The case before the U.S. Supreme Court regarding the health-reform law has raised anew questions about the boundaries of federal power. Much of the case centers on the Affordable Care Act's individual insurance mandate, but the states' attorneys general also have raised the issue of whether the law exceeds federal authority by mandating expanded coverage of the uninsured under Medicaid.
In recent years, the court has placed limits on the use of federal power to directly order or "commandeer" the states in achieving national goals, but it has been reluctant to limit grant conditions and the spending power in general. The argument is that state grants are voluntary agreements freely entered into by state governments, diminishing their coercive nature.
Thus, it is not surprising that most federal mandates are carried out not by direct order but by conditions of aid. When one looks at recent controversies between federal and state governments, it is those grant conditions that states protest most vehemently, such as those accompanying No Child Left Behind, Medicaid mandates predating the health-reform law, and emergency management requirements.
The state plaintiffs argue that at some point grants are no longer voluntary and that the new Medicaid health-reform mandates have become equivalent to direct commandeering of states by federal officials in the service of national goals.
This is not the first time the Supreme Court has taken up this issue. In ruling that the federally mandated drinking age of 21 passed constitutional muster, for example, the court recognized that there might be some point where a grant condition became too onerous, but decided that the drinking age was not one of those. For one thing, states were at risk of losing only 5 percent of their federal highway money. By contrast, the health-reform law potentially puts at risk not only new Medicaid funding but existing funding as well.
At what point does pressure become coercion? This question was raised by the court years ago but never resolved for grants. If the court does overturn the Medicaid mandate, it would have to carefully delimit the boundaries of its ruling, lest the conditions of nearly all grants unravel and lose their legal force.
Here are some important questions to think about in determining the coerciveness of grant conditions, should the court go there:
• How large is the grant as a share of state or local budgets? The larger the grant, the more untenable it becomes to hold that state and local participation is truly voluntary. Medicaid is the largest federal grant received by each state.
• What is the share of state or local spending on grant conditions as a share of their total budgets? This is more a measure of the impact of federal matching, maintenance-of-effort and other grant conditions on the fiscal sovereignty of state and local governments. The states' matching for Medicaid alone now exceeds 20 percent of state own source budgets, crowding out other state priorities in the process.
• What share of the grant is at risk from violating grant conditions? Grant penalties range from total elimination of funding to reduction of just a portion of the grant.
• How related is the grant requirement to the overall purposes of the grant? While program-specific provisions are directly related to the grant, some federal programs use grants as a lever to enforce compliance with requirements for other unrelated federal mandates. For example, state or local violations of federal air-quality standards can trigger withholding of infrastructure grants from Washington.
The court is likely to consider formal grant requirements such as those above to help resolve the coercion issue. But it should also consider the informal ways that state and local governments can protect their autonomy during the actual implementation of grant programs. For instance, many federal grant policy goals reflect the program initiatives of numerous state and local governments that set the agenda for federal action. Moreover, state and local governments enjoy leverage to push back and limit the scope of federal mandates. Grants and mandates alike are only as powerful as the political will to implement them. States and localities can and do exercise several sources of influence, including:
• An information monopoly: The state and local grant recipients know whether and how they are complying with federal rules and can selectively present information to make their case.
• A beneficiary monopoly: Penalizing state and local governments for failing to follow federal rules would also penalize the intended beneficiaries of the programs themselves.
The case before the Supreme Court highlights the need to reassess the boundaries of our federal grant system. Should the court choose to enter this thicket in the health-reform case, it would have to promulgate its own principles on grants.
However, a dialogue on the coercive features of grants has been a long time in coming. The Unfunded Mandates Reform Act generally exempted all grant conditions from its scope, thereby just postponing the time when these issues would be addressed. It is important for the experts and managers in the intergovernmental community to seek consensus about these issues. It is unfortunate that the court will not have the benefit of that community's thinking as it turns to these critical issues.