With apologies to National Journal I've copied a subscription only article that describes recent changes in federalism driven by the recession, and the pressures placed on state revenues by diminishing tax bases, and the federal funds made available by the recent stimulus bill. The term golden rule federalism refers to the old maxim: he who has the gold makes the rules. Are poorer states falling more under federal mandates due to their need for federal money?
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Education Secretary Arne Duncan had some harsh words for Wisconsin's education laws during a November visit to Madison. He complained that the state's policies, particularly its cap on charter schools and its refusal to use test data in evaluating teachers, were antiquated, unacceptable, and even "ridiculous."
Rather than take offense, his hosts acted quickly to appease him.
The very next day, Wisconsin's Assembly and Senate passed a package of four bills designed to bring the state in line with Duncan's vision. In so doing, Wisconsin became the 10th state in 2009 to alter its education laws to please the Education secretary.
The reason is money. Last year's economic stimulus law provided Duncan with $4.35 billion to give to states that pursue innovations in education. The so-called Race to the Top fund is competitive: All the states want a share of the money, and the Education secretary can give out the aid largely as he sees fit, without having to rely on any set formula.
But there is not enough money to go around, which is why the states are doing everything they can to satisfy Duncan. No other Education secretary has ever had that much cash at his disposal. "There's no question those of us in Wisconsin want to have as strong an application as we can to get at the $4.35 billion," said John Lehman, who chairs the state Senate Education Committee. "It is true that there is a big carrot that got people thinking."
The Obama administration has been using a lot of carrots to elicit support for its policy goals, from forcing states to accept new Medicaid recipients to cracking down on distracted drivers. With states facing their worst financial outlook in decades, they are becoming increasingly reliant on money from Washington. "It wouldn't surprise me if federal funding ends up being 40 percent of state budgets" during the current fiscal year, said Marcia Howard, executive director of Federal Funds Information for States, which on behalf of state legislators and governors tracks federal grant money. Federal dollars -- dominated by Medicaid funds -- made up just over 25 percent of state spending as recently as 2008 before jumping to 30 percent for the fiscal year that ended in most states last June.
With so much money being transferred from Washington to state capitals, the administration is practicing what might be called golden-rule federalism: Whoever has the gold makes the rules.
"The fact that states are so broke offers unprecedented opportunities for the federal government to intrude into areas that were strictly the purview of states," said Sujit CanagaRetna, a senior fiscal analyst with the Council of State Governments.
President Obama thus presents a paradox when it comes to federalism. Barely five years out of the Illinois Legislature, he has expressed more genuine interest in collaborating with the lower levels of government than perhaps any other president since Jimmy Carter. Several Cabinet secretaries have been working together to craft joint programs to find a more coherent approach to matching federal efforts with local programs. Obama's Office of Management and Budget and the newly created White House Office of Urban Affairs are pushing all federal departments and agencies to do likewise.
"We've absolutely come to some sort of turning point, where the sheer amounts of money now are much more decisive.'' -- Matt Spalding, Heritage Foundation
But at the same time, Obama is clearly presiding over a greater centralization of power and policy-making in Washington. It was inevitable that states would have to cede ground that they had been able to hold for themselves in recent years, given a president determined to set his own mark in a swath of domestic policy areas, such as education and health care. But the states' growing dependence on Washington for aid has greatly accelerated the shift.
And their ability to set their own courses as independent actors is diminishing. "This is an administration that doesn't take the states and locals as it finds them -- it has an agenda," says Paul Posner, a federalism expert at George Mason University. "The agenda they have is not framed in terms of helping state and local governments with their problems, but in pushing their own goals."
Innovation On Uncle Sam's Dime
In July 2007, California Gov. Arnold Schwarzenegger and New York City Mayor Michael Bloomberg appeared together on the cover of Time magazine under the headline "Who Needs Washington?" State and local governments were then passing dozens of laws in areas where Washington was paralyzed, including immigration, climate change, and expansion of health coverage. States had also taken the lead in regulatory areas where Washington appeared moribund, such as financial services and tobacco. There was a feeling among governors and mayors that Washington was so partisan and so distracted by the Iraq war that more and more domestic policy-making would fall on their shoulders.
"You had a period of rapid state innovation right across the board," said Ray Scheppach, executive director of the National Governors Association. "That's stopped mostly because of the budget impact, so the pendulum has clearly swung toward Washington."
States have collectively had to cover more than $250 billion in budget shortfalls over the past two years. In 2009, their revenue collections dropped by double digits in every quarter -- the worst performance in at least 50 years. States were able to use stimulus dollars to close approximately 40 percent of their deficits last year, but a recent Rockefeller Institute of Government study suggests that they have lost twice as much money to falling tax collections as they have gained in federal largesse.
