expenditures and EPA Grants to Local Governments for Wastewater Treatment Infrastructure, 1972-1986
6.	Distribution of Households by Estimated Cost of Treating Drinking Water to the Standards Specified by the Safe Drinking Water Act
7.	EPA's Estimate of the Annual Costs of Complying with Final and Proposed Rules Under the Safe Drinking Water Act
8.	Annual Local Expenditures for Water Supply Measured on a Per Capita Basis, 1957-1991
9.	Actual Local Expenditures for Water Supply Measured on a Per Capita Basis, Compared with Preregulatory Trends, 1957-1991
BOX
1.	Types of Federal Action That Can Induce Spending as Defined by the Advisory Commission on Intergovernmental Relations

 

SUMMARY AND INTRODUCTION

The past several years have witnessed a growing movement to draw attention to the costs that state and local governments bear in complying with federal requirements. (A coalition of state and local officials even went so far as to declare October 26,1993, National Unfunded Mandates Day.) The increasing concern about the effects of such costs on state and local government has led the Congress to consider legislation that would limit its ability to pass additional unfunded mandates or that would increase the information it must consider when unfunded mandates are being enacted. The options it is examining range from preventing the passage of state and local requirements that are not accompanied by federal dollars to such lesser measures as forming a commission to study the cost of mandates or expanding the cost estimates of legislative proposals affecting states and localities prepared by the Congressional Budget Office (CBO). Environmental laws have been cited as particularly burdensome at the local level. As a result, concerns about unfunded mandates have played a central role in the debate on the reauthorization of the Clean Water Act and the Safe Drinking Water Act.

Yet despite the amount of discussion about unfunded mandates, little empirical work has been done.¹ Most previous attempts focused on the cost of a single regulation (rather than on the cumulative effects of multiple regulations) and were carried out at the time that the regulation was proposed. The studies are not, therefore, based on actual experience.

Several years ago, the Environmental Protection Agency (EPA) undertook a major examination of the cost of multiple environmental regulations. It estimated that the annualized cost of pollution control in 1995 would total $5 billion for states and $35.8 billion for local governments (measured in 1992 dollars).² These cost estimates are useful, but they have important limitations. First, they represent total expenditures for pollution control--including the expenditures that state and local governments would have made in the absence of federal regulations. Second, they are based primarily on engineering analyses conducted at the time that the regulations were being developed and not on actual cost data.

Several local governments have also begun to try to calculate the costs that they have incurred as a result of federal mandates. For example, the city of Columbus, Ohio, estimated that it spent $68 million for pollution control in 1991 (measured in 1992 dollars). That estimate includes the cost of complying with federal and state mandates as well as the cost of pollution control measures that the city would have undertaken in the absence of those mandates.³

In an effort to better understand the magnitude of the costs imposed by federal mandates on local governments, the Congressional Budget Office is examining available evidence on the costs that local governments bear to comply with the Safe Drinking Water Act (SDWA). This act is only one component of the unfunded mandate issue, but critics point to its requirements as particularly burdensome. CBO's analysis considers three different sources of information: engineering analyses performed at the time that the regulations were developed, census data on actual expenditures, and self-reported cost data provided by cities and counties.

CBO is also studying broader trends in federal aid to state and local governments, the implications of funding mandates at the federal level, non-monetary concerns about federal mandates, methodological issues associated with measuring the costs that result from federal mandates, and appropriate methods for considering those costs in their proper context. Preliminary conclusions from the study include the following:

• According to the Advisory Commission on Intergovernmental Relations, the number of federal mandates rose from fewer than 5 in 1960 to 66 in 1990. At the same time, census data show that federal aid to state and local governments for uses other than public welfare has generally been declining on a per capita basis since 1978.
  
  
• The cost of federal mandates must be measured carefully. Failing to treat capital costs correctly and to account for federal funds in figuring local costs will result in misleading findings that can dramatically overstate or understate a mandate's costs. In addition, general subsidies, such as tax benefits, that the federal government provides to state and local governments should be taken into consideration. Attributing a particular share of them to any given mandate, however, is difficult.
  
  
• The most troublesome methodological issue is determining the incremental cost of federal mandates. That calculation subtracts the costs that communities would have incurred in the absence of a mandate from the total costs they incur for compliance.
  
  
• Available evidence indicates that treating drinking water to standards specified under the SDWA would result in a total cost of less than $20 per year for most households. Proposed rules that are now being considered could double or triple that cost. All such estimates, however, reflect the total rather than the incremental costs of compliance. Communities undoubtedly would have undertaken some of those measures in the absence of the SDWA.

1. Advisory Commission on Intergovernmental Relations, Federally Induced Costs Affecting State and Local Governments: Concepts, Experiences, and the Question of Relief, draft report (May 1994), p. ii.; Center on Budget and Policy Priorities, Unfunded Mandate Legislation: An Analysis of the Glenn-Kempthorne Bill( Washington, D.C.: Center on Budget and Policy Priorities, May 1994).

2. Environmental Protection Agency, Environmental Investments: The Cost of a Clean Environment (November 1990).

3. Environmental Law Review Committee, Environmental Legislation: The Increasing Costs of Regulatory Compliance to the City of Columbus (Columbus, Ohio: Mayor's Office, May 1991).

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