The Top 5 State-Local Issues Facing the Feds

In the next four years, state and local governments are going to be at the very front of domestic policy -- especially on issues like health care where the feds have gotten most of the headlines.
by | December 2012

Now that President Obama is prepping for his Jan. 21 swearing-in, he may want to give some thought to the big federalism issues lurking in the background. Let me tee up the top five challenges on the national agenda.

First is Obamacare. Although health care was perhaps the No. 2 issue in the campaign, behind jobs and the economy, the critical role of the states and how to pay for health reform received less attention. Mitt Romney savaged Obamacare as a “trillion dollar federal takeover of the U.S. health-care system.” In reality, the states are the epicenter of the program, with a complex web of federal guidelines and a bucket of incentives that encourages states to create and manage their own private insurance marketplaces. Similarly, Romney would have given “each state the power to craft a health-care reform plan that [was] best for its own citizens,” with Obamacare-like protections for pre-existing conditions and guarantees that children could remain on family health plans until age 26.

Obamacare depends on figuring out how to create health exchanges and make them work -- and how the feds will step in if the states don’t step up. Romney’s plan had many of the same elements, but without the crucial state mandate. Moreover, both programs imagine incentives, but neither side knows how to pay for them. Some Republicans are thinking they could stop health reform in its tracks by defunding it, but that could create bigger financial problems for the states. In the next few years, the gap between promises and funds could matter much more than the differences between the parties’ positions.

The second challenge is Medicaid, the sleeper health-care issue in the campaign -- that is, for everyone but state officials. Obamacare expanded Medicaid and mandated that states expand coverage too. The Supreme Court struck down the latter requirement, and left it up to the states to opt in or out. Romney thought the best approach was converting Medicaid into a block grant, which would have led to questions of just how much of a federal subsidy Medicaid would need.

But the biggest question by far is how to fund the nursing home costs of baby boomers. Medicaid pays for two-thirds of all nursing home residents, and that could grow as boomers live longer and outlive personal savings that were hammered by the collapse of so many 401(k)s. A block grant debate would reignite the big Obamacare battles, but it would only scratch the surface of the Medicaid program’s long-term questions.

Third is education. Obama and Romney agreed on local flexibility. Obama championed his Race to the Top plan, while Romney supported tough No Child Left Behind standards and suggested the federal government should have less control. On higher education, where Americans are increasingly worried that the ballooning cost of college is becoming unsustainable, Romney and Obama agreed that college was important -- and so was controlling its cost. However, neither candidate had any real plan for how to cut costs or finance their larger visions for higher ed. That’s a real problem for state and local governments scrambling to cover rising tuitions and expenses, and college students hoping for a boost in federal aid.

The fourth challenge is whether or not to issue another stimulus. State and local governments are still struggling to recover from the devastating blow the Great Recession inflicted on their budgets. The Rockefeller Institute of Government reported that in August state revenues had finally returned to pre-recession levels, but the housing collapse continued to plague property tax revenues. These continuing budget problems are a drag on the recovery, and the loss of state and local government jobs has contributed to unemployment. But another round of federal stimulus would be politically unpalatable.

Fifth is the role of state governments as incubators of presidential candidates. The 2016 presidential campaign started long before the 2012 race ended, and the early handicapping puts governors at the head of the pack.

Among the Democrats, there’s New York Gov. Andrew Cuomo and Maryland Gov. Martin O’Malley, along with mayors Antonio Villaraigosa of Los Angeles, Cory Booker of Newark, N.J., and even San Antonio’s Julian Castro, whose convention speech earned him kudos and national attention.

Even more Republican governors are on the early short list, including Chris Christie of New Jersey, Scott Walker of Wisconsin, John Kasich of Ohio and Texas Gov. Rick Perry. (Not to mention former Florida Gov. Jeb Bush.) The brutal inside-Washington budget games over the next few years will give the army of outsiders -- both Democrats and Republicans -- a strong shot in 2016.

How does this top five list add up? In the next four years, state and local governments are going to be at the very front of domestic policy, even for policy issues like health care where the feds have gotten most of the headlines. There’s enormous room for innovative and entrepreneurial state and local action, but little (if any) prospect of federal cash. Clearly, the future belongs to the bootstrappers.

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