View Research by Author - Stephanie Schardin

Citation URL: http://www.urban.org/StephanieSchardin

This report examines the design and potential impact of current proposals to block grant Child Welfare, Food Stamps, Head Start, housing assistance, job training, Medicaid, transportation, and local law enforcement. The authors conclude that fixed funding may drive states to cut services or narrow eligibility during periods of fiscal stress. Four of the 10 proposals include maintenance of effort (MOE) provisions, but only the Medicaid proposal adjusts the level of required state spending for inflation. Requirements for public participation, data collection, and performance evaluation vary widely across the proