2011 May Mark the End of Federal Aid

The modern era of federal aid championed by President Nixon and his “new federalism” program draws to a close.
by | October 2011

When Congress finally staggered to the finish line in August with its debt deal, the financial markets weren’t the only players who recoiled. State and local government officials worried they were about to get slammed.

And when Standard & Poor’s voted no-confidence in the deal by downgrading the federal government’s debt, the worries grew. New Jersey found itself knocked down a notch, joining Kentucky and Michigan at Fitch’s AA-, just ahead of California and Illinois. Manassas Park, Va., a small Washington suburb, fell five notches in the Standard & Poor’s rating.

But a careful examination of the situation by Josh Goodman of Stateline.org showed that the debt deal wasn’t nearly as bad for state and local governments as everyone feared -- at least in round one. Grants for entitlements (mostly for Medicaid, the Children’s Health Insurance Program, welfare and food stamps), which constitute two-thirds of all federal aid, are off the table. Congress’s new bipartisan “super committee” has to find more cuts, but heavy betting is that programs for the poor will escape in this round. The result is likely to be far less damaging to federal grants.

In the long run, however, 2011 will probably join 1978 and 1987 as one of the major post-World War II turning points in federal aid to state and local governments.

First, let’s look at 1978 and what made it a turning point. In the two decades prior, discretionary grants tripled from 1958 to 1968, and then tripled again by 1978, even after accounting for inflation. President Richard Nixon may have been one of the best friends that state and local governments ever had, with his “new federalism” programs that created block grants for job training, health, social services and community development. In 1972, the feds even created a general revenue-sharing program that relocated Vietnam War military spending to state and local governments to spend with very few strings attached. The Ford and Carter administrations maintained the momentum.

Those were the salad days. The 1978 budget, in fact, was the high-water mark of discretionary federal aid, not matched since (except by the short-term infusions of cash through the stimulus program). Since the late 1970s, federal aid has been the story of rising spending for entitlements and declining support for everything else.

That made 1987 the next important point in federalism: It was the first time federal grants for entitlements exceeded discretionary grants. Congress snuffed out general revenue sharing in 1986, and the remaining block grant programs were either killed or far more tightly regulated. Meanwhile, spending for Medicaid grew rapidly, as the program began covering more items and nursing home expenses soared, with more seniors unable to afford the enormous cost of long-term care. With this shift, intergovernmental finance changed forever.

Remember these years: 1978, the high-water mark for traditional federal grants, and 1987, the crossing point for entitlement grants. To these benchmarks we can now add 2011, a debt deal that puts federal aid on the block.

There are three reasons for this. First, as Congress combs through the budget, the long list of federal discretionary grants will be ripe targets. Federal aid for community development, housing, job training, social services and similar programs has been under attack for a long time. Faced with inescapable pressures to protect other discretionary programs like air traffic control, airport security, food safety and defense, these programs are more vulnerable than ever. The automatic trigger would nick them if the super committee fails to agree on spending cuts; if the super committee avoids the trigger, the cuts are likely to be far greater. There doesn’t seem any way discretionary grants can escape, especially as we roll forward toward the big targets looming down the road.

Second, all roads to a long-term deficit solution run through entitlements and, especially, health care. There is overwhelming consensus that we need to rethink Medicaid and the underlying federal-state deal for funding it. Medicaid escaped in the first round, but it can’t remain on the sidelines for long. Some state officials are proposing a grand deal in which the feds trade a pot of money for state control of the program. They think they can make the program work better without federal regs and oversight. Looking down the road at the soaring cost of the program, the feds might eagerly take that deal. But there’s no escaping fundamental -- and painful -- decisions on just how we’re going to rein in costs for health care and nursing homes.

Third, the massive economic instability that aggravated this most recent round of budget battles will likely be with us for a while. State and local governments have largely been collateral damage, with growing responsibilities for services supported by a tax base weakened by plunging real estate, uncertain consumer sales and stagnant wages. The 2011 debt deal will make it far harder for the feds to step in with help during future economic downturns.

We’ve faced tough economic challenges before, and we’ve faced big shifts in intergovernmental grants. State and local governments have never had to tackle both together. This time, they’re increasingly likely to find themselves on their own.

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