Some Thoughts on Local Government Finance

by Dick Hall-Sizemore

The recent posts and comments concerning the reversion of the city of Martinsville to town status (see here, here, and here) provide a good opportunity to discuss the complexity of local government finance and the limitations of using simplistic measures to compare governments.

Jim Sherlock referred to the “wreckage” of Martinsville, which he attributed to “decades of Democratic control.” When asked to define “wreckage,” he referred to the city government overspending to a “negative ROI” and declared that “the first job of any government in Virginia is to live within its means.” The obvious implication is that Martinsville spent more than it took in.

The only specific evidence offered to support the Martinsville “wreckage” charge was the higher spending per person by Martinsville and the higher tax rate in the city.

Local government finances is a fairly complex subject, but there is a good amount of data online for anyone who wants to dig. The website of the Virginia Auditor of Public Accounts serves as the base for most of this data. Its annual Comparative Report of Local Government Revenue and Expenditures is the basic document. It contains a great deal of data, but it has its limitations, as will become clear later in this discussion. The website also has the annual financial report of each local jurisdiction, which can provide even more insight for those experienced at reading and understanding financial reports (which I am not).

Sherlock offered no evidence to substantiate his assertion that Martinsville has a “negative ROI” (I do not know what term means in the context of government) and that the city has spent beyond its means. However, the city’s audited financial report demonstrates, as shown in the graph below, that the city has had an unrestricted general fund year-end balance for each of the past ten years.  Clearly, it has not spent beyond is means.

Source: Martinsville 2020 Annual Financial Report,

Next is the charge that Martinsville has a higher tax rate than Henry County and spends more per capita than the county does. Of course, it does. It provides a higher level of services to a denser population than Henry County does. That is what makes it a city. And, it should come as no surprise. Virtually every city in the Commonwealth has a higher tax rate than adjoining counties.

In addition to disparate service levels, counties enjoy economies of scale. Although Mr. Sherlock dismissed this argument, such an advantage does exist. Being able to spread certain common fixed costs, such as a city or county manager’s or school superintendent’s salary over its population of 51,000, rather than Martinsville’s 13,000, will result in a lower per capita cost for Henry County.

Several specific services can serve as examples of disparate service levels. The starting point for the data is the APA’s 2020 Comparative Report. Each city and county in the Commonwealth receives state financial assistance for specific services and programs. However, if one is trying to compare the spending of its own revenues by a city or town for a specific service to comparable spending by another jurisdiction, one needs to back out the state funds. It is here that the APA report has limitations. It reports  total local revenues by source, but does not break the spending for specific services down by revenue source. To accomplish that, one has to use the reports of the agencies from which the revenues came.

For each of the service areas considered below, I have adjusted the spending reported by Martinsville and Henry County in the APA report by the state funding received for that service. Note: the resultant spending amounts are certainly not completely “clean”; they are likely to include federal and additional state grant money. I have adjusted only for the major, continuing sources of state aid. To do more would require more resources that I have access to and more time than would be justified for this exercise.

Law enforcement

The city has a police department that provides law enforcement and traffic control services. In the county, the sheriff provides those services, supplemented by the State Police.

Both the city and the county receive state financial assistance for law enforcement. In FY 2020, Martinsville received a little under $1 million in HB 599 funding. For sheriffs, the Compensation Board reimburses localities for the total cost of the sheriff’s salary, as well as the total cost of all approved deputies.  (Most localities, including Henry County, employ, at their cost, more deputies than approved by the Compensation Board.)

Determining the cost of law-enforcement in local funds for the county is complicated by the sheriff being responsible for law-enforcement, running the jail, providing court security, and serving legal process. (Martinsville also has a sheriff, but he is not responsible for law enforcement.) Without additional data that is not readily available, it is not possible to determine how much Henry County spent in local funds for law enforcement by the sheriff.  However, using Compensation Board data that is available online, it is possible to estimate that cost.

The table below shows the adjusted FY 2020 Martinsville cost for law enforcement and an estimate of the cost for Henry County in local funds.

Fire and Rescue Services

To provide fire and rescue services within its 11 square miles, Martinsville has two stations consisting of two engine companies, one ladder company, a rescue truck and two advance life support ambulances. Its personnel are cross-trained in both fire and EMS.