Even as the economy begins to grow, tax collections will lag. "Our data show at that at the state level, [revenue] growth over the next five to 10 years will be roughly half what we've seen over the last 30," said Scott Pattison, executive director of the National Association of State Budget Officers. Three percent annual revenue growth is "the new normal for states" if they're lucky.
If states during the Bush years were moving forward on issues where Washington was stuck, the reality is that they were able to push ahead on the cheap. Although some states spent a few billion dollars on stem-cell research, other policies cost them next to nothing. Twenty-nine states have adopted renewable-energy standards, putting forward such goals as requiring utilities to generate 20 percent of their power from renewable sources by 2020. But switching to wind and solar power is going to cost the utility companies -- not state governments -- money. And regional cap-and-trade systems, such as the Northeastern states' Regional Greenhouse Gas Initiative, bring in revenue from energy users.
In recent years, states from Vermont to Washington have undertaken ambitious expansions of health coverage, particularly for children. Although driven by individual states, these efforts were largely financed by the federal government through Medicaid and the State Children's Health Insurance Program. Massachusetts' much-discussed 2006 health reform law, which mandated that most individuals had to purchase insurance, was primarily spurred by a desire among state lawmakers to preserve a $385 million pot of federal health dollars. In 2008, Massachusetts received an additional federal waiver that allowed the state to spend another $1.4 billion in federal dollars annually on its health insurance plan.
In other words, state health coverage experiments -- much like the changes in welfare that were pioneered by Wisconsin and other states before becoming enshrined in federal law in 1996 -- have been conducted largely on the federal dime. That's unlikely to be the model going forward. Instead of coming up with new programs, many states are now engaged in serious debates about what core services they can afford to provide.
States also are going to be much busier trying to meet federal goals than pioneering new approaches of their own. "I don't see this administration supporting a federalism where we provide more money for governors and mayors to focus on their plans and initiatives," Posner said. "The focus will be on national goals. I can see this administration pursuing additional ways to put money down in the state and local sector but tying it to strong national goals. It's going to have to be a twofer."
Block Grants And State Sovereignty
It has always been the case that when states and local governments cut spending, they try to spare federal programs. After all, if the federal government is paying 50 percent of a program's cost, they would have to cut $2 in spending just to save $1 for their own treasury. Not surprisingly, state budgets have long been subject to federal whims, both through the creation of programs that impose new mandates and the simple expansion of the federal government.
The modern state budget was born, in fact, during the Great Depression. States expanded their budgets and operations to handle new responsibilities, including doling out federal funds to the unemployed. And because states were either in or near default during the Depression, they adopted income and sales taxes, which had originated among local authorities. "Revenue raised from state sources increased 250 percent from 1927 to 1940 because of the widespread adoption of taxes that had been insignificant or nonexistent before 1930," according to a March report from National Conference of State Legislatures.
If state spending tended to increase during federal expansions under Democratic administrations, Republican presidents took a different tack. Under the Nixon and Reagan models, block grants meant offering states less money but more flexibility. Their proposals had the dual purpose of reining in spending and giving states more authority.
It's the opposite of Obama's approach, which is more in line with Lyndon Johnson's during the Great Society -- finding innovative ways to use grants to get states and localities to pursue federal policy goals. "In the absence of reauthorization of some of the grant programs, the Obama administration is using regulations to impose their agenda," said Marcia Howard of Federal Funds Information for States, a joint project of the NCSL and the governors association. "You could call it a heavy federal hand, but it's more inducements, using more carrots than sticks to get states to do what they'd like them to do."
In response, many state officials complain that federal priorities are starting to crowd out their own. This may sound a little ungrateful. The influx of federal dollars may be edging out other parts of state budgets on a percentage basis, but it's not as if their absence would allow states to spend more in areas such as corrections or parks. As things now stand, states would simply have less to spend.
Some states have heatedly invoked the 10th Amendment in stressing supposed limits on federal policy-making. Legislative chambers in Texas and North Dakota approved resolutions last year proclaiming state sovereignty and demanding an immediate end to federal mandates not enumerated in the U.S. Constitution.
But it looks increasingly as if the Republican governors who opposed the stimulus -- and appeared at the time merely to be seeking to score partisan points -- had a valid argument. South Carolina's Mark Sanford, Mississippi's Haley Barbour, and others noted that it would be a mistake to accept federal money that obligates them to continue the spending when the federal pipeline runs dry a year or two later. As that time draws nearer on such programs as unemployment insurance and energy-efficiency block grants, more of their colleagues are worried about what they'll do when the funding drops off.
