Gone With the Windfall

States are finally getting their federal care package. Local governments would like to see some of it.
January 2004
By Jonathan Walters  |  Senior Editor
A Senior Editor of Governing, Jonathan has been covering state and local public policy and administration for more than 30 years.

As states were hemorrhaging red ink last spring, they were offered a modest transfusion by the federal government--$20 billion in so-called "fiscal relief" funding. The special allotment was included in President Bush's huge tax overhaul package, added at the insistence of a group of moderate Republican senators sympathetic to the states' collectively dismal budget situation.

But while there might have been general sympathy toward states at the time, there was also a great deal of discussion about what states would do with the money. How much would actually go to fiscal relief? Would any of it be shared with the states' fiscally stressed partners in government: cities and counties?

These were questions that couldn't be answered at the time, because when the $20 billion deal was cinched, most states had written their budgets for the upcoming year--or biennium. Now, however, as the next state budget cycle arrives, the answer to the windfall mystery is becoming a little clearer.

The destination of half the windfall is no mystery at all. Under the terms of the law, $10 billion has to go directly to state Medicaid programs. But that still leaves $10 billion in discretionary cash that is being divided among states according to population. So it's of some importance how that discretion is exercised.

Connecticut, which will ultimately get $116 million of the $10 billion, tipped its hand early. As part of its budget deliberations last year, the state passed a temporary six-month increase in its estate tax (creating what one wag described as a "don't-die-yet" tax). The increase, however, was to go into effect only if Congress failed to come through with federal funds. When the fiscal relief law was enacted, the temporary tax disappeared. That seems a reasonable enough use of the money.

There are some less reasonable ones. Florida, for example, plans to spend $310 million--more than half of its discretionary pile--to lure a huge biotech firm to Palm Beach County. There are those even within the state who point out that this sort of smokestack chasing--or, to be more accurate, test-tube chasing--wasn't exactly what states told Congress they needed the money for.

While it might be tempting to accuse Florida of breaking the federalism faith, though, there were in fact few strings attached to the second $10 billion. Three general parameters were laid out for how states could use the money, says Molly Stauffer, who worked on the relief bill for the National Conference of State Legislatures. The relief funds had to be spent, Stauffer says, either on essential services, coverage of unfunded federal mandates, or expenditures "of a type that existed in the most recently approved state budget."

While some might regard using hundreds of millions of fiscal-relief dollars for business recruitment as a generally bad bet, it does seem to satisfy one of the three requirements: It is an expenditure similar to ones that were in the budget already. On top of that, Florida can argue that a biotech subsidy comports with the spirit of the law because it is designed to put the state on a more fiscally sound footing. The bottom line, says Stauffer, is that Congress didn't want states spending the money on brand-new programs. Almost anything else is likely to pass the test.

Florida's biotech gamble appears to be something of an anomaly when it comes to allocation of the fiscal relief money. Early indications are that most of the states will be directing the bulk of their discretionary windfall toward basics such as education, corrections and health.

But what's worth highlighting here is what states aren't spending the money on: fiscal relief for localities. When the legislation was first being worked out in Washington, it included direct federal allocations to local governments as well as to states. The local provision didn't make it into the final version of the law. So far, only a handful of states have lived up to the spirit of the original bill and passed some of their windfall along to their local government partners.

Among the more generous states is Washington, which is sharing some of its $200 million with towns, cities and counties. Some 134 cities and 16 counties will split $10 million over the two-year life of the relief program, 5 percent of the total that the state is receiving.

Given the modest size of that local payout, "sharing" might be an overly generous term for what the state is doing, says Jim Justin, head of government affairs for the Association of Washington Cities. "Don't get me wrong," says Justin, "we appreciate crumbs, but crumbs is what it is when compared to what localities would have received had Congress stuck with its original plan." Had the original language gone through, Justin thinks, local governments in Washington State might have gotten as much as a combined $80 million over two years.

Certainly states should have wide latitude in how they distribute their relief money. But it is ungracious at best, and negligent at worst, not to share the money with local governments. After all, it was an effective local coalition that helped them get the windfall in the first place.