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Power To The States


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POWER TO THE STATES

Wisconsin's Republican Governor Tommy G. Thompson is in an ebullient mood, and why shouldn't he be? Wisconsin's economy is whirring--unemployment is under 3.5%--and welfare rolls are dropping. The GOP-controlled legislature, swept into power amid last November's Republican Revolution, easily approved a Thompson budget that cuts property taxes and reforms education and welfare. Soon, he boasts, he'll unveil even more welfare changes aimed at moving people quickly off the dole. "These reforms," he boasts, "will be the most exciting and ambitious in the country."

Yet, as Congress prepares to cede control over everything from welfare to transportation and environmental policy to the states, Thompson is convinced that lawmakers in Wisconsin--or any state capital--can do almost anything better than the pols in Washington. And he's aching to prove it. "We're seeing a rebirth of [state power]," says the 53-year-old Thompson, "and I'm totally comfortable with the states' ability to handle it."

Cocky? Yes. A dreamer? Not at all. Ready or not, "states first" advocates such as Thompson are about to see their wishes granted--in spades. This summer, Congress is rapidly cobbling together legislation that would hand governors responsibility for dozens of major programs, including welfare, Medicaid, and job training, that account for over $200 billion in annual spending.

In small part, Congress is responding to a public grown weary and cynical of Big Government. But more than anything, Washington desperately wants the statehouses to do something it won't--make the politically tough decisions on which social, environmental, and safety programs must be cut to balance the budget. While Congress is willing to give states more responsibility, it also is proposing that they manage it with a lot less money than the feds themselves previously felt necessary. For two of the most politically charged programs, welfare and Medicaid, which provides health and nursing-home care for the poor and disabled, proposed spending would plunge 30%, or nearly $270 billion, from fiscal 1996 to the year 2002.

That's the most radical transfer of power since the New Deal, when Washington began taking over numerous responsibilities previously left to the states. The changes would eviscerate the federal government's role as protector of the poor, leaving that responsibility to the states. And almost overnight, the American system of federally mandated entitlements that has developed since the 1960s to safeguard the poor will disappear. Currently, the GOP-controlled Congress plans to reduce growth in federal funding of social programs, keeping such budget-busters as Medicaid from increasing in lockstep with need or inflation. That would save Washington $182 billion by 2002, its only hope for a balanced budget.

Meanwhile, states would have to make do with what they have, economizing by shifting Medicaid users into managed-care programs, reducing costly oversight of environmental rules, or setting limits on how long people could stay on the welfare roll. "The states will redefine the safety net," says Judith M. Gueron, president of the Manpower Demonstration Research Corp. (MDRC), a New York-based research group. "They haven't had the responsibility in the past."

The philosophy behind this change, dubbed "devolution" by policy wonks and trumpeted by such devotees as House Speaker Newt Gingrich, holds that the states are inherently more efficient than the federal government because they are closer to the people they serve. To be sure, such change will be welcomed by millions of disgruntled voters. And some governors, especially Republicans such as Iowa's Terry E. Branstad, view this tectonic shift as "a golden opportunity" to unleash high-quality reforms that have eluded the bureaucracy-laden feds.

Trouble is, as the feds retreat, the states may be overwhelmed by the sheer scale of expectations and responsibilities. And since few state officials expect federal payments will be adequate to fund all the new responsibilities, governors eventually will likely have to take the knife to other state spending programs such as higher education, roads, and prison-building. "All departments have been notified that past generosity won't continue," warns Minnesota's Republican Governor Arne Carlson.

The risk of this power shift is heightened because of the brief time interval before the transfer starts--as early as next fall. Early experiments in state reforms show some encouraging signs--for instance, Minnesota's program to provide medical coverage for the working poor to keep them off the dole.

Yet most states' programs are no more than pilots, virtually untested. And those who now look to states for the answers to Washington's problems should remember that many local bodies can be as bureaucratic and inefficient as the feds--and often far more corrupt. Few states can point with pride to their stewardship over public education, long under their purview. Twenty-one states are under court orders to reform their child-welfare systems. And when Tennessee shifted its Medicaid population to managed care in 1993, the state rushed its program out in five months. The result: A computer system inadequate for processing claims fell months behind in reimbursements to doctors and hospitals, sparking 50,000 calls from confused recipients.

Fortunately, most state balance sheets are at their healthiest in more than a decade, thanks to a rising economy and fiscal prudence. In contrast to the $203 billion federal deficit last year, the states' collective budget surplus totaled $17.3 billion. Yet surging costs to care for the growing ranks of the elderly, disabled, and criminal populations could bring the same havoc to state finances that they have to the federal budget.

Under Republican Medicaid proposals, for instance, the federal government would send $124 billion to the states in the year 2002--30% less than the $178 billion the feds would plan to spend if they retained control of the program. Essentially, that's a high-stakes gamble that states will be able to quickly ferret out enough inefficiency, fraud, and waste to make up the difference--a questionable assumption. That's why some governors are wary of the new states-rights rhetoric touted by conservatives such as Gingrich. Fears Indiana's Democratic Governor Evan Bayh: "Congress simply wants to shift the burden of the deficit to state and local government."

Power would be shifted to the states through block grants, essentially huge bags of cash the states could spend within broad policy areas. What's more, under current legislation winding its way through Congress, states would gain far more power to spend the funds as they--rather than politicians in Washington--see fit. For example, governors would be free to use federal transportation funds on whatever road-building projects they'd like, create their own environmental programs, and distribute job training money in almost any fashion. Red tape should be cut: About 90 job training programs, many with differing eligibility standards and spread across 14 federal departments, would be consolidated. And states could mostly avoid the time-consuming and expensive process of begging the federal government for waivers to experiment with new social programs.

That's a dramatic turnabout from the parent-child relationship the states currently have with Washington. Just ask Texas Comptroller John Sharp. After filing a request to issue electronic debit cards to food-stamp recipients in 1991 in an effort to combat fraud, Sharp's bid languished in Washington for three years before it finally was approved in 1994. "If it hadn't been for the hoops we were made to jump through, we could have done this in six months," he says.

Although the added flexibility is tempting, there's no avoiding the huge financial risk. Take Medicaid. Congress based its budget numbers on the assumption that states could ratchet down the rate of Medicaid growth from 10.4% today to 4% by 2002. Since Congress plans to stem Medicaid spending for seven years, states are on their own if they can't cut their rate of growth that much. That's a tall order. "I see a lot of states cutting their services and costs," says Vladimir Y. Stadnyk, executive managing director of public finance for Standard & Poor's Ratings Group. "That will be good for credit ratings, but lousy for the people who live there."

States are only now beginning to tote up the costs. Montana, a largely unpopulated state with big road-building and repair needs, could lose perhaps half its annual $150 million federal transportation aid under the complex distribution formulas in some block grant proposals, and it has little means to make up the difference. Minnesota already faces a projected cumulative deficit in 2005 of $2.5 billion before federal cuts, which could cost the state an additional $1.8 billion over the next six years.

NASTY INFIGHTING. Yet states worry most that federal block grants for welfare and Medicaid will be scaled back under current congressional proposals, forcing states to receive the same amount of federal dollars--even if recession adds more people to the rolls. "One of the scary things about block grants is that the feds haven't repealed the business cycle," says Mary Ann Cook, a senior administrator in the Dane County (Wis.) Human Services Dept.

That has helped fuel nasty infighting among state delegations on Capitol Hill over block grant funding formulas. Northern and Midwestern governors fear Southern senators will rig formulas to penalize prosperous states that have already made aggressive efforts to trim welfare and Medicaid spending. Snaps Minnesota's Carlson: "Formulas shouldn't reward sloppy, inefficient states."

Similarly, states with fast-growing ranks of poor and elderly such as New York, Florida, and Texas, worry that formulas based on early 1990s federal spending--one idea floating around Congress--won't cover their needs. Florida, for one, would lose $9 billion in federal Medicaid funds over seven years under congressional plans--even though its population grows annually by 272,000 people and its Medicaid bill by 14%. "That level of inequity will never be acceptable to Florida or to the other growth states," warns Governor Lawton Chiles, who says proposed caps would allow slow-growth states to "make out like bandits." Resolving such formula fights could tie up congressional approval of block grants until the fall.

State power is also set to expand in areas other than social spending. Many in Washington are determined to shift responsibility for environmental standard-setting, too. It's unclear how dramatic the rollback will be, but there's no doubt that the feds will slash grants used by the states to build sewage-treatment and drinking-water plants. This year, the feds will chip in $1.3 billion of the total $5.3 billion states are devoting to environmental spending. Next year, much of the federal contribution may be gone.

Clearly, that will compound the states' other budgetary problems, encouraging privatization of their water and sewage-treatment operations to save money. Environmentalists and industry worry that any power shift to states could result in a dangerous and uneven mix of policies. "For a national company like ours, you have to be watchful that a patchwork of regulations doesn't develop," says Edmund J. Skernolis, director of government affairs at environmental-services giant WMX Technologies Inc. One of Skernolis' fears: pollution havens "where waste might move to the cheapest alternative."

Nonetheless, fans of block grants are confident that, unburdened by federal bureaucracy, governors should be able to offer equal or better services with less money. "I'm looking forward to an era when states really are laboratories of democracy," says New Jersey Governor Christine Todd Whitman. This argument echoes themes raised by the Nixon and Reagan Administrations, which used block grants to give states authority over such programs as youth job training and child health care. The current reforms are far broader in scope than their predecessors, though, and the dollars involved much larger. "Past is definitely not prologue in this case," says Richard P. Nathan, director of the Rockefeller Institute of Government at the State University of New York.

Indeed, the Reagan Administration block grants, which became law in 1982 and totaled only $7.3 billion, were puny compared with those on the table today. And past efforts didn't touch the safety net for the poor. Moreover, if House Republicans have their way, the states will get control with less oversight and fewer rules than under Reagan's grants.

Yet a close look at earlier block grants provides some warning signs for the future. The Job Training Partnership Act, for instance, distributes $1.6 billion to the states for spending on adult and youth job training. The federal program, administered by state agencies and private industry councils, subsidizes on-the-job training and hires private training institutes that are paid according to how long participants are trained. Critics charge that more than half the program's funding goes for administration. And in 1991, the General Accounting Office rebuked state oversight of job training efforts. In one instance cited by the GAO, Illinois paid a car wash to train new employees--for six months. And in 1993, Illinois used $2 million in JTPA funds to hire workers to battle summer floods.

"There's no rigorous oversight or accountability," says Anthony C. Carnevale, vice-president of the Committee for Economic Development. "It has been one of the biggest slush funds around for a long time." Nevertheless, one Senate proposal would roll $7 billion in job training programs into a grant to the states, but with more performance standards.

Unfortunately, JTPA isn't the only example of weak program management by states. The Mississippi Human Services Dept. has been dogged by allegations of overspending and even outright fraud, and is currently under investigation by the state auditor and the Health & Human Services Dept. Already, a state audit has disclosed that existing federal block grant money intended for child care for the poor was diverted by state officials to buy items such as $37.50 designer salt-and-pepper shakers, as well as $40,000 in improvements to a building the state didn't own.

COSTLY REFORM. Of course, not all states stumble when they try their hand at reform. Some have devised creative--and successful--ways to shift people from welfare to work in recent years. Among the best is California's Greater Avenues for Independence (GAIN), a state program designed to move recipients of Aid to Families with Dependent Children into the workforce by giving them job training and job-search help. GAIN has boosted the incomes of those who participate in it, while reducing state AFDC payments, according to the MDRC, the nonprofit research group. Over three years, earnings of participants jumped on average 22%, or $1,414 above those of AFDC recipients who didn't enter the program. Participants also received an average of $961 less in AFDC payments during their three years, a savings to the state.

But such successes show that unless states intend to move people off welfare by dumping them on the streets, reform is costly, at least initially. California spends an average of $4,515 per GAIN participant over five years on such things as job training. In fact, in three of the six counties the MDRC studied, program costs exceeded budget gains. New Jersey's Whitman has sunk $50 million into providing health insurance for the uninsured and those leaving welfare for work. Even Wisconsin's Thompson admits: "It costs more up front to transform the system than many expect."

The bottom line: Don't bet on welfare and Medicaid reform to balance the budget. In fact, the Kaiser Commission on the Future of Medicaid found that Medicaid managed-care programs typically reduce total costs by only 1% to 2%, because elderly and disabled Medicaid enrollees are legally excluded--something current congressional proposals may not change. Although the elderly and disabled make up only 30% of Medicaid's participants, they account for 60% of spending--largely for nursing-home care.

Many governors rightly worry that growing post-devolution cost pressures will spell an early death for reforms that only now are showing signs of working. Take the highly touted Oregon Health Plan. Since its debut in 1994, it has won plaudits for expanding coverage to an additional 120,000 people through a controversial rationing plan in which 606 of 745 illnesses are covered. The added recipients are mainly working poor who wouldn't normally qualify for Medicaid but who lack private medical insurance.

Oregon Medicaid Director Hersh Crawford says that there's no way for the state to limit cost increases to 4% by 2002. "Our disabled population is growing 10% annually," says Crawford. "And we have the fourth-oldest population in the U.S." Oregon's options: Slash services, reduce payments to providers, and start charging premiums. That's exactly what it's doing. On Oct. 1, the state will require a family of four to pay $26 a month for coverage, and it's paring the number of medical services it covers to 581, a 4% drop.

Florida's pilot Family Transition Program, a welfare-to-work plan that provides AFDC recipients with health and child care, as well as transportation to their jobs, is in a similarly tenuous position. It's a small program, with a budget of just $14.7 million and 2,800 enrollees. But Director Betty Hooper, who thinks it will take three years to see concrete results, fears her program may get axed if Florida is forced to curtail overall spending. The state, she says, "might simply have to take care of people instead of investing in something we'd like to see happen."

