This current situation is a unique one for state and local budgets. Unlike previous recessions where revenues declined as part of an economic downturn, state and local revenue is fairly stable. Instead of a revenue problem, these governments now have an expense problem where a federal retreat would potentially create a dramatic growth in expenses for their existing programs. This is particularly problematic because the federal government covers about one-third of state expenses every year (and these funds often flow down to local governments).
This circumstance is particularly novel because when state and local governments face major financial shocks, it is usually the federal government that steps in to support them. For example, during the COVID-19 economic crisis, Congress provided $350 billion to help governments across the country shore up their finances. But this time, rather than helping to solve state and local fiscal challenges, the federal government is their source.
As a result, these governments may have major budget gaps to fill in the coming years and a series of tough decisions about whether they want to continue services that have traditionally been supported by the federal government. In most cases, continuing such services will likely require raising taxes or making cuts in other areas.
However, without more certainty about the fate of specific federal funding streams, state governments do not have sufficient information to act in many cases. Nonetheless, there are immediate steps that they can take to be prepared for making budget decisions when the effect of these federal funding changes becomes clearer.
How to Gather Data
For example, the U.S. Department of Agriculture (USDA) provides school meals to 30 million students each year with about $35 billion in federal funds. USDA has already cut $1 billion this year and has made additional cuts in certain states, including the funding that supports administration of the school meals. If more of this funding disappears, state and local governments will have to decide if they can continue providing meals to all, some or none of these students.
Using data can help them make decisions about how state or local funding could be used to continue the program. For example, knowing which students receive federally supported school meals, what schools they attend, and their families’ income brackets is the basis for making decisions about state or local support for the program. State and local governments could use this information to decide if they would provide meals to only the children in the lowest income brackets, in certain parts of the state where there are higher levels of overall food insecurity, or perhaps in areas where other services (like food banks) are not available.
Regardless of the specific programs and the decisions state and local governments will make, having this kind of data about the scope of potential gaps should be the starting place for the decision-making process about which programs they would consider supporting with non-federal funding. Data can also be used to identify which state or locally funded programs might be affected by these changes (for example, six states provide additional state funding to support school meals).
Identifying the Most Impactful Programs
While using data can help state and local governments make informed decisions about their programs, they will likely have to cut at least some programs in the face of federal funding reductions. When faced with these difficult decisions about which programs to reduce or eliminate, examining the evidence about the impact of various programs is another important tool. Using existing research, governments can identify the most impactful programs that should be supported with their own funds in any scenario involving federal funding reductions.
Although a number of states have taken important strides to use research in their decisions by embedding evidence in their budget processes, too often state and local decision-makers lack a meaningful knowledge of the existing research about their programs. More state and local governments should be building this kind of capacity within budget offices, as well as forging stronger connections to agencies that often have a deep and nuanced understanding of the programs they administer.
Fortunately, the federal government itself provides numerous research clearinghouses to help state and local governments identify the evidence of effectiveness for many of the programs where they receive federal funds. And many states have developed helpful tools to assist in identifying the impact of programs, such as the Minnesota Inventory, which supplies effectiveness ratings for different program interventions based on the evidence. In Tennessee, a similar program inventory provides insights into the evidence for various state programs. Other state and local governments would be smart to follow these examples.
Information from clearinghouses reveals, again, that school meals are a good illustrative example of the type of program where state and local governments would want to seriously consider ways to continue important aspects of the program even absent federal funds. A wide body of studies indicate that school meal programs reduce food insecurity, increase academic engagement and reduce disciplinary issues in schools. For example, a 2019 evidence summary concluded that there is “strong evidence that having access to school breakfast programs (SBP) increases academic engagement and achievement.”
Based on this research, governments might decide to shift their own state or local government dollars to support school meals programs if federal funds were to disappear. In addition, where states or local governments do not have sufficient funds to continue the program with their own funds, they can also use evidence to identify potentially less impactful state-funded programs that might be reduced or eliminated to free up funds to support other programs that have proven results.
Innovating to Increase Efficiency
While state and local governments face a potentially dire situation with dual threats to their budgets and their services, there is also a potential silver lining: Governors and mayors may have an opportunity to improve the efficiency of these programs. If federal funds were to disappear then the federal rules for administering these programs would also go away. Without the strict federal requirements that dictate how programs are delivered, state and local governments would have more flexibility to deliver services in ways that meet the needs of their residents. This could mean that they could employ new and innovative program models that increase efficiency.
For example, there are hundreds of pages of federal rules for the school meal program. Many families, for example, are required to fill out a school meals application form in order to qualify for free or reduced meals. This application requirement can be burdensome for families, schools and governments. State and local governments using their own funds to administer a school meals program could eliminate the need for application forms to increase efficiency.
Federal rules also set standards for the program’s income levels, reimbursement rates, nutritional standards and use of local suppliers, among other things. While states would likely want to keep many of these important requirements, there are some areas where changes could be made to increase efficiency and impact if these rules no longer applied.
While state and local governments face great uncertainty about their federal funding, it is clear that reductions in federal programs will increase potential expenses and leave service gaps for communities across the country. Despite this lack of clarity, state and local governments can be positioned to make the best possible decisions by ensuring they have key data for each of their programs readily available and that they understand the existing evidence about the effectiveness of the programs at stake. Using data and research will allow them to make informed decisions and identify opportunities to innovatively restructure programs where the complex administrative rules imposed by federal grants are no longer a consideration.
Jed Herrmannprovides budget and program implementation consulting services to state and local governments. He previously served as a senior official at the U.S. Treasury Department and the White House Office of Management and Budget, designing and implementing trillions of dollars of programs for state and local governments.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