In contrast, Henry County relies primarily on eight volunteer fire companies and five rescue squads to provide those services within its 382 square miles. The county does provide some full-time and part-time EMT and paramedic-firefighters to assist the volunteers.

Both jurisdictions receive state financial assistance from the Department of Fire Programs and the Department of Health for these services.

Street Maintenance

The state maintains all the roads in Henry County.

Martinsville is responsible for maintaining streets, bridges, and sidewalks within its boundaries. However, the Virginia Department of Transportation provides the city financial assistance under its urban street payment program.

Tax rate increase

Sherlock echoed the county claims and fears that a Martinsville reversion would result in massive tax increases for the county. He also referred to the increase in taxes on residents and businesses in the city as a result of “double taxation” by the town and county.

The history of city-town reversions in Virginia suggests that these fears are unfounded. The following table shows the pre- and post-reversion tax rates in two of the three city-to-town reversions that have occurred. In both cases, county residents and businesses had either a lower, or only slightly higher, tax rate and the combined tax rate for town residents and businesses was lower than the city tax rate before reversion. (Available on-line data does not go back far enough to enable such a comparison of tax rates relative to the South Boston reversion in 1995.)

My Soapbox

Obviously, this has not been anywhere near a thorough analysis of the relative financial conditions of Martinsville and Henry County and their level of services. I do not have ready access to sufficient data, nor do I have the experience, to do so. That will be the job of the staff of the Commission on Local Government as it analyzes the proposed agreement and makes a recommendation to the court that will consider it.

My aim has been to use the Martinsville reversion situation as an example of the complexity of local governments and their finances. Relying on simplistic measures such as per capita expenditures and tax rates is likely to produce an incomplete or misleading conclusion.

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23 responses to “Some Thoughts on Local Government Finance”

  1. James C. Sherlock Avatar
    James C. Sherlock

    Well researched, Dick.

    Both Martinsville and Henry County are profoundly poor.

    Locals economists attribute that to NAFTA. Martinsville was a furniture town and Henry County residents worked in that industry and grew tobacco. Tobacco is tobacco.

    50% of the furniture industry jobs in the U. S. we’re lost in 2 years after NAFTA enforcement.

    They are not wrong about the severe relative economic decline compared to the rest of Virginia. Each district’s composite index has declined from about .33 to about .22 in 20 years.

    Both the City and County studies say County taxes will go up. They differ only on how much. Pretty much blood out of a turnip.

    The information you provide does not change the big picture.

    The city council is 100% for the reversion. The county commissioners are 100% against it. That means they are in 100% agreement that the Republican county residents are getting screwed by the Democratic city residents.

    You can spray all the perfume in France on that from Richmond and it will not change the smell.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Despite your trying to turn this into a partisan issue, that is not how it will be resolved. The final decision will be made by a three-judge court, appointed by the Supreme Court. According to law, “The court shall affirm the agreement unless the court finds either that the agreement is contrary to the best interests of the Commonwealth or that it is not in the best interests
      of each of the parties thereto. In determining whether such agreement should be affirmed, the court shall consider, among other things, whether the interest of the Commonwealth in promoting orderly growth and
      the continued viability of localities has been met.”

      1. James C. Sherlock Avatar
        James C. Sherlock

        The three judge panel will review Virginia law on reversions, find that the law encourages them, and rule that this reversion is within the law. Because it is.

        Nice try on me “trying to turn this into a partisan issue”, I am just reporting the facts on the ground.

        “The Democratic city council is 100% for the reversion. The Republican county commissioners are 100% against it. That means they are in 100% agreement that the Republican county residents are getting screwed by the Democratic city residents.”

        Sorry, that happens to be true. No offense.

  2. Ted McCormack Avatar
    Ted McCormack

    Thank you, Dick. As one who worked 23 years in comparing city/town vs. county finances and services levels, it’s not as simple as it seems. I cannot tell you how many times I heard county residents proclaim that a municipality wastes money on urban-type services, like paid police & fire, snow removal, parks, etc. Bosun

  3. LarrytheG Avatar

    Thank you. The numbers shown don’t look that different from city’county comparisons I have seen in the comparative reports. There is
    way more to this that the simplistic GOP vs Dem fairy tales that we see here on BR and other right-leaning commentary. When Ed Risse was a regular contributor to BR, way less partisan discussions would take place on the differences between urban and rural (not without their own debatable issues either ).

    Most towns and cities in Virginia tax more and spend more for more/additional services, regardless of whether Dem or GOP – as opposed to them spending more for the SAME services. Water/sewer versus septic. Higher levels of fire service – and lower insurance costs. Higher levels of medical care – much quicker response times than rural volunteer medical. etc.

    Too bad we can’t break out the revenues and costs specific to the jurisdiction and separate from the state and Feds (and fee-based services like water/sewer). Do cities actually have to charge more for “equivalent” services or is it just the simple idea that more services are provided and they do cost more – and some people want to live where there are more/better services?

    But I do have a question about the state aid specifically for employees and that is what is the logic behind the state stipulating certain employees and employee levels and the state helping to fund them. What’s the logic behind the state setting those standards in the first place – and basically justifying collecting taxes from all Virginians to then transfer some of those taxes to fund localities that may not have the funds on their own to have those employees and/or employees that have to be certified as to their professional ability? For instance, localities don’t decide how many judges they need – or want. The state decides that I believe.

    With schools, it’s different in that SCOTUS requires all states to ensure each child receives equivalent resources for education and Virginia does that with the local composite index where the state fills in what the locality cannot afford – and they use “ability-to-pay” metrics to assure that the locality is not purposely “underfunding”. No no states do it the same way and Va’s approach just their way of meeting that dictate. Most all states also have the tension between the richer jurisdictions “subsidizing” the poorer ones.

    Social services, food, health, and related also receive Federal and State funding – that some would also characterize as redistributions of wealth.

    But state funding for Constitutional officers and public safety and such – what’s the logic there? Is the state essentially deciding what the baseline/minimum level of governance-provided services is acceptable?

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Virginia is one of the few states, if not the only one, that provides state funding for local law enforcement (sheriffs) and for the operation of jails. The origins and rationale are enshrouded in the mists of time.

      1. DJRippert Avatar

        The origins and rationale are enshrouded in the Byrd Machine – pay off rural and small towns with suburban and city tax dollars. Instruct the rural and small town voters to preserve the Byrd Machine agenda through the election of constitutional officers and gerrymandered General Assembly districts.

    2. Brian Leeper Avatar
      Brian Leeper

      Water/sewer vs septic is not applicable to taxation. Water/sewer is funded by user fees, not taxes. At least if best practices are being followed.

      1. WayneS Avatar

        You are correct. A large majority of localities in Virginia structure their public water & sewer utilities services so that capacity charges / connection fees pay for capital projects and user fees pay operational expenses.

        There are exceptions, of course, especially when a given locality first gets into the public utilities business, but the goal is almost always to have the water/sewer department end up as a self-funded entity within the government of the locality.

  4. Nancy Naive Avatar
    Nancy Naive

    “… the city has had an unrestricted general fund year-end balance for each of the past ten years. Clearly, it has not spent beyond is means.”

    I pray you, in your letters,
    When you shall these unlucky deeds relate,
    Speak of Martinsville as it was; nothing extenuate,
    Nor set down aught in malice. Then must you speak
    Of one city that spent not wisely but too well…

    1. Stephen Haner Avatar
      Stephen Haner

      The Bard weeps….Maybe if I like lived in Martinsville or Henry County this might get my attention, but it doesn’t.

  5. DJRippert Avatar

    So complex an analysis for so simple a problem. Martinsville has been losing population for the last 50 years. Martinsville’s peak population was in 1970 at 19,653. It has dropped each and every census period and now stands at a 2019 (est) population of 12,554 – a stunning drop of 36.1%. At the same time the population of the US rose from 203,211,926 to 331,449,281. A gain of 128,237,355 or +63%.

    Had Martinsville simply grown at the same rate as the US overall it would have 32,034 people. Martinsville is about 20,000 people short of just keeping up.

    I’d say that the meltdown of population experienced by Martinsville constitutes “wreckage”.

    “However, the city’s audited financial report demonstrates, as shown in the graph below, that the city has had an unrestricted general fund year-end balance for each of the past ten years. Clearly, it has not spent beyond is means.”

    Wow. Why do you equate a slightly positive balance with not spending beyond its means? If that spending was driven by a taxation level that drove away people and employment then Martinsville may have well spent beyond its own means.

