Is Federalism Breaking Down?

Bad intergovernmental relations have the United States headed for fiscal disaster.
February 2015
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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’s the most important issue that the 2016 presidential candidates won’t be talking about? A very good bet is the train wreck facing federal-state-local finances. There are lots of mega-issues on the table -- international crises, immigration and health reform battles, and economic growth -- but whoever wins won’t be able to duck the big intergovernmental issues lurking down the tracks.

The good news is that state and local governments have recovered remarkably well from the gruesome economic collapse in 2008. Tax revenues in most states have recovered to pre-recession levels.

The bad news is that the collapse shredded the national consensus on how our federalism balancing act ought to work. As Paul Posner and Timothy Conlan from George Mason University point out in an important and far-reaching study on federalism and intergovernmental relations, we’ve emerged from the downturn with a “polarized federalism.” Politics in the states is splitting along partisan lines, with one-party control of the legislature and governorship on the rise and sharp fractures developing between Washington and state capitols. Some states, like Kansas, came out of the recession determined to cut taxes and spending. Other states, like California, have increased taxes and broadened government’s scope.

For a generation, there was an implicit deal on intergovernmental financial questions. The policy battleground would be in Congress and, once the deals were struck, most states would more or less move down the same tracks. That implicit deal is over. By Posner and Conlan’s count, 21 states refused to expand Medicaid coverage as part of the Affordable Care Act, while 27 states and the District of Columbia opted in.

The Great Recession and the rise of partisan polarization have broken the foundation on which fiscal federalism has operated since World War II. And this isn’t just high-level policy polarization in state capitols. A September 2014 Reuters survey found that 1 in 4 Americans want their own state to secede from the union, an upswell fueled by contempt for politicians and concern about the sluggish recovery.

Why does this polarization matter? After all, a case could be made that the great genius of American federalism is allowing the states to chart their own course. Three big issues explain why.

One is the crumbling of the quiet consensus on the federal government’s traditional role in stabilizing big economic swings and equalizing differences in fiscal capacity among the states. That could make it much harder for the feds to step in if another economic downturn cripples state finances. In the meantime, it could also make it harder to sustain the redistribution from richer states to poorer ones that lies behind much federal aid. Some of the states opting out are net winners in this game. But if they opt out of these programs, inequality across the country could increase.

The second is looming state and local infrastructure problems. Last year’s spectacular water main break on Sunset Boulevard in West Hollywood was just a sample of problems brewing underneath roads around the country. The Interstate 35 bridge collapse in 2007, which crippled traffic in Minneapolis and killed 13 people, is a warning about the 1 in 9 American bridges that are structurally deficient. These problems will demand attention, either through a planned program of renovation in advance or a hurried response to the inevitable disasters to come. A go-it-alone approach could prove risky for many states and cities.

And the third is the huge tangle of issues lurking in Medicaid. Tired of escalating costs, some governors have pushed to roll the federal program aimed at funding medical care for the poor into a block grant, to give them more flexibility. Many of these governors aren’t expanding the program, leaving some citizens with a “coverage gap.” The Kaiser Family Foundation found significant numbers of families with incomes too high to be eligible for Medicaid and too low to receive the program’s tax credit. The states will have to figure out what to do to plug the gap -- or to deal with even more financial and social problems flowing from the uninsured.

An even bigger challenge is the stress that aging baby boomers will put on the Medicaid system. From 2010 to 2020, the population over the age of 65 will increase from 40 million to 55 million Americans, and 7 million Americans will join the “oldest old” of those over the age of 85. They will inevitably place more strain on Medicaid, which covers the cost of medical and nursing home care for citizens who can’t afford it. Nearly one-third of the program’s budget goes to long-term care for the disabled and elderly, and the program pays 40 percent of long-term care costs in the country. Many about-to-be-retirees lost a good chunk of their nest egg in the economic collapse, and others will outlive their savings. That will necessarily squeeze state budgets.

This “fend for yourself” federalism, as Posner and Conlan put it, will make it easier for presidential candidates to opt out of discussing these issues in the 2016 campaign. But they won’t go away. These issues are sure to collide further down the tracks before the 2020 campaign begins.