A Time for Strings

We need to stimulate state and local economies. We also need to keep close watch on what we're stimulating.
February 1, 2009
Donald F. Kettl
By Donald F. Kettl  |  Columnist
Former dean of the School of Public Policy at the University of Maryland, and a nonresident senior fellow at the Volcker Alliance and the Brookings Institution

What do we really want to accomplish with the money that is about to come pouring out of Washington?

State and local governments would certainly like cash without conditions, but that isn't going to happen. After the first $350 billion of federal bailout money went to banks that proved reluctant to tell anyone what they did with it, policy makers are in no mood to write ever-bigger checks with no restrictions.

Of course, states and localities aren't in the habit of turning down money from Washington just because it has a few strings attached. President Nixon's general revenue-sharing program in 1972, although pretty loose in what it allowed local governments to spend the money on, required them to audit their books, which many had never done before. Thousands of local governments took federal funds - and conducted their first-ever financial audits.

So there will be strings on the stimulus this time. The question is what they might be. Here are some ideas from the left, center and right.

From the left, transparency rules. While he was in the Senate, Barack Obama's biggest contribution to government management was his sponsorship (along with Senator John McCain, among others) of the USASpending.gov Web site. It provides one-stop information about where federal contracts, grants and loans go. Transparency is likely to be one of the management cornerstones of the Obama administration.

Thus, if the stimulus package gives governors cash to improve the states' financial stability, the feds could reasonably ask them to document in real time what effect the emergency aid is having on their fiscal condition. If mayors get money to repair infrastructure, the feds could ask them to chart improvements in the condition of their bridges and the amount of water saved by fixing sewers and mains.

There's no question that state and local governments are facing a genuine emergency. The financial meltdown struck them just as expanded pension and benefit obligations were hitting their budgets. The costs of health care alone have produced staggering burdens. This is not a problem that will be solved quickly, but we'll be able to have a smarter debate about what to do in the long run if we have a better sense of what effect the stimulus package produces in the short run.

From the center, the talk is about coordination and cooperation. Most of the options on the table for stimulus money - expanding Internet access, promoting affordable housing, strengthening local schools, supporting medical assistance and social service programs, and improving infrastructure - deal with problems that cross state and local boundaries. As Brookings analyst Bruce Katz has pointed out, when it comes to improving transportation, we need strategies "that transcend state borders." The feds could set aside a big chunk of cash for only those governments - state and local - that agree to work and play well with others across those borders.

On the right, the market is the answer. The meltdown has crippled the municipal debt market, where state and local governments are paying big interest premiums to borrow - when they can borrow at all. Lots of important proposals, such as Pennsylvania's plan to lease its turnpike in exchange for up-front cash that could be used for infrastructure improvement, have taken big hits.

The feds could use some of the stimulus money to shore up the municipal debt market and facilitate deals that private investors might fund if things weren't so unsteady. With this approach, the feds wouldn't just be shoveling money out the door. The markets would be deciding which deals made the most sense.

Of course, all three strategies share one big problem: The goal of the stimulus is to spend the cash as quickly as possible. The more rules there are, the longer it will take for the money to help buoy the economy.

But as the money cascades out the door, it's worth mulling over what we really want to stimulate. The underlying state-local fiscal problems won't evaporate when the economy bounces back. We've got the chance now to get a running start on the big, lasting puzzles we face. We ought to take advantage of it.