    Martinsville represents the complete failure, over 50 years, of the Virginia General Assembly’s efforts at rural and small town economic development. A complete disaster despite the tobacco money, educational funds transfers, etc.

    But, subsidized broadband will certainly turn everything around.

    1. Brian Leeper Avatar
      Brian Leeper

      Absolutely subsidized broadband will certainly turn everything around. They’ll be able to stream re-runs of “Here Comes Honey Boo Boo” and other quality educational content.

  6. James Kiser Avatar
    James Kiser

    It is not that the city spent beyond it means, it means the city spent beyond the desires of the people who used to live there to pay for it. And the ones who still live there can’t pay for it.

    1. James C. Sherlock Avatar
      James C. Sherlock

      Neither can the residents of the county.

    2. LarrytheG Avatar

      Cities and Towns have elections right? Most of the costs are a city/town are annual recurring costs for salaries which means the tax rates can be cut and services reduced if that is the will of the voters. I think the state actually restricts how much debt (for capital expenditures) that cities and towns can actually carry if not mistaken.

      But every election cycle, candidates can run promising to lower taxes and cut services compared to others running that will not make that promise. People do choose.

      So, it’s not the majority of voters that think the city spent more than they desired – it’s the minority – right?

      You can REALLY see this dynamic in some counties where those with kids want MORE schools and school programs and those no longer with kids want far less.

      This is a central issue in many exurban ring counties with city/town workers who commute to the counties for cheaper housing but they still want good schools. They basically out-vote the native rural folks who never wanted to pay for better schools to begin with.

      1. WayneS Avatar

        “So, it’s not the majority of voters that think the city spent more than they desired – it’s the minority – right?”

        He said “spent beyond the desires of the people who used to live there”, meaning those people have moved away.

        When a majority of voters deludes themselves into thinking they can afford to pay for things for which they cannot afford to pay, the minority/nondeluded voters can (and often do) “vote with their feet”, thereby leaving behind an even larger majority of deluded voters.

        They may be the majority, but that does not mean they are fiscally responsible.

  7. WayneS Avatar

    RE: Relative costs of law enforcement.

    Perhaps one of the reasons Martinsville appears to spend more than four time as much per-capita on law enforcement as does Henry County is that the Martinsville Police Department has 1.8 times as many employees per capita as the Henry County Sheriff’s Department.

    Martinsville Police Dept. – 54 employees for 12,800 residents.
    Henry County Sheriff’ Dept.- 122 employees for 54,000 residents.

    NOTE: I have not counted the City’s Sheriff’s Department employees in these numbers, nor have I counted whatever State Police assistance is offered either jurisdiction.

    “Economy of scale” notwithstanding, why would the City of Martinsville need so many more employees on per capita basis, especially since they patrol only 2.9% as much area as the Henry County Sheriff’s Department?

    1. Paul Sweet Avatar
      Paul Sweet

      Town taxes will pay for town police. A smaller area to patrol means much faster response time.

      As far as I know, a city’s sheriff department’s main duty is not law enforcement, but to serve court notices.

      1. WayneS Avatar

        “Town taxes will pay for town police. A smaller area to patrol means much faster response time.”

        Yes, but we are talking about a city, which unlike a town is independent of the surrounding / adjacent county. A county sheriff has no jurisdiction or duties within a city; he does have jurisdiction and duties in any town located within his county.

        “As far as I know, a city’s sheriff department’s main duty is not law enforcement, but to serve court notices.”

        Yes, but a county’s sheriff’s office is responsible for law enforcement, process serving and taking care of the courts and county jail, so an apples-to-apples manpower per capita comparison with a city should include that city’s sheriff’s department.

        1. Brian Leeper Avatar
          Brian Leeper

          It depends. Some cities in Virginia like Manassas and Manassas Park do not have their own court systems and use the county’s courts. In that case the county sheriff does have jurisdiction and duties in those cities.

          1. WayneS Avatar

            I did not know that. Thank you.

        2. Dick Hall-Sizemore Avatar
          Dick Hall-Sizemore

          Also, many counties are members of regional jails. Therefore, the sheriffs in those counties do not have the responsibility of running a jail. That is even more reason to exclude the non-law enforcement from the sheriffs numbers when making manpower comparisons with cities. It does get messy.

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