May 28, 2003

May 28, 2003 | WebMemo on Federal Budget

What Unfunded Mandates? CBO Study Reveals Washington Not at Fault for State Budget Crises

States have successfully secured a $20 billion bailout from Washington to close their expanding budget deficits. Never mind that free-spending states created their own fiscal crises: General fund revenues have climbed 46 percent since 1990, but spending has climbed 50 percent - nearly twice the rate of federal spending. Total state government spending topped $1 trillion for the first time ever in 2000 and has continued to rise.[1]

Many state officials have claimed to be entitled to a federal bailout as reimbursement for a flurry of new unfunded mandates imposed on them by Washington. These claims were followed by several sympathetic media reports detailing state difficulties paying for expensive education and homeland security mandates. Many of these analyses seem to define an unfunded mandate as "any program that states wish Washington would pay for." In reality, unfunded mandates must be both unfunded and mandated. Nearly all-recent federal education and homeland security laws have been either voluntary, or fully funded by Washington.

In fact, only twosignificant unfunded mandates have been imposed on state and local governments since 1996, according to a new report by the Congressional Budget Office (see tables 1 & 2).[2] These two unfunded mandates cost the average state only $9 million per year, or 0.09 percent of the typical state's $10 billion general fund budget. The CBO report shows that the 1995 Unfunded Mandates Reform Act (UMRA) has reduced the amount of new unfunded mandates placed on state and local governments.[3] Consequently, states cannot legitimately blame Washington for their spending crises.

Table 1: Significant Unfunded Mandates Enacted Since 1996

Year

Description

Public Law

Average annual cost per state

Percent of state budgets*

1996

Minimum wage increase

104-188

$4 million

.04 percent

1998

Reimbursement reduction for food stamp administrative costs

105-185

$5 million

.05 percent

Total

$9 million

.09 percent

*The average state spends $10 billion annually from their general fund.

A significant unfunded mandate is one that exceeds the Unfunded Mandate Reform Act's cost threshold of $58 million per year (inflation-adjusted from $50 million in 1996), which is $1.2 million per state.
The CBO has not yet determined whether the mandates in 2001 Port and Maritime Security Act are fully funded or not.
Source: "A Review of CBO's Activities in 2002 Under the Unfunded Mandates Reform Act," Congressional Budget Office, May 2003, and prior years' editions.

Table 2: Notable Laws that are not Unfunded Mandates

Year

Description

Public Law

Mandated or Voluntary

Funding

Comment

2002

No Child Left Behind Act

107-110

Voluntary

Funded

States can opt out if they determine that federal funds are insufficient.

2002

Upgrade of voting systems

107-252

Mandated

Funded

Washington funds expected annual cost of $10 million per state.

2002

Bioterrorism legislation

107-188

Mandated

Funded

Requirement to assess water suplies is funded.

2002

Homeland Security Act

107-296

Mandated

No cost

Only marginally affects state budgets.

2002

Pipeline safety

107-355

Mandated

No Cost

Only marginally affects state budgets.

2001

USA PATRIOT Act

107-56

Mandated

No Cost

Only marginally affects state budgets.

2001

Aviation and Transportation Security Act

107-71

Mandated

No cost

Only marginally affects state budgets.

Source: "A Review of CBO's Activities in 2002 Under the Unfunded Mandates Reform Act," Congressional Budget Office, May 2003, and prior years' editions.

Voluntary Programs

Why is the number of unfunded mandates so much fewer than is commonly reported? The answer lies in the definition of an unfunded mandate, which UMRA generally defines as a federal program that meets both of the following criteria:[4]

  • Mandate - "Any provision in legislation, statute, or regulation that would impose an enforceable duty on state, local, or tribal governments … or that would reduce or eliminate the amount of funding authorized to cover the costs of existing mandates. Duties that arise as a condition of federal assistance or from participating in a voluntary federal program are not mandates." [5]
  • Unfunded - "Direct federal funding is less than the amount state, local, and tribal governments would be required to spend to comply with the mandate. Such costs are limited to spending that results directly from the enforceable duty imposed by the legislation rather than from the legislation's broad effects on the economy." [6] An unfunded mandate does not violate UMRA unless the combined annual cost to state, local and tribal governments exceeds $58 million (inflation-adjusted from $50 million in 1996), which is approximately $1.2 million per state.

The distinction between voluntary and mandated programs is important. Its central principal is that states should be free to spend their own tax revenues as they see fit, rather than forced to fund unwanted programs imposed on them by Washington.

Voluntary programs, by definition, are not imposed on states. They are mere proposals by the federal government of how states could perform a certain function. If a state likes the federal model, Washington offers to help pay the costs of implementing it. If a state dislikes like the model, they can opt-out and remain independent of federal meddling.

The 2001 No Child Left Behind Act serves as an example of a voluntary program. States have the authority to decide how to educate their disadvantaged children. The federal government has created its own model program, the No Child Behind Act, and offered to subsidize the program's cost for any state volunteering to adopt it. The states that have criticized the federal model or found the federal funding insufficient are free to opt-out and run their own programs instead.

De Facto Mandates?

Many governors and state legislators call programs such as the No Child Left Behind Act "de facto mandates" because not participating is not a realistic option. Why isn't opting out a realistic option? Because the benefits of the federal dollars far outweigh the costs of using the federal model instead of their own. In other words, the programs are a net positive for states.

States have grown resentful of the federal government - despite receiving $400 billion per year in federal funding - because they now consider themselves entitled to this money with no strings attached. States expect federal money to subsidize their own education and homeland security visions. When Washington instead requires that federal dollars be used only for federally approved purposes, states feel cheated.

For example, states have received federal funding for educating disadvantaged children since 1965. Flexibility in the original federal law allowed states significant control over how those federal education dollars were spent. Over time, states came to feel entitled to federal money subsidizing their own education programs. When the 2001 No Child Left Behind Act placed different restrictions on how states spend this federal money (which was substantially increased), they could no longer allocate as much federal money to their own preferred education programs. Somehow, this assertion of federal authority over how its money is spent became known as an "unfunded mandate," despite the program being neither unfunded nor mandated. States still consider this federal funding more than worth the new restrictions, as no state has yet opted out of the program.

There are arguments for and against open-ended, unregulated grants to states. States, however, are not entitled to have their own state programs funded by Washington. A comparison can be made with welfare reform: governments have the right to require welfare recipients to work in return for receiving public assistance. No one is entitled to taxpayer dollars, and anyone who considers the conditions overly burdensome is free to opt-out of the system. The same principal applies to state governments receiving federal money.

States are showing hypocrisy. They demand total control over the spending of their own tax revenues without federal meddling. However, their claims of "entitlement" to federal dollars with no strings attached challenges Washington's right to control how its tax revenues are spent. In effect, states are attempting to impose an unfunded mandate on Washington.

Pre-1996 Unfunded Mandates

UMRA does not affect the unfunded mandates enacted prior to 1996. For example, Washington requires that states provide an adequate level of special education funding, but furnishes only a portion of the cost. The Environmental Protection Agency mandates that state and local government enforce federal environmental regulations without sufficiently funding their cost. Washington needs to reform these unfair and burdensome unfunded mandates. States, however, cannot legitimately blame decades-old unfunded mandates for budget crises that sprung up only three years ago.

Medicaid, the largest unfunded mandate, requires deeper analysis. Federal law mandates that states run Medicaid programs, and also sets minimum eligibility and benefit standards (states have the option to expand eligibility and benefits beyond the federal minimum). The federal government then reimburses states for approximately half the program's $200 billion total annual cost. Washington deserves much of the blame designing an expensive and inefficient program, and then imposing it on states without providing full funding.

Yet states have made the program even more expensive. Approximately 60 percent of a given state's Medicaid budget is for optional services and populations beyond the federal minimum.[7] These optional services - such as now covering weight-loss help and substance-abuse treatment - have played a large role in the program's 165 percent increase since 1990. If states are now feeling the pinch of rising Medicaid costs, they have all the authority they need to reduce the non-mandated eligibility and benefits offered. They could also support President Bush's proposal to grant states increased flexibility to modernize their Medicaid programs. Current high Medicaid costs are not all Washington's fault.

Conclusion

Clearly, the federal government is obligated to reimburse states for costs it imposes on states against their will. However, Washington is not obligated to pay all the costs for federal-state partnerships that states freely choose to enter. Although state budget struggles are real, Washington did not impose them. No state has been required to implement the No Child Left Behind Act. States are spending more on homeland security because they wisely made it a priority, not because of excessive Washington mandates to do so.

There is a simple solution to the fractured relationship between Washington and the states:

  1. States should have complete control over how their tax dollars are spent. The federal government should reimburse states for costs imposed on them against their will.
  2. Washington should have complete control over how its tax dollars are spent. If states willingly accept federal dollars, they should also accept federal strings attached.

-Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


Footnotes

[1] See Brian Riedl, "The Case Against A Federal Bailout of the States," Heritage Foundation Executive Memorandum No. 857, February 4, 2003, at http://www.heritage.org/Research/Budget/em857.cfm.

[2]To violate the UMRA, an unfunded mandate must cost state, local, and tribal governments a combined total of least $58 million per year (inflation-adjusted from $50 million in 1996). UMRA also affects mandates on the private sector, although that is not the subject of this paper. See "A Review of CBO's Activities in 2002 Under the Unfunded Mandates Reform Act," Congressional Budget Office, May 2003, and prior years' editions.

[3] Public Law 104-4.

[4] Some unfunded mandates do not violate UMRA, such as those carrying out U.S. constitutional requirements.

[5] "CBO's Activities Under the Unfunded Mandates Reform Act, 1996-2000," Congressional Budget Office, May 2001, p. 5. This is a general definition, not an all-encompassing one.

[6] "CBO's Activities Under the Unfunded Mandates Reform Act, 1996-2000," Congressional Budget Office, May 2001, p. 6. This is a general definition, not an all-encompassing one.

[7] "Unfunded Mandates: A Five-Year Review and Recommendations for Change," testimony by National Governors' Association Executive Director Raymond C. Scheppach before the House Government Reform Subcommittee on Energy Policy, Natural Resources, and Regulatory Affairs, and House Rules Subcommittee on Technology, May 24, 2001.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies