How Washington Boosts State and Local Budget Deficits

Report Budget and Spending

How Washington Boosts State and Local Budget Deficits

July 31, 1992 28 min read Download Report
Andrew Cowin
Distinguished Fellow

(Archived document, may contain errors)

908 July 31,1992 HOW WASHINGTON BOOSIS STATE AND LOCAL BUDGET DEFICITS INTRODUCTION while Americans for many years have been accustomed to reading stories in the press about huge federal budget deficits, more recently they have seen news stories lamenting record state budget feficits as well. In 1991, t h e combined deficits of 31 states totaled over $30 billion. New York and California alone accounF for $19 bil lion of that amount. Local governments are suffering similar budget mblems. Ne&rly 40 peynt of all counties with populations over 100,OOO faced bu dget shortfalls in 19

91. Cities also were affected. Bridgeport, Connecticut, almost filed for bankruptcy and Philadelphia, Pennsylvania, found its credit rating lowed to junk bond levels.

While some state budgets show improvement this year, the underlying bblems re main.

Some analysts claim that these record deficits occur because state taxes are too low.

Yet three of the five states With monster deficits, New Y k, California! and Connecti- r cut, axe also among the top ten states in per capita taxes. other analys$ poiit to a high rate of spending as the cause of deficits, and this indeed seems to sipcam E ight of the ten biggest spending states in the 1980s faced deficits in lF1.

Harming States. This year, many states used accounting gimmicks, pgher taxes and some spending restraint to trim their deficits. But budget cut debates often have fo cussed on poli ce, teachers, and essential services. And in the long run, Gher taxes I 1 2 3 4 he Sad State of the States Business Week, April 22,1991, p. 2cl. Also see "Sta~-Local Fi Rethinldng Service Delivery at Taxing Authority The Fiscal Newsletter, March/April1992 , p. 1.

National Association of Counties, County Government Budget Shor#aU Report, August 1991, p; 3.

Ad- Commission on Intergovemmental Relations, Significant Features of Fe&alh, Vol. 2,1991 pp. 164-165; Business Week, op. cit.

Stephen Moare State Spend ing Splurge: The Real Story Behind the Fiscal Crisis in State Governmat Cat0 Institute Policy Report, May 23,1992, p. 9. will reduce the productivity of businesses in these states, and the purchasing power of consumers, which will make local economies wor se and reduce tax =venues.

States therefore must find ways to restrain or cut spending in non-essential areas But one important obstacle to spending restraint largely has been overlooked: Federal government grants-in-aid and mandates essentially farce stat e and local governments to spend much more than necessary on everything from medical care to welfm to road building. A complex web of federal programs binds together the treasuries of federal state, and local governments As much as 25 percent of state bud g ets now comes from the federal government, and up to 60 percent of some state budgets is spent on joint federal-state programs. Among the most important joint programs are Medicaid, which will cost the states $44 billion in 1992, and various federal welfm mandates, which will add $15 billion to state budgets.

Most state and local officials welcome this financial assistance from Washington even though the money comes from the very same people who pay statk and local taxes. But the problem is that the money comes with strings attached Tb obtain it, the states and local governments must also spend funds, and abide by costly federal rules Federal government assistance leads to higher budget costs on the sites and local governments through two principal mechani sms: grants-in-aid and direct mandates.

Grants-in-ald provide funds to the states to achieve certain f4 ends. The states themselves must contribute a certain amount of their own funds for the project in question and abide by federal guidelines and regulati ons. Socalled block grants which combine money for several specific programs within one large, more flexible grant, impose looser constraints on the states. For example, the Social Services Block Grant requires states to use funds to help prevent child ab u se and to support emer gency food and shelter programs, but does not prescribe exactly how the state must do this. Other grants, such as federal Medicaid funds or drug treatment grants, place very strict requirements on how the states must spend the funds .

Thm are currently over 500 grants-in-aid programs to states and lochties. The total cost of these programs to the federal government has grown from $10.9 billion in 1965 to $171 billion this year. Estimates for total state costs run as high as $75 billio n? The cost to the state and federal governments combined of Medicaid mandates alone has grown from $5 billion in 1970 to a probable $104 billion this year, with spending for 1995 projected at $200 billion that also push up spending.

I I I Grants-in-aid b oost state spending in a number of ways J States accepting money for a construction project, for example, a subway, usu ally will be left to cover the projects huge operating costs 5 This includes the states contribution to Medicaid and Aid to Families wi t h Dependent Children, as well as other health, income security, and other social services programs. It also includes msportation, agriculhm, land management, conservation, environment, education, criminal justice, and occuI#ltional safety and health progr a ms 2 J States axe induced to spend more money than they otherwise .would, often driv ing up local as well as state taxes 4 When the federal government pays for a program administered by the states the states have little incentive to run the program effici e ntly 9 States axe induced to spend money on projects or programs that do not best serve the local interest Federal mandates simply require the states to provide certain services or p grams. Unlike grants-in-aid, they do not help the states meet the expens e s. These man dates include Cmsscutting requirements that are used to promote various fedaal policies through requirements on federal grants For example, any constru$ion proj ect receiving federal funds must pay union-scale wages because the Davis bacon Ac t requires prevailing wages to be paid, even if less exknsive labor is available, thereby driving up the cost Cmssover requirements that force states to implement federal policy in one area or risk losing funds, usually in a related area. Fq example, state s that fail to meet federal standards in licensing and testing school bus drivers could lose 5 percent to 10 percent of major federal highway grants Direct orders that simply require states to conform with federal &cy whether federal funds are involved or n ot. The Americans with Disabilities Act of 1990, for example, requires local governments to make all public tran sit accessible to the handicapped even when less costly alternatives are avail able that better serve the needs of the handicapped In another e xample, the costs to the states and localities of complying with the federal Cleh Water Act in the 1990s could reach $200 billion Partial preemptions that allow the federal government to override existing state regulations. Some federal health and safety s tandards fall into this caw wY The best way to cut the waste and the misallocation of resources caused by federal grants-in-aid and mandates is to return to the states the responsibilities that 8~e best served by local governments. What is needed is a cle a r delineation of responsibilities with the federal government handling national matters, such as defense and fareignre lations, while state and local governments provide police protection, local infrastruc ture, and welfare. As important, state and local g overnments should not rely on the fed eral government for their funds for exclusively local functions. Rather, the federal gov ernment, in turning over responsibility for certain functions to the states, also must cut taxes by a corresponding amount This w ill allow the states to raise taxes only enough to meet local needs, while cutting out the wasteful spending and inefficiency that come To lift the cmnt costly burden of federal mandates from the shoulders of the states with federal government mandates. I as well as to reduce federal spending and deficits 3 1) Congress should limit itself to legislating on national issues. Programs aimed at state and local problems should be returned to those levels of government 2) Congress should cut federal taxes by an a mount equal to the cost of programs it returns to the state and local governments, thexeby enlarging the tax base of those governments so they can pay for the programs 3) Federal mandates should be fully funded and administered by the federal gov ernment 4) U.S. Senators should be invited by their states le

slatures to explain the costs of newly proposed or enacted federal mandates to a special state joint legislative committee at the beginning and end of each session of the U.S.


The United States began as a federal system with state and federal governments shar ing powers and responsibilities. The division of responsibilities was cly and rational.

The shift in the past three decades toward federal involvement in nearly all areas of public policy has not been good federalism nor has it led in most instanyes to better re sults. Greater federal involvement has not raised education standards, hFld down health care costs, reduced traffic jams, or cut crime. States and cities BT~ experimenting with new ways to provide education, welfare, infrastructure and other public services.

Federal policy makers can help states and local governments to undertake inno vative approaches by reducing federal red tape that raises their budget costs HOW GRNTS-IN-AID HAVE MUSHROOMED The federal governments practice of giving money to the states to coax them into spending resources on federal policies began with the 1862 Md A ct. This act au thorized the transfer of federal land to the states wvh could then sell the tracts if they used the proceeds to fund colleges and universities.

Federal grants grew significantly when Congress in 1916 authorized iarge-scale fed eral aid for state highway construction. This was followed by the Vocational Rehabilita tion Act of 1920, designed to help disabled veterans, and the Sheppard-Fowner (Mater nity) Act of 1921, aimed at reducing maternal and infant mdty rates.

Franklin Roosevelts admini stration greatly expanded the use of granks during the Great Depression. For example, the federal government spent billions of dollars on emergency relief pgrams, helping states to build highways, roads, yd bridges. The Social Security Act of 1935 establi shed numerous grant programs that yontinue today.