And federal money, even as it continues, is far from cost-free. "We've absolutely come to some sort of turning point, where the sheer amounts of money now are much more decisive, which means political control is much more decisive," said Matt Spalding, director of American studies at the Heritage Foundation. "The default policy response more and more is toward central Washington control, because at the end of the day, what really drives policy when you have the federal government putting all the money into the pot is that the decisions are all being made by federal regulators."
Even with the influx, states are still raising the majority of their own money, and they can certainly set their own course on state-level programs such as prisons and parks. But with federal dollars making up a much larger share of state revenues, it is true that the pipers out of Washington are going to be calling the tune much more often than they have in the recent past.
The Sheriff Has His Priorities
Obama's instincts are not those of a centralizer. Nearly every state and local government lobbying group readily concedes that outreach and access are much improved on his watch. They say that his administration attempts to take a collaborative approach whenever it can, with a special interest in reshaping the interaction between the federal government and metropolitan regions. The Office of Management and Budget has sent guidance to all federal agencies instructing them to find ways to work together on joint programs affecting regions. The White House regularly convenes working groups that attract top-level agency officials to address these questions, while also looking for ways to encourage more cooperation among often-squabbling local jurisdictions within regions. For instance, the Housing and Urban Development Department has been sharing its expertise in working with local governments with departments such as Energy and Transportation, as well as agencies such as the Environmental Protection Agency.
"You do want the federal government to say, 'These are the goals,' but not to dictate the specifics," said MarySue Barrett, president of Chicago's Metropolitan Planning Council. She summarizes the White House position this way: "We're going to set the standards, and here's some help to meet those standards, but we're not going to tell you how to do it."
Obama went so far in May as to issue a memorandum directing federal agencies not to pre-empt state and local laws when they didn't have to (although he certainly didn't diminish their authority to do so). His administration has deferred to lower levels of government in areas where it was conducive to constituency politics. In October, the Justice Department announced that it would (in most cases) not prosecute suppliers of medical marijuana who were in compliance with state laws. Four months earlier, EPA signed off on a waiver long sought by California and 13 other states to regulate greenhouse-gas emissions from vehicles.
"This is an administration that doesn't take the states and locals as it finds them -- it has an agenda." -- Paul Posner, George Mason University
Like every administration -- and more quickly than most -- Obama's White House may have recognized that it needs state and local governments to carry out much of its program. But despite its care in consulting with them and in seeking ways to foster regional economic growth, this administration mostly treats state and local governments in just that way -- as a means for carrying out its own agenda.
State grant proposals are receiving an unprecedented level of dollar-by-dollar scrutiny not only from the operating agencies to which they apply but also from OMB and the Office of the Vice President. (Obama called Joe Biden the "sheriff" of stimulus spending.) States and localities are now required to supply much more information about how they are spending federal dollars. The stimulus law contained $250 million for enforcement, and the Government Accountability Office has sent auditors into 16 states to watch over their stimulus spending. It's a level of accountability that the administration clearly intends to keep up long after the stimulus runs out.
"This is a secretary and a president who believe strongly in evidence-based policy-making," said Erika Poethig, a deputy assistant secretary at HUD for policy development and research. "Part of that means evaluation, but it also means coming up with clarity around what the purpose of the program is. There's a high degree of commitment to that."
This approach may be most evident when it comes to education. The administration is spending record amounts on education, and it clearly expects states to get with its program when it comes to ideas such as lifting caps on the number of charter schools and using stand-ardized test data in evaluating teachers. "States were complain-ing under [George W.] Bush because they had all these education mandates with no funding," said David Wyss, chief economist for Standard & Poor's. "At least with Obama they're getting the funding to match the mandates, but the mandates are increasing."
In certain ways, education-reform activists are glad that Duncan is showing states a firm hand. Recent experience, they note, suggests that the federal government can require states to do certain things -- but it can't make states do them well. Bush's 2002 No Child Left Behind law required states to use standardized tests to ensure that a rising share of their student populations were proficient in language arts and math. But the law left it up to the states to determine what "proficiency" meant, and it's clear that many of them have gamed the system to guarantee that more of their students can pass.
The question remains whether education -- a classic example of a state and local responsibility that the federal government has been involved in for only 50 years -- is best run by an agenda driven out of Washington. "It's absolutely the case that the administration is taking enormous liberties with its ability to use emergency funds, especially the stimulus, to push states into policy adoption," said Frederick Hess, director of education policy studies at the American Enterprise Institute.
"If one believes that there's sufficient expertise and farsightedness in Washington, that the key is to cudgel these recalcitrant states into behaving, then I'm sure this is encouraging," Hess said.
"It so happens that I actually like what they're pushing states to do, but my concern is that this model of federal leadership is problematic. The question of federalism depends on whether one actually believes there is value in the checks and balances, and the states as the laboratories of democracy."
Alan Greenblatt, a freelance writer, covered state and local government issues at Governing magazine for nine years.
