Tag: federal money

Utah Legislators Call for Fiscal Federalism

Tea partiers take note: at the forefront of any effort to reduce the size of the federal government should be the devolvement of federal programs to the states. Achieving this may seem like mission impossible given the states’ addiction to federal money. However, there are signs that the idea of returning the relationship between the federal government and the states to that which the Founders prescribed is starting to gain some currency.

On Friday, the president of the Utah Senate and the speaker of the Utah House of Representatives penned an op-ed in the Washington Post calling for the federal government to begin the devolution process. The authors want the states to have the right to opt out of federal programs and allow the states to keep the taxes their residents send to Washington to fund them. The states would then be free to fund and manage the programs as they see fit.

The authors call their idea a “modest experiment,” and indeed, it is hardly radical. The 10th amendment to the Constitution is clear:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

From the op-ed:

Let’s select a few programs – say, education, transportation and Medicaid – that are managed mostly by Utah’s government, but with significant federal dollars and a plethora of onerous federal interventions and regulations.

Let Utah take over these programs entirely. But let us keep in our state the portion of federal taxes Utah residents pay for these programs. The amount would not be difficult to determine. Rather than send this money through the federal bureaucracy, we would retain it and would take full responsibility for education, transportation and Medicaid – minus all federal oversight and regulation.

Such a notion terrifies proponents of big government because state budgets are generally constrained by balanced budget requirements, debt inhibitions, and the inability to print money. States are also more limited in how much they can abuse taxpayers for the simple reason that citizens can move to a friendlier environment. Indeed, one of the beautiful aspects of returning to fiscal federalism is that it would strengthen this competition that $600+ billion in annual federal subsidies has somewhat neutered.

See this essay for more on fiscal federalism and this Cato Policy Analysis on the problems with federal subsidies to state and local governments.

Update: A C@L reader pointed me to this resolution introduced by Michigan state representative Paul Opsommer, which calls on the federal government to allow the states to opt out of federal highway programs funded by the federal gas tax. The states would be free to fund their own roads with their own gas tax revenues instead of sending money to Washington where its then redistributed back to the states according to Congress’s politicized wishes. As the resolution notes, the federal government uses the leverage it has over transportation spending to force the states to enact policies that they don’t want.

Kent Conrad and Fiscal Federalism

Senator Kent Conrad (D-ND) has a reputation for being a “deficit hawk.” But the bar is apparently so low in Washington that merely paying lip service to “fiscal responsibility” is enough to earn you the hawk title in the press. In reality, Conrad is a tax and spender as a story in today’s Wall Street Journal demonstrates.

These examples illustrate Sen. Deficit Hawk’s commitment to deficit reduction and fiscal responsibility:

  • “Like many in Congress, he is conflicted. He boasts a 23-year record of looking after North Dakota voters with ample farm subsidies, aid for drought-hit ranchers, defense spending and scores of pet projects. He has done little to help rein in Medicare and Social Security expenses—the U.S.’s biggest budget busters.”
  • “He has been a defender of the state’s grain farmers ever since [his election to the Senate in 1986]. He voted last April against a proposal to cap federal payments to the nation’s farmers at $250,000 per farmer per year, a measure that Mr. Conrad criticized as disastrous but that supporters said would have saved $1 billion a year.”

  • “He also helped draft a five-year, $300 billion farm bill in 2008 that boosted overall farm subsidies. The bill created a $3.8 billion emergency ‘trust fund’ for farmers who lose crops or livestock to natural disasters, which was Mr. Conrad’s idea. Since 2008, North Dakota ranchers have received $23 million under the fund, second only to Texas.”
  • “Mr. Conrad also has used legislative earmarks—provisions inserted into bills by lawmakers to fund local projects—to deliver federal money to North Dakota businesses, cities and schools. He secured $3 million last year to build a new terminal at the Grand Forks airport, and $13 million more for a fire station at a nearby air base. Dickinson State University got $600,000 to build a Theodore Roosevelt Center, while a Navy research project got $1.2 million to develop a ‘chafing protection system.’ ”
  • “In 2003, Mr. Conrad joined most Democratic senators to support Mr. Bush’s plan to provide Medicare prescription-drug coverage to seniors, at a cost of around $40 billion a year. The plan required Congress to scrap the spending controls Mr. Conrad once championed. Republicans won the votes of Mr. Conrad and other rural senators by agreeing to expand the program by pumping $25 billion more into rural hospitals and doctors over 10 years.”
  • “Mr. Conrad helped negotiate the 2005 highway bill, which critics blasted as a bipartisan exercise in spending excess. The $286 billion bill contained 6,371 earmarks. Even before Mr. Bush signed it, Mr. Conrad told constituents that the bill would deliver $1.5 billion to North Dakota communities. ‘That equates to North Dakota receiving $2 for every $1 in gas tax collected in the state,’ Mr. Conrad said in a news release.”

It would appear that Conrad doesn’t really want to cut spending to rein in deficits. He wants to increase taxes. One might think a proponent of tax increases in a red state like North Dakota would struggle at the ballot box. However, the Wall Street Journal article cites Tax Foundation data showing that North Dakota receives $1.68 in federal spending for every $1 it sends to Washington in taxes. In other words, Conrad’s tax increases would allow him to buy more votes at the expense of taxpayers in other states.  A North Dakotan is quoted as saying, “The joke here is that we elect conservatives to state office because we don’t want them to spend our money, and liberals to national office because we want them to spend other people’s money.”

This is a precisely why a return to fiscal federalism is crucial to getting spending-driven deficits under control. In the meantime, let’s stop calling politicians who want to spend more money and increase taxes to pay for it “deficit hawks” or “fiscally responsible.”

State and Local Subsidies

Earlier this week I criticized the U.S. Conference of Mayors for going to Washington and groveling for more federal handouts. Let me provide some more background for my criticisms with a look at federal budget data. The first chart shows that since 1960, total federal subsidies to state and local government have increased an astounding 1,173%.

Several readers have asked me what particular programs account for this large increase in state aid. The federal budget breaks down the total figures into categories. Not surprisingly, health subsidies — mainly Medicaid — account for almost half of the current total and are the driving force behind the massive overall increase:

However, there have been large increases in other activities as well. Here are the changes by federal budget function in state aid since 1960, in billions of 2010 dollars:

  • Health: $1.5 to $310.7 (+21,128%)
  • Education, Training, Employment & Social Services: $3.7 to $103.3 (+2,723%)
  • Community & Regional Development: $0.7 to $20.3 (+2,674%)
  • Other*: $0.7 to $12.0 (+1,707%)
  • Natural Resources & Environment: $0.7 to $7.8 (+966%)
  • Income Security: $19.0 to $113.8 (+498%)
  • Transportation: $22.0 to $73.5 (+235%)
  • General Government: $1.5 to $4.7 (+221%)
  • Administration of Justice*: $2.6 to $5.3 (+100%)
  • Agriculture: $1.5 to $1.0 (-32%)

*Administration of Justice begins in 1975. “Other” begins in 1965 and consists of grants for national defense, energy, social security, and veterans’ benefits and services.

All of these categories are at or near their high water mark in constant dollars with the exception of Natural Resources & Environment ($13.8 in 1980), Agriculture ($4.5 in 1985), and General Government ($26.9 in 1975).

Rather than being deprived, state and local governments have developed an unhealthy dependency on federal money. In a way, the states have become an extension of the federal government. This is at odds with the Constitution, which clearly intended for the federal government to have specific limited powers. As the 10th amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” There seems to be very little reserved to the states anymore, and even less to the people.

See these essays for more on constitutional basics and the desirability of fiscal federalism.

Federal Transportation Follies

The 2009 stimulus bill gave the U.S. Department of Transportation $50 billion to distribute to the states for highways, roads, and bridges. A House bill passed in December would add another $28 billion. According to Washington folklore, spending on infrastructure is always good because it’ll create jobs and spur economic growth. However, three recent examples are a reminder that the government often does a poor job of allocating resources.

First, an Alaska legislative audit concluded that the state should not have spent federal transportation money building a road to the site of the proposed “Bridge to Nowhere,” which was canceled after a national outcry. Alaska kept the federal money originally earmarked for the bridge, and then-Governor Sarah Palin agreed to spend $26 million of it on the road despite the fact there was no bridge.

Second, the Department of Transportation is supposed to exclude “unethical, dishonest, or otherwise irresponsible” parties from receiving federal funds. But according to a report from DOT’s inspector general, the average case took DOT officials “300 days to reach a suspension decision and over 400 days to reach a debarment decision.” For example, Kentucky awarded $24 million in transportation stimulus money to companies with officials under review by the Federal Highway Administration for bribery, theft, and obstruction of justice. The FHA took 10 months to review the companies before ultimately suspending them, but Kentucky had already given the companies the money.

Third, a Tennessee television station analyzed the state’s use of federal transportation stimulus money and found that it “spent an average of $161,500 per job created and that some paving jobs, which were temporary, cost taxpayers more than $1 million each.” The station interviewed a construction company that had been busy during the summer when it had federal money. Now its trucks are idle and the workers it hired have all been laid off.

Randal O’Toole says that “The best test of infrastructure value is whether users are willing to pay for it.” There’s almost no connection between infrastructure projects funded by federal taxpayers and the typically local users. Leaving infrastructure projects to state and local governments to fund would make more of a connection. Privatization, which would utilize tolling and other user fees, would be even better.

