Congress has just passed a stimulus bill of spending increases and tax cuts totaling almost $800 billion to get the economy moving again. State and local governments are the primary conduits for the spending programs, with nearly $300 billion of additional grant funds for specific programs and for general purpose fiscal relief. The funding is truly unprecedented. For perspective, total federal assistance to state and local governments was $443 billion in fiscal year 2007.
Certainly, this bill will significantly reduce the fiscal gaps facing state and local governments. For instance, Virginia estimates that the prospective aid it will receive will cover about half of its projected $3 billion deficit.
However, before states and localities celebrate, it is important to think clearly about the implications of this legislation. First, the new gift of federal largess does not come without any strings attached. States must maintain their own spending for elementary, secondary and higher education at their fiscal year 2006 levels to get the federal education stabilization fund money. California officials indicate that their deficit is so deep that they may have to cut their own education funds below these mandatory levels for the coming year and lose out on the federal funding. Other categorical programs, such as special education, have even more stringent maintenance-of-effort provisions, requiring states to continue their spending at prior years' levels -- a real problem for states like California or Nevada that are particularly hard hit by the recession. The new fiscal stabilization grant would foist new education requirements on the states for high quality teachers and other reforms, positioning the U.S. Department of Education with more centralized policymaking authority.
Second, state and local governments will be on the hot seat as never before. The stimulus legislation is accompanied by an unprecedented wave of new accountability requirements and provisions. While geared toward promoting public trust and confidence, and motivating those on the front lines to improve the efficiency and quality of services, the new information could generate a wave of second-guessing and blame shifting, with state and local officials as the possible target.
Indeed, the U.S. Office of Management and Budget has already developed more than 60 pages of guidance for federal agencies to provide accountability and oversight for the funds, barely a week after the ink had dried on the new legislation. The stimulus bill itself directs more than $350 million to hiring new staff for the Government Accountability Office, the inspectors general, and a new board of federal senior managers and IGs to oversee the accountability effort. Even the Council of Economic Advisers will play a role, with quarterly reports tracking the economic impacts of the funds.
The accountability provisions for this legislation are unusually centralizing. Detailed reporting standards will be articulated requiring state and local governments to report early and often on program activities and results in uniform ways. Care is being taken to ensure that the stimulus funds are tracked separately to avoid commingling with other federal and state or local funds. Mandatory posting of grant awards and individual projects to a new Web site, Recovery.gov, will promote public transparency.
Much of this is understandable. After all, the stakes are high for the economy and the new Administration. It is important that the funds create new jobs quickly. To carry this out, state and local governments will be accountable not only for the normal outputs for grant programs -- to make sure that federal laws are carried out and that programs achieve results -- but also to document that the programs have achieved their job creation goals.
As these new accountability measures begin to take effect, it is likely that many stories will surface about how state and local governments are using or misusing the funds. It is difficult to imagine that there won't be some problems that will surface, given the size and speed with which the programs are being deployed. One challenge that will arise is how to place these findings in context. Do they represent isolated incidents that can befall any large enterprise, or are they indicative of a more systemic failing in federal, state or local government delivery?
A second challenge will be to trace the impacts of federal funds as they travel through the labyrinth of our very complex, multilayered federal system. Tracing the actual use of federal funds becomes very difficult for programs when federal funds are designated for broad purposes for programs in which state and local governments are already providing the major share of funding. Particularly for the $100 billion in general fiscal relief, such broad-purpose federal grants become "fungible." Figuratively, tracing the actual uses of federal grants becomes as difficult as tracing the impact of pouring a thimble full of water into a swimming pool. The funds will undoubtedly have a broad fiscal impact, but it will be to bolster the broader fiscal position of the states, not to finance individual programs.
A third challenge will be how to understand the impact of stimulus funds when their primary use is not to create new services or outputs but rather to prevent a bad situation from getting worse as the recession deepens. Audits alone are well suited to capture factual evidence of programmatic impacts, but not to assess the counterfactual -- what would have happened in the absence of these new funds to state and local services? It will not be easy for federal elected officials to defend the use of scarce federal funds by saying that their principle impact was to avoid an even more calamitous outcome. They will need to know specifically what cuts in services and jobs were avoided thanks to the federal stimulus dollars.
State and local governments need to avoid replacing the country's banks as the new national scapegoats if the recovery effort gets bogged down. This means that governments have to take proactive steps to make sure that accountability is built in at the front end of these programs. The following measures can help state and local governments keep one step ahead of the accountability process:
o Work proactively with federal officials to ensure that reporting and data tracking incorporate state and local needs and concerns.
o Establish uniform reporting across the states for those areas where federal guidelines do not capture information; this will be important in establishing a definitive state and local administrative record.
o Develop public Web sites and other steps to ensure that the public can gain easy access to information on stimulus programs within each state.
o Actively engage local governments, nonprofits and other sub-recipients of stimulus funds to ensure that proper grant and contract management procedures are established and followed.
o Develop state-specific annual reports for stimulus programs and projects to document their impact on program results and job creation.
Accountability in our complex federal system should ideally be a shared enterprise. The federal government cannot hire enough managers and auditors to check up on the use of funds for such a wide-ranging initiative. The active involvement of the many managers in state and local governments is critical to ensuring that the new stimulus plan meets the high expectations that so many of us hold.
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