June 18, 2003 | Backgrounder on Federal Budget
States have successfully secured a $20 billion bailout from Washington to close their expanding budget deficits. Never mind that state overspending created this crisis. 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 per year 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 are supported by sympathetic media reports detailing state difficulties in 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, as the name indicates, 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 two significant 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 and 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 Congressional Budget Office (CBO) report shows that the 1995 Unfunded Mandates Reform Act (UMRA) has reduced the number of new unfunded mandates placed on state and local governments.2 Consequently, states cannot legitimately blame Washington for their spending crises.
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 classifies as a federal program that meets both of the following criteria.3
The distinction between voluntary and mandated programs is important. Its central principle is that states should be free to spend their own tax revenues as they see fit, rather than be forced to fund unwanted programs imposed by Washington.
Voluntary programs, by definition, are not imposed on states. They are 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 the model, it can opt out and remain independent of federal meddling.
The 2001 No Child Left Behind Act is 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?
Some call these programs "de facto mandates" because no rational state would opt out of the federal programs--the federal money more than justifies the federal strings attached. In other words, states unanimously enrolled in these programs because the deals were too good to pass up, not because Washington required it.
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 reassertion of authority by Washington over how federal money is spent became known as an "unfunded mandate," despite the program being neither unfunded nor mandated. States still consider this federal funding worth more than 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 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 may opt out of the system. The same principle applies to state governments receiving federal money.
State officials are being hypocritical. 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 federal tax revenues are spent. In effect, states are attempting to impose an unfunded mandate on Washington.
UNFUNDED MANDATES BEFORE 1996
UMRA does not affect the unfunded mandates enacted before 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 began only three years ago.
Medicaid, the largest unfunded mandate, requires deeper analysis. Federal law mandates that states run Medicaid programs and sets minimum eligibility and benefit standards, but states have the option to expand eligibility and benefits beyond the federal minimum. The federal government then reimburses states for approximately half of the program's $200 billion total annual cost. Washington deserves much of the blame for 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 the average state's Medicaid budget is for optional services and populations beyond the federal minimum.6 These optional services--such as 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 the authority to reduce the non-mandated eligibility and benefits. 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.
Clearly, the federal government is obligated to reimburse states for costs it imposes on them. 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, they were not imposed by Washington. 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:
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.
1. See Brian Riedl, "The Case Against a Federal Bailout of the States," Heritage Foundation Executive Memorandum No. 857, February 4, 2003, at www.heritage.org/Research/Budget/em857.cfm.
2. Public Law 104-4. UMRA also affects mandates on the private sector, although that is not the subject of this paper. See Congressional Budget Office, "A Review of CBO's Activities in 2002 Under the Unfunded Mandates Reform Act," May 2003, and editions from prior years.
6. Raymond C. Scheppach (National Governors' Association Executive Director), "Unfunded Mandates: A Five-Year Review and Recommendations for Change," testimony before the Subcommittee on Energy Policy, Natural Resources, and the Regulatory Affairs, Committee on Government Reform, and before the Subcommittee on Technology and the House Committee on Rules, U.S. House of Representative, May 24, 2001.