Federalism is a Two-Way Street

By Scott D. Pattison, National Association of State Budget Officers
The financial relationship between the federal government and the states has never been more intertwined and complex. This makes federalism and intergovernmental relations issues critical for state governments. States need an improved relationship with the federal government that includes more understanding of the respective roles of the two levels of government and an increased focus on outcomes. 
With nearly one-third of total state funds coming from the federal government, states are extremely dependent on the federal government for money. This is a significant portion of state budgets and makes for some fairly major challenges for state officials. Just as important is the fact that the federal government is extremely dependent on the states to carry out federal programs and mandates. Overcoming current challenges in federalism, therefore, will help both levels ensure the goals they set for programs are being met. 
States face significant challenges involving their financial relationship with the federal government. These challenges include decreasing federal funds, problematic uncertainty and burdensome mandates. 
The first major challenge states face is declining federal government money to states—and the expectation that these funds will decrease even further. With high federal deficits and other demands for federal spending, it’s easy to see why money the states receive from the federal government is decreasing. Like states, the federal government is facing demands for more spending and lower taxes, while at the same time facing significant liabilities. 
The ability of the federal government to do everything citizens want—while also seeking to control the deficit—means funding cuts in some areas, particularly to discretionary federal funds. Many of the grants state receive are in the discretionary category. That money to states already has dropped by 4.6 percent since the 2010 federal fiscal year. Mandatory programs outside of health care have increased a small amount, by about 2.5 percent. Only in the Medicaid program, the health care program for low-income individuals, has there been any significant increase. States should expect a general long-term decline in discretionary grants. 
Given the financial management pressures for the federal government, there is every expectation Congress will be inclined to slowly decrease these funds to states and, of course, some of those funds are already part of the budget-cutting sequester legislation implemented in 2013. States will face the challenge of a federal government requiring various programs, but providing less money for them.
A second major challenge is the uncertainty caused by the lack of long-term federal decision-making on funding for programs to the states. 
Congress often waits until the last minute to authorize funding for many programs. States are left wondering how much money they will have for programs they are required to carry out. Many times, the delay by Congress in deciding whether to reauthorize programs creates an enormous amount of uncertainty for state officials. The uncertainty can last months, sometimes years. When legislation is passed, it’s often for too short a time. 
For example, Congress recently passed a transportation funding bill that only lasts until May 2015. That uncertainty makes planning extremely difficult. This is a huge problem for states, especially since uncertainty causes disruption to program activities and hiring and therefore limits states’ ability to reach their goals, whether it’s less crime or improved education. 
One senior budget official from the Midwest recently said, “We’d rather have certainty as to how much we will receive, rather than year after year of uncertainty without the ability to plan.” Not that states want cuts, but this underscores the states’ frustration with the continued uncertainty caused by the many times Congress is unable to pass a budget or other funding legislation. The uncertainty is compounded when legislation is passed for only for a short time, as was the case with transportation funding.
A final challenge for states is the problem of the many mandates and strings attached to much of the money the feds provide for programs. Many programs include significant requirements on all funding received from the federal government. As funds decline, states are expected to meet the same burdensome requirements, but with less money. 
Several things could improve the federalism environment involving finances. 
First, money from the federal government should have significantly fewer specific requirements and more general goals. If the grant is to reduce crime through money for drug rehabilitation, then give the states the flexibility to do what works best for them. Make the states accountable for developing effective anti-drug addiction programs that decrease crime, but avoid micromanaging and having numerous requirements. 
The federal government should offer increased flexibility that will benefit everyone. States will have fewer “check the box” burdensome requirements that don’t necessarily lead to the outcomes everyone wants. And the federal government can work with the states to get the results they want—such as lower crime—without the administrative burden of making sure many specific administrative requirements are being met. 
Second, federal officials need to have a better understanding of state programs and processes so they appreciate the consequences of their actions on state programs and the ability of those programs to carry out the goals they want achieved. While states don’t necessarily expect increased certainty in this difficult political environment, state officials can encourage the federal government to consider overcoming obstacles to passing appropriations and pass them for longer periods of time. Finally, for those programs the federal government feels they must cut, they also should re-examine the program’s requirements so that the level of funding realistically matches what is required.
Federalism is the proverbial two-way street. States receive money from the federal government to carry out certain programs and outcomes. The feds want these outcomes achieved. Both governmental levels need to work together to ensure that the funding levels and the requirements match and that practical flexibility is provided to state programs so we all get what we want—better outcomes for society.

Scott D. Pattison has served as the executive director of the National Association of State Budget Officers in Washington, D.C., since 2001. Founded in 1945, NASBO serves as the professional organization for state budget officers in the 50 states and U.S. territories. NASBO collects data and publishes numerous reports on state fiscal conditions; it also organizes meetings and training for budget and finance officials.