That's already occurring. In the recent Texas legislative session, the state slashed a program designed to keep the elderly out of nursing homes when federal funds weren't renewed. And at Miami's 40-year-old Children's Psychiatric Center, Executive Director Robert Nolan already is wrestling with $500,000 in state and federal cuts this year to an operation that serves 5,000 kids. As galling as these cuts are, Dr. Nolan fears they're only harbingers of a future under block grants. That's because the legislature, which encouraged Nolan to develop on-site centers in as many as 40 schools, now has cut the funding--but left the programs.

What's possible, as this dark scenario spreads nationwide, is what Harvard University professor Paul E. Peterson calls "a race to the bottom." States could start making it harder and harder for anyone to receive welfare benefits, with governors vying to come up with the most draconian program. And since the block grant scheme being considered by Congress would no longer tie federal aid to how much states themselves spend, governors could slash away without much fear of any federal reprisals.

Still, many governors feel the potential benefits of devolution are worth the risks. "We've got to get relief from bureaucratic, overly micromanaged programs coming out of Washington," explains New York Governor George E. Pataki. Certainly by this fall, the nation's governors can expect Congress to give them powers they had only dreamed of before. But what is power without the funding? "It could be an empty victory," sighs Indiana's Bayh. Adds a more pessimistic David B. Walker, a University of Connecticut federalism scholar: "The states are being handed a box of chocolates, and some of them contain cyanide." Ready or not, it's time for the states to choose.

Leaders of the Republican Revolution are intent on handing the states

responsibility for policy areas traditionally administered by Washington.

Medicaid

Congress aims to turn Medicaid into a $158 billion block grant;

its allocation would be based on either the 1994 or past three year average level of federal funding. The block grant would cut the annual rise in federal health-care spending for the poor to 4% from 10.4% and save Washington $182 billion by 2002.

Welfare

Congressional Republicans may combine Aid to Families with Dependent Children, food stamps, child care, and child nutrition into a single $222 billion block grant to the states. The program would cap spending over a five-year period and cut federal health-care funds for the poor 30%, or $89.5 billion, by 2002.

Job Training

The Senate is considering lumping 91 different federally funded training programs into a single $7 billion block grant to the states. But the grant would cut the funds available for job training by 15% in 1998.

Transportation

The Clinton Administration would like to turn over more responsibility for transportation policy. But there's a catch: Clinton proposes sending only $36.9 billion to the states during the next fiscal year, a $2.3 billion decrease.

Environment

Republicans are pushing to end federal oversight of state implementation of the Clean Air Act. And a House committee has proposed slashing the Environmental Protection Agency's $7.3 billion budget by 34%. One possible result: A nationwide patchwork of state-based environmental regulation.

DATA: BUSINESS WEEK

THE TUG OF WAR BETWEEN WASHINGTON AND THE STATES

1935

President Franklin Roosevelt affirms federal oversight of labor relations and Social Security above state regulation.

1789

Constitution drafted, granting far more federal powers than allowed under the former Articles of Confederation.

1954

Supreme Court in Brown vs. Board of Education rules "separate but equal" schools unconstitutional.

1861-65

The North's victory in the Civil War quashes Southern states' bid to secede from the Union over disagreements on issues such as tariffs and slavery, cementing the supremacy of federal over state power.

1810

The Supreme Court sets precedent that state laws in conflict with the federal Constitution cannot be enforced.

1819

Supreme Court Chief Justice John Marshall establishes a broad interpretation of federal restrictions on state powers.

1896

Supreme Court in Plessy vs. Ferguson adopts the "separate but equal" doctrine, allowing states to legally segregate blacks despite federal protections.

1957-63

Over protests from governors such as Alabama's George Wallace, federal troops desegregate several Southern school systems.

1964-67

Despite filibusters by representatives of Southern states, Congress passes, and President Lyndon Johnson signs, a rush of federal civil and voting rights legislation. Court rulings override state-sanctioned discrimination against blacks.

1972

Richard Nixon's New Federalism revives revenue sharing with the states, but the supposedly "no strings" grants come with extremely complex rules and plenty of restrictions on governors.

1994

Republicans capture both houses of Congress with ambitious promises to reduce entitlements and return cash and control of many federal programs to the states.By Kevin Kelly in Chicago and Richard A. Melcher in St. Paul, with Susan B. Garland in Washington, Wendy Zellner in Dallas, Antonio Fins in Miami, and bureau reports


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