These include old age assistance and aid to the blind and disabled, which are now com pletely funded by the federal Supplemental Security Income. In addition, the 1935 Act instituted aid to dependent childr en, as well as maternal health, child health, crippled children, and child welfare programs. These are now funded through the federal-state Aid to Families with Dependent Childm partnership and related programs 6 Victor J. A4iller.A History of Federal Gra n ts-In Aid to State andLocal Governments (Washington, D.C Fedefal Funds Information for States. June 24.1988 p. 2 4a a After World War II, the primary focus of federal grants turned to urban issues. The federal government helped fund ort construction, urba n renewal, urban planning and the interstate highway system. With the passage of the Great Society programs in the 196Os, the federal grant system exploded. The most important and far reaching of these programs was the 1965 addition of Medicaid to the Soci a l Security Act. Medic aid is a program funded jointly by the states and the federal government. It provides medical aid to welfare families, the poor elderly, blind, and disabled. This one grant-in aid program, which in 1970 cost a total of $5 billion, th is year will cost the states $44 billion:m&the-federal govemmene$6O-bfion;h$-l(34-billion-in total spending Reversing the Trend. From 1965 through 1980, the number of grant-in-aid pro grams quickly expanded to 5

38. During that period, the cost to the f& g overnment grew-from-$.lO.~-billion 9.l~~-billion~~un~.of-~grams .helpedlfund-every thing from nutrition for rural school children to housing for the urban eiderly. Then, be ginning in 1981, Ronald Reagan reversed this trend. As a start, under 4s Administr a tion 57 individual grant programs were folded into seven block grants. me concept be hind the block grant is to give mm responsibility and flexibility to the states. Exam ple: Instead of thirteen programs, each dealing with an aspect of education and eac h mandating precise uses for the money, under a block grant all of these bgrams would be rolled into one, and the states would be told, generally, to assess their local require ments and educate children in the way they thought best.

Block grants cut red t ape and give states mm flexibility. However, Aey also have a disadvantage. The most popular programs in Congress are those that allow a Congress man to take credit for solving a specific problem. With block grants, Congress raises taxes so that state and local officials can claim credit for programs.

How this undermines the block grant concept is illustrated by two sets of legislation which were meant to help the homeless. In 1981 the Community Services Block Grant provided money to assist low-income indiv iduals with housing and emergency aid. Ad ditionally, the Social Services Block Grant provided money far emergency food and shelter programs. When, in 1987, homelessness emerged as a significant issue, Con gress could have increased the block grants and l et states deal with homelessness in their own way. Instead, Congress passed the multi-billion dollar Stewart B. McJSinney Homelessness Assistance Act and created redundant and mm expensive programs.

Symbolic Program. Today, there are some 500 grant-in-aid programs. Most cost less than $10 million per year. These smaller programs were created more to symbolize the desire of Washington lawmakers to do something about certain problems, than to have any significant impact. Example: In-home Services for Frail O l der Individuals created in 1988, is meant To provide grants to States for in-home services for vic tims of Alzheimer disease and related disorders 9r10 But the budget obligation for fis- cal 1992 is only $6.8 million, or an average of $136,ooO for each st ate-hardly enough to be of any real help i 8 9 10 Millet, op. cit p. 3.

How of Representatives. Committee on Ways and Means, Overview of Entitlement Programs, 1991 Green Book, p. 14

16. CFDA 93.641, Specid Programs for the Aging-Title III. Part D-In-home Services for Frail Older Individuals 5 HOW GRANTS-IN-AID WASTE MONEY Grant-in-aid programs create incentives that lead to wasteful spending at all levels of povernment. The federal government wastes money because the states contribution to each program Ed uces the explicit cost of a program to Congress. This is in spite of the fact that taxpayers must pay for the entire cost at one level of govemment or another.

Because Congress does not pay the full cost of the program, a grant-in-aid program ap pears a be tter value for the money than if the program were paid for entirely out of fed eral iEds=-in turn mians thXtTongressmati mmjipgfiiins requiring a state contribution that federal lawmaken would consider uneconomic or wasteful if Wash ington were responsibl e for all of the funds The-lure-of-federal-funds-also-encourages-states-and-localities tosuppart and partici pate in capital projects they never would undertake if they had to rely on their own money This causes four problems 1) States or localities accept money to build a project, such as a subway, but are left on their own to pay operating expenses after the project is completed 2) Federal matching formulae give the impression of a buy one, get one free sale. States are encouraged to spend more money than they otherwise would driving up the cost for their citizens and the federal taxpayer 3) States have little incentive to administer effectively a program paid for by the federal government when little of its own money is at risk 4) The promise of federal d ollars induces states to spend money on projects that do not serve local needs as well as alternatives might.

Various grant-in-aid programs illustrate the perverse nature of these spending and Example: Mass Transit Systems. Consider the Miami light rail sy stem, known management incentives as Metromover. It opened in 1984, and was funded mainly through a grant under the Urban Mass Transportation Act. Planners bragged that 100,000 people would ride Metromover each day; they claimed the daily ridership would top 200,000 by 1985.

When ridership proved to be only around 10,OOO people a day, bsident Rea an re marked that it would have been a lot cheaper to buy everyone a limousine. History is repeating itself today as Los Angeles builds a subway system, largely funded by the federal government. The estimated cost is $1 billion a mile. The system eventually will open in downtown Los Angeles, but does not extend to the suburbs, where e bulk of Los Angelinos live. Thus it will have a minimal effect on traffic problems.

Cities like Miami and Los Angeles press for such systems in large part because they do not pay the full cost. Thus, fiom a narrow, local point of view, wasting billions of P 11 12 Zbid Doug Bandow, How Federal Aid Raises State and Local Spending, Cat0 Institute Policy Rep ort.

November/December 1989, p. 10 6 dollars on a huge project can make good economic and political sense if someone else is picking up a large share of the bill. Writes George Peterson, Director of the Urban Institutes Public Finance Center, if forced to become Feliant on their own re sources, states would select very different budget priorities than those coaxed from them by federal aid.13 In fact, one survey of municipal projects nxeiving partial fed eral and state assistance found that 5 1 percent of t h e projects would not have been un dertaken without federal aid.14 Example: Welfare. Aid to Families with Dependent Children (AFDC) and Medic aiii forae non-elderly p-Gr are two of the most expensive components of Americas welfare smorgasbord, costing abou t 130 billion in 19

92. States share these costs with the federal government according to congressionally determined fmuiae. states pay as-much-as. half-of-AFDC-and almost-45-percent of-Medicaid These-programs-suffer-from-the ebu y -one,-get -one-free-temp tation-&at induces some states to provide broader coverage than they would if they weFe spending only their own taxpayers money. States are largely free to set different levels for AFDC payments. Example: In Mississippi the maximum annual grant for a fami l y of three is 1,440 a year, while in California the maximum payment is almost $8,000 The feci eral aid to Mississippi is much less than that given to California. Nevertheless, in their federal tax payments frugal Mississippians must help fund California's generosity.

Similarly, with Medicaid states have the option of providing non-essential senices and sharing the costs with the federal government. Forty-seven states pay for dental coverage, 28 for occupational therapy, and 29 for chiropractors services. M ore ser vices cost more money, which comes from both state and federal taxpayers. In addi tion, for a variety of reasons including efficiency, cost of living, and types of patients served, the average recipient cost varies widely. New York costs are $5,09 9 per recipi ent while the costs in West Virginia are only $1,4

43. If all states deliveied Medicaid as cheaply as West Virginia, the nations Medicaid bill would be cut by 53 percent or some $38 billion per year. l6 Example: Job Trainlng Partnership Act. W hen one level of government pays and the other spends, the= is little incentive for the spending party to spend wisely.

This is documented in a General Accounting Office report on the Job Training Partner ship Act (JTPA JTPA is a $4 billion a year block g rant program where a block of money is sent to each state with general guidelines on how to spend it, rather than pre cise regulations. I The goal of JTPA is to train and find jobs for poor people and dislocated workers.

Yet the GAO report found a number of problems with the programs effectiveness.

Among them: contrary to law, too much money goes to retrain the mod employable workers instead of those most in need, in some instances only 60 percent of the placed 13 14 15 16 George Peterson, Federaism and t he States. in John Palmer and Isabel V. Sawhill, eds The Reagan Record Washington, D.C Urban Institute. 1984 p. 244.

Catherine H. Lovell, et al Federal and State Mandating on Local Governments: An Expbration of Issues and fmpacts (Riverside, California: University of California, Riverside, 1979).

House of Representatives, Committee on Ways and Means, Overview of Entitlement Program, 1992, p. 636.

House of Representatives, Committee on Ways and Means, Overview of Entitlement Program, 1990 p. 1302 7the fed eral govern ment being responsi ble for the full cost In the 1980s, for ex ample, Congress con cluded that there disparities in eligibil ity criteria among the states, and decided to narrow them. Rather gal states and restrict repeatedly ordered broader c o verage. were unacceptable than side with the fru coverage, Congress workers kept their jobs for more than four months; as much as 30 percent of the cost of the program goes to overhead, some-of the money was used improperlym lure copra tions into locating in particular states; and, some of the money was used to purchase expensive equipment rather than to train people for jobs 17 Chart 1 Total Medicaid Spending: An Increasing Burden on Both Federal and State Budgets Billioni of Dollarr 8280 8200 8180 860 80 1970 1976 1980 l988 1990 PO6 Oouffi Natlonal Anaoclatlon of State Budaet O??lcera. HWltM. DaL.Chmrl The Most Costly Example of Grants-In-Aid: Medicaid Medicaid is by far the most expensive of the grant-in-aid programs. Created in 1965 to-assure-health-cm to&-poor, Medicaidxost.$S-billiOn-billion in-19

70. This year Medicaid will cost $104 billion, with $44 billion paid by the states and $60 billion by the federal government. It is estimated by the National Association of State udgei Officers NASBO) that Medicaid willjost almost 200 billion by 19

96. Medicaid consumes 14 percent of state spending 1P I I 17 18 19 JobTraining and Partnership Act: Inadequate Oversight Leaves Prognun Vulnerable to Waste, Abuse and National Association of State Budget Officers Total Medicaid Spending February 1992.

Statement by the National Governors Association Short Term Medicaid Policy March 1991 I Mismanagement," General Accounting Oftke, July 19

91. I 8 The most recent federally mandated expansion of Medic aidoccurredin 1990 Among other things Congress forced stat es to cover all children under the age ofnineteen in families below the poverty level.m The previous year, Con gress forced the states-to provide Medicaid to pregnant women and children up to the age of six Chart 2 By 1995, Medicaid Spending Will Consume O ver a Quarter of State Budgets Medicaid am a Percentage of Budaet Nolo: State SpendlnO bene 8xcIudaa local funda contributed to Medlcatd Drograma 8ourc.: National ABaocIatIon of State Budget Of tlcera. HBrltBOB DBllChBrt all families below 133 percent of t he official level of poverty? These changes have proved very costly to the states Example: In Missouri, 80 cents of every new state dollar invested in the Missouri Department of Social Services over the last eight years has gone into Medicaid, The latest f ederal mandates ma& the situation even worse, forcing Missouri cut all state agencies 5 percent across the board, and put the savings into Medicaid paperwork requirements mandated by the federal Nursing Home Refarm Law of 1987 the state will have to incre a se Medicaid spending by between $400 million and $800 million John Rodriguez, deputy director of medical services at Califdmias Depart ment of Health SeMces, complains that the new federal paperwork will add noth ing to the quality of patient care The sta te claims that its ~edi-~al payment system for nursing homes already substantially complies with the Nursing Home Ref- Law.

The major difference is that the federal paperwork is overwhelming. According to Cali fornia health officials, one new federal farm is 200 pages long compared to 40 pages for the equivalent state form 2P Example: California officials calculate that in der to comply with federal HOW FEDERAL MANDATES INCREASE STATE SPENDING In addition to the strings attached through grants-in-aid, the f ederal government uses regulation to exercise direct control over the states, usually by heatening to withhold money unless the states acquiesce to federal wishes. Often the money to be withheld 24 21 22 23 Ibid 24 25 Omnibus Budget Reconciliation Act of 1990, PL. 101-508.

Omnibus Budget Reconciliation Act of 1989, P.L. 101-239.

Skate Hedth Notes, February 199 1 Part of the Omnibus Budget Reconciliation Act of 1987.

The Medicaid Budget Bust, State Legislatures, June 1991, p. 13 9 has no direct connection with the federal mandate to be imposed This type of coercion comes in four forms 1 Crosscutting Requirements aim to achieve a social or economic goal and apply to all federally funded programs or projects. Example: The 1931 Davis Bacon Act requires that l ocally prevailing wages in practice the union scale, be paid to construction workers on federally assisted construction pro jects-hospitals, highways, and housing. This increases the costs of federal projects by.some $1.5 billio&per_year Crossover Require ments compel states to comply with requirements in one program or lose funding in a different program, but usually in a related area.

Example: The Highway Beautification Act of 1965 requhd states to remove billboards from the nations major highways or risk losing 10 percent of their When states and localities complain about the costs of crosscuttihg and cross over regulations, some critics respond that they can avoid the costs by simply refusing the federal money. But this is does not tell the full story. I f a state or locality were to reject federal regulation such as Davis-Bacon, and lose fed eral money for construction contracts, the loss to the state or loc&ty would extend beyond the amount withheld by the government. The citikns would still have to pay their share of the federal taxes that fund Davis-Bacon pm jects in other jurisdictions. Federal spending and federal taxes have shrunk the tax base of states and localities to such an extent that they must go along with the federal regulation, because the y lack the resomes to raise enough Direct Orders must be complied with under hat of criminal civil penal ties. Example: the Fair Labor and Standards Act that farces states to pay their workers the federally established minimum wage.

Partial Preemptions are where the federal government partially overrides a states authority in the areas of health and safety. A program such as the Oc cupational Safety and Health Act is considered a partial preemption be cause the federal government sets minimum health and sa f ety sdndards, but allows states or localities to administer and enforce the federal criteria highway funds. I funds on their own. j The Most Costly Example of Regulation Clean and Safe Water The 1987 amendments to the Clean Water Act are among the most ex p ensive exam ples of federal regulations. The Clean Water Act mandates that wastewater be cleaned at treatment plants before discharge into lakes and streams. The Environmental protec tion Agency estimates it will cost $83.5 billion to bring all municipal w astewater treat ment facilities into compliance with new national standards, and billions of dollars more to operate, manage, and maintain the plants. During the 199Os, state and local governments will spend over $200 billion to comply with current federa l wastewater mandates The mst is so high that some cities, especially the poarer ones, may have to cut services like police, fire, and education to fund the federal mandates 10 Local citizens and authorities might decide that their lakes and rivers, while n ot as clean as they would like, pose no serious health hazard. They might believe that the ad ditional huge expense at a particular time is not worth the small improvement in water quality if this also means reduced police protection or lower teaching sta ndards. Fed eral mandates, however, preclude local authorities from making those decisions.

Another expensive federal mandate emanates from the Safe Drinking Water Act Amendments of 1986, which promulgated new procedures and timetables for setting national drinking water standards. standard poor's, the credit rating agency, predicts enb;;nous costs stemmhg f6m the 'Clean-Ga-Safe W;k%xcts. It says the EPA has hinted that residential water bills could double to as much as two percent of median family income, that is, to 550 a year. History shows that Clean Water Act regulations when-added-to-Safe-Drinhg -Water-lawsrm -very expensive Example: The federally mandated cleanup of Boston Harbor, largely to meet clean and safe water regulations will result in an inc r ease in the average Boston a~ residential water bill from the cur rent $337 a year to $1,300 by the end of the 1990s. Example: It might cost New York City between $4 billion and 5 billion to comply with only the Safe Drinking Water Act, over 500 per resid e nt Approaching $1 Billion. Few jurisdictions have thoroughly analyzed the potential costs of clean, safe water. One that has is Columbus, Ohio, a city of 633,000 with a metropolitan ma population of over 1 million. That city found that the combined costs o f complying with the Clean Water and Safe Drinking Water Acts will approach $1 bd lion-approximately $770 million for Clean Water and $105 million for Safe Drinking Water.The Columbus Health Commission estimates that compliance will cost metropolitan area household an additional $685 per year throughout the 1990s What impact will these costs have on cities? In its careful, almost diplomatic lan guage Standard Poor's says communities may have limited fmancial resources and many demands on these resources to provide And The dt quality of [cities] could be threatened, particularly where wealth indicators are weaker than average Should a city fail to meet Clean Water Act requirements regulators could ban additional sewer connections, stymieing a community's eco nomic development or impose stiff fines, potentially depleting cash reserves."31 In other wards, the poor will suffer because only the wealthy will be able to pay their water bills and also afford other services like garbage collection.

Although everyone f avors clean and safe water too few have asked whether the congressionally imposed standards are needlessly strict, driving up the cost on state and local taxpayers. Congress seems to care little about such an outcome because Con gress does not have to rai s e the money to accomplish its goal. The question arises 36 7 Yrh 26 27 Ibid 28 29 30 31 Ibid The Rice of Clean, Safe Water Standard Poor's Credit Comment July 1990 Environmental Legislation: The Increasing Costs of Regulatory Compliance to the City of Col umbus Report of the Environmental Law Review Committee, City of Columbus (Ohio May 13,1991.

Standard Poor's, op. cit New Clean Water Costs Uncertain Standard Poor's Credit Comment, March 1991 11 whether Congress would have found a cheaper or-more efficient way to clean the nations water if it had to spend federal tax dollars Another Expensive Regulation Access to PublicTransit for the Disabled While Mayor of New York City, Ed Koch wrote a widely read article for The Public Merest magazine explaining the af f ect of federal regulation on state and local govern mentr-Reac~~~man~tes-~m-W~s hington,Koch..listed.our maxims that appeared to guide the mandate mandarins 1) Mandates solve problems, particularly those in which you are not involved 2) Mandates need not be tempered by the lessons of local experience 3) Mandates will spontaneously generate the technology required to achieve them 4) The price tag of the lofty aspTtion to be served by a mandate should never deter its imposition on others.

As an example of these maxims in practice, Koch discussed the crosscutting require 3 ments of Section 504 of the Rehabilitation Act of 19

73. He complained that the law mandates total accessibility for the handicapgp to transit system, instead of dealing with thefunction of transportation: mobility. That is, rather than work with New York to devise means for moving the handicapped around th e city, federal regulations ordered the city to make public buses, subways, and subway stations accessible to the handicapped.

The regulations make little sense for two reasons: 1) they impose wi&ly disparate burdens on different communities, and 2) handicapped people have different needs de pending on their location and disability.

Enormous Transit System. New York City is unlike any other city in America. Its public transit system serves 5 million riders on a weekday. Most of them take the sub way, which was designed and built around the turn of the century, but approximately 1.5 million people ride the buses. This is compared to a modem suburban jurisdiction with lo0,OOO public transit passengers a day served mainly by a small fleet of buses.

The difference in size, age of the system, and type of system would argue for flexibil ity rather than the rigidity of Section 504.

The handicapped are not particularly well served either. Four million people work in the southern half of Manhattan, crowding the str eets and making it difficult for wheel chairs to maneuver towards a bus or subway stop. In other parts of New York, long dis tances separate subway stops or bus stops, making them inconvenient for the handi capped, particularly in bad weather. The handica pped might have been better served if the city, rather than retrofitting the subways and buying new buses, instead used vans to provide door-to-door service 32 33 Ibid.

Edward I. Koch, The Mandate Millstone, The Public Interest, Fall 1980, p. 44 12 Able-bo died commuters also suffer because of federal mandates meant to help the handicapped If a handicapped person takes a .bus,-the driver has to get out to operate an expensive wheelchair lift in a process that takes about five minutes. If a handi capped pers on were waiting at each bus stop, this would turn a twenty minute ride into an hour-and-a-half ordeal for the other passengers.

Equally impractical rules apply to subway access. New York City's system was built in the early 1900s and riders enter almost ex clusively by stairway. Federal mandates farce costly retrofitting with elevators to accommodate the handicapped, forcing the city to spend-honey ihat'could be bet& u&d elseiha: G-lT80, Koch estimated the cost of converting the system to confoxm to federal mandates at $1.3 billion over 30 years, plus at least $50 million in operating expenses Everyone Loses.'To provide access 'foi'22,800 people in wheelchairs and'l10,000 semi-ambulatory. people Section -504.left-New York-City -with. the-choice.of-either spe n ding $1.3 billion to fix its transportation system, in a way unlikely to address the problem meant to be solved, or lose all its federal mass transit funding In fact, every body lost: The city unnecessarily will pay $1.3 billion. The handicapped will have ac cess only to the regular mass transit system, which may not properly sefve their needs.

The people who commute by bus face long and unpredictable delays &pending on the number of handicapped needing service. And, the federal mass transit funds buy less than they might have because they are paying for impractical transpodtion.

Mayor Koch estimated a cost of $38 per trip for each wheelchair user or severely handicapped person. Although it would have been cheaper to put them in taxicabs, the real point is that for substantially less money an alternative system, such as a van ser vice, could have been instituted but for the mandates from Washington i I WHAT IS TO BE DONE Starting in earnest during the Great Depression, and continuing for about 35 years thr o ugh the Great Society, Congress created a huge conglomeration of federal grant-in aid programs administered by the states. In the last two decades, Congress inmasingly has used its leverage to order states to fulfill national goals. Congress was helped in this effort by favorable Supreme Court decisions allowing Washington greater control over almost every aspect of state government. The result: The federal budget drives pri orities and determines policies for all levels of government, while all levels of govern ment face periodic budget crises.

The decline of federalism not only has been financially expensive, but also costly in ways difficult to measure. Government programs aimed at helping people too often have reflected a "one size fits all" mentality, ignoring both the differences among states and the benefits of experimentation.

To restore a balanced federal system, to preserve budgeting security, and to ensure that government programs are tailored to the needs of the people they serve, Congress must be removed from the state and local decision-making process. A number of steps would help achieve these goals 1)- Congress should limit itself to legislating on national issues. Programs aimed at state and local problems should be returned to those levels of government 13 The federal government has taken over functions in recent years that the framers of the Constitution never-would havexonsidered !national in scope. According to the Advisory Commission on Intergovernmental Relations, by even the most leni e nt cri teria of national purpose, it is impossible to justify many existing intergovernmental programs The report goes on to state that The national government over time has acquired an array of functional and financial responsibilities that are more appp ri ately assumed by citizens at the state and local levels 935 Meanwhile, the report con tinues, much of the present grant-in-aid money is in effect used by sta s and locali ties to shift.their-own-iinancial-burdens to a largernatimal---base.

Housing and m edical care for the poor, and welfare are problems that occur at the neighborhood level. They are the antithesis of national problems like national defense international-trade,-interstate commerce,and-polluted-nvers-and oceans 2 Congress should-cut federa l -taxes-by-an-amount equal to the cost of pro 38 grams it returns to the state and local governments, thereby ynlarging the tax base of those governments so they can pay for the programs Gasoline, alcohol, tobacco, telephone, and other sales taxes provide & 5 billion for the federal government. the federal government divested itself of all sales taxes, that would allow the states to take in enough money to fund Medicaid without federal assis tance, or mm than enough money to fund Aid to Families with Depend ent Children and federal housing programs.

The sales tax is traditionally a state and local levy and should remain so. It would make sense for the federal government simultaneously to divest itself of the taxes and the programs. In addition, Congress shoul d cut the income tax to help states fund these programs.

By shedding as many inappropriate programs as possible, the feded government will sa ve money. If states and localities want to maintain the federal prdgrams, they can run them without interference from Washington at a substantial cost savings I 3) Federal mandates should be fully funded and administered by the federal government.

Any pro gram that Congress believes is of national importance should be funded and administered through the national government. The experiment in admkstrative feder alism, where Congress dictates and partially funds pmgrams while the states adminis ter them, has been a costly failure which has left voters confused about what level of government to hold responsible for the failure 4) U.S. Senators should be invited by their states legislatures to explain the costs of newly proposed or enacted federal mandates to a special state joint legislative committee at the beginning and end of each session of the U.S. Congress 34 Devolving Federal Program Responsibilities and Revenue Sources to State and local Governments, Advisory Commission on Intergovernmental Relations, 1 9 86, p. 8 35 Ibid.,p. 10 36 Ibid.,p.ll 14e Until the practice was changed by the 17th Amendment to the U.S. Constitution in 1913, U.S. Senators svereslected by state legislams and directly accountable to-them This arrangement helped the states fend off abu s es of federal power. Today, U.S. sena tors still are the principal officials elected statewide and sent to Washington to repre sent the interests of their states. Given the huge burdens that federal mahdates place on the states today, state legislatures w o uld do well to demand formal and public reports from their two U.S. Senators on the effects of washington policies on the states. State legislators would have the opportunity to question the Senators on what can be done to reduce-the-mmdate-burden andsthe - publicwould bemade-better aware of why and how state funds are spent, often against their own wishes and priorities CONCLUSION Progress often comes from recogniiing mistakes and carrecting them. The time has come to recognize that federalism, as it has ev o lved in the last seventy years, is badly off course. A correction must be made. Perhaps the most serious cons4uence of mis guided federalism is the tremendous cost that federal mandates place on state and local budgets. Federal, state and local budgets fa ce recurring crises unless Congress adjusts the relationship between Washington and the other levels of government.

The solution is to return to the states control of those policy areas that are best han dled at a level of government closer to the people. This would include problems such as health, housing, and education. The federal government should handle truly national issues such as defense, trade, diplomacy, the environment, and immigration Time to Surrender. The current form of federalism is so cumb e rsome, wasteful and expensive that the only practical solution requires the federal government to sur render to the states many of the programs under federal control, and pdvide the states the ability to pay for those programs by relinquishing federal con trol oyer the gasoline alcohol, tobacco, telephone, and other excise taxes, and by reducing federal income tax rates so that states can tap that source if they desire.

At the end of his Presidency, Ronald Reagan declared that "while much of the 20th centur y saw the rise of the federal government, the 21st century will be the Century of the state The states today are the engine of domestic policy innovation. But unless Washington relieves them of onerous federal rules, their ability to solve America's do me s tic problems could be suffocated by red tape and mounting deficits I I Andrew J. Cowin Jay Kingham Fellow in International Regulatory Affairs 37 Ronald Reagan Flattening Hierarchies in the American Feded System Intergovernmenrul Perspective, Fall 1988, p. 6 15


Andrew Cowin

Distinguished Fellow