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Are Block Grants The Answer?


Economics: GOVERNMENT FINANCE

ARE BLOCK GRANTS THE ANSWER?

It sounds like a piece of federal budgeteering arcana. But in the Republican-controlled Congress and in statehouses around the country, the block grant has become a battle cry. Eager to cut the federal budget and please the states, members of Congress have proposed that an array of aid programs to the states be folded into larger, broad-purpose block grants. Many governors are also urging that federal monies no longer be "micromanaged" and that state administrators be given a chance to put federal dollars to work more efficiently--to "do more with less."

Does the widespread adoption of block grants make economic sense? The answer is yes, as long as Americans are willing to accept that fiscal discipline will ultimately mean lower standards and fewer services from their state and local governments. But they shouldn't expect block grants or any other budget-cutting vehicle to work economic miracles.

Today, 15 block-grant programs are in existence, which account for 7.5% of total federal aid to the states. Nine of them are the legacy of President Ronald Reagan's push for a new federalism, and an analysis of those programs showed that administrative savings of 2% to 5% were achieved, says George E. Peterson of the Urban Institute in Washington. Since federal grants were cut by 12%, however, the states had to find savings elsewhere. In some cases the states were able to kick in more bucks, but in others, standards and services eroded, he says.

Moreover, the block-grant experience to date has been fairly limited, and what is being debated in Washington is on an unprecedented scale. Not only are a number of the nearly 600 federal grant programs to the states likely to be rolled into block grants but the bigger, open-ended entitlement programs such as Aid to Families with Dependent Children and Medicaid are also likely to be turned into block grants. When that happens, Congress will cut funding. Right now, these programs match federal dollars to state dollars, with some especially poor states getting as many as four federal dollars for every dollar they spend on welfare. Already, a proposal to cut funds for school lunches and roll the program into a block grant has drawn fire.

The sudden removal of matching funds means that as demand for services grows, states will have to make up the federal match themselves, change the level and quality of services, or do both. The likely outcome, says Peterson, is "spiraling parsimony, as every state scrambles to avoid becoming a welfare haven that treats the poor more generously than its neighbors."

WAIVING WAIVERS. Block grants may not afford the states as much flexibility as they anticipate. For one thing, no block grants will give governors carte blanche as to how to spend federal monies. Indeed, a recent General Accounting Office study found that over time, new funding constraints were added to the 1981 block grants because of concerns that the states weren't meeting national needs.

Still, many states may be content simply to operate under fewer constraints than before. Wisconsin officials, who hope to cap off 10 years of welfare reform by eliminating all AFDC payments by 1997, traveled to Washington to get 149 waivers from three Presidential Administrations to implement 14 different welfare experiments. A welfare block grant would eliminate the need for such waivers.

Coping with the cutbacks in federal dollars may also prove more difficult than proponents of block grants contend. While some states were able to make up the shortfall by ramping up their own spending in the early 1980s, it's not clear that will happen this time around. Most states are now running surpluses, but slower growth means those surpluses will soon "melt away," observes Steven Gold, director of the Center for the Study of the States at the State University of New York at Albany. Governors who have promised or enacted tax cuts will have to contemplate tax increases, and more funding burdens may be pushed down to localities, says Gold.

But across the country, the overwhelming mood is in favor of budget cuts and tax relief, even at the local level. And in some states, such as Wisconsin and Oregon, local property tax relief is forcing state governments to shoulder a greater share of the K-12 education budgets. This means that already scarce resources in state budgets must be reallocated toward education. And that leaves less for social programs that the federal government once helped to fund.

Most analysts doubt that the states will pick up the slack. If states have to pay a full dollar to increase spending by a dollar on programs for which the federal government once offered matching funds, then they have no incentive to devote more resources to the programs, says Robert D. Reischauer of the Brookings Institution, who until recently was the head of the Congressional Budget Office. During recessions, when demand for social programs inevitably picks up, there will be even more of a squeeze on resources.

SLIPPING STANDARDS? Still, many states believe they can meet the challenge of new spending limits. But that almost certainly will require a change in standards. How this is accomplished can make the difference between judicious reform of social programs and wholesale evisceration of those programs. Capabilities of officials vary across states, as does the inclination to make programs effective. Wisconsin's welfare reforms, for example, required more up-front spending on training and job placement in order to secure long-term savings.

Not all states will favor such a strategy. When federal day-care requirements were eliminated as part of one of the Reagan block grants, the state of Texas managed to care for about 16% more children in day care at almost 20% less cost to the state. But Texas altered the minimum ratios of staff to children, allowing 1 staff member to care for as many as 13 toddlers. The federal standard had required that 1 staffer care for no more than 4 toddlers.

If block grants are widely adopted by Congress, Americans will see a range of responses across states as standards and eligibility requirements change. The effects may not seem so dramatic in 1995 or 1996, but they are sure to be in later years as the effect of caps on federal grants begins to bite. The unanswered question, says Gold of the Center for the Study of the States, is whether the American public will tolerate a shrinkage in social services, no growth in school budgets, higher state university fees, and an overall diminution of services. If they won't, then block grants may come to be regarded as one more failed recipe for economic reform.

THE BATTLE OVER BLOCK GRANTS

WHAT PROPONENTS SAY:

-- States will gain flexibility

-- Federal funds will be cut or capped

-- States will realize cost savings

WHAT OPPONENTS SAY:

-- Standards will be eroded

-- State and local finances will come under further pressure

-- Savings will be achieved at the expense of aid recipients

DATA: BUSINESS WEEKBy Karen Pennar in New York


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