FAA Says Wasteful Spending ‘All Good’

It’s not uncommon to hear the claim made that the “stimulus” would have had a greater economic impact had the money been focused on infrastructure. But proponents of public “investment” in infrastructure seem to forget that the government allocates capital on the basis of politics rather than economics. Government is naturally inefficient because it is immune to the market signals that guide private actors who stand to lose their own money should an investment not pan out.

A perfect example is federal spending on airport infrastructure. The USA Today’s Thomas Frank has been doing good work looking at how the Federal Aviation Administration distributes funds to the nation’s airports. In his latest piece, Frank analyzed FAA records obtained under the Freedom of Information Act and found that taxpayer money is being put to questionable use:

Airports have spent $3.5 billion in federal money since 1998 on projects the Federal Aviation Administration rated as low priority because they do little to improve the most pressing needs in the nation’s aviation system…The money comes from a program that is supposed to improve aviation safety…But the program also has funded terminals at little-used airports, hangars to store private jets, and parking areas that are free to customers.

For example, Frank reports on Pellston Regional Airport in Michigan, which “used $7.5 million in federal funds to build a terminal with stone fireplaces and cathedral ceilings. The airport averages three departures a day.”

But the FAA sees it differently:

‘They’re all good projects,’ said Catherine Lang, FAA acting associate administrator for airports.

C@L readers who get stuck in congested airports this holiday season may wish to keep that quote in mind.

In a sister piece, Frank quotes Lang as saying that the terminals at these airports are “crumbling, loaded with asbestos and have no other source [of money].” If airport infrastructure in this country is truly crumbling, then why is the FAA expending scarce resources on stone fireplaces?

Frank cites more examples:

  • Lake Cumberland Regional Airport in Kentucky got $3.5 million to build a glass-fronted terminal in 2004 that was largely unused until the first passenger flights began this June. The airport now has six flights a week.
  • Montgomery Regional Airport in Alabama got $22 million to build a $35 million terminal with a sloping glass facade and a rotunda topped with a domed ceiling that reflects the historical architecture of the state Capitol.
  • Halliburton Field Airport in Duncan, Okla., got $700,000 for a terminal with a pilot room and a reception room. The airport, open only to private planes, has 24 landings and takeoffs a day, mostly local pilots in piston-engine planes.

We should be looking to privatize infrastructure as this Cato op-ed states:

First, privatization would reduce the responsibilities of the government so that policymakers could better focus on their core responsibilities, such as national security. Second, there is vast foreign privatization experience that could be drawn upon in pursuing U.S. reforms. Third, privatization would spur economic growth by opening new markets to entrepreneurs.

I suppose the drawback would be that politicians would be denied the fun of spending other people’s money, not to mention the campaign contributions.

More on ‘Race to the Top’

Andrew Coulson has already touched on this, but I thought I’d throw in my two cents. “Race to the Top Fund” guidelines were released today and they should please no reformers. They are simultaneously too weak, and way too much.

They are too weak because they don’t require states to actually do anything of substance. Have plans for reform? Sure. Break down a few barriers that could stand in the way of decent changes? That’s in there, too. But that’s about it. And the money is supposed to be a one-shot deal – once paper promises are accepted and the dough delivered, the race is supposed to be over.

In light of those things, how is this more appropriately labeled the Over the Top Fund than the Race to the Top Fund? Because while not requiring anything, it tries to push unprecedented centralization of education power.It calls for state data systems to track students from preschool to college graduation. It calls for states to sign onto “common” – meaning, ultimately, federal – standards. It tries to influence state budgeting.

In other words, it attempts to further centralize power in the hands of ever-more distant, unaccountable bureaucrats rather than leaving it with the communities, and especially parents, the schools are supposed to serve – exactly what’s plagued American education for decades. And, of course, it does this with huge  gobs of federal money taxpayers have no choice but to supply.

The Pay Czar at Work

Mark Calabria notes how the form of salary scheme at financial institutions played no apparent role in sparking the financial crisis.  But that hasn’t stopped the federal pay czar from boasting about his power, even to regulate compensation set before he took office.

Reports the Martha’s Vineyard Times:

Speaking to a packed house in West Tisbury Sunday night, Kenneth Feinberg rejected the title of “compensation czar,” but he also said said his broad and “binding” authority over executive compensation includes not only the ability to trim 2009 compensation for some top executives but to change pay plans for second tier executives as well.

In addition, Mr. Feinberg said he has the authority to “claw back” money already paid to executives in the seven companies whose pay plans he will review.

And, he said that if companies had signed valid contractual pay agreements before February 11 this year, the legislation creating his “special master” office allowed him to ask that those contracts be renegotiated. If such a request were not honored, Mr. Feinberg explained that he could adjust pay in subsequent years to recapture overpayments that were legally beyond his reach in 2009.

This isn’t the first time that federal money has come with onerous conditions, of course.  But it provides yet another illustration of the perniciousness of today’s bail-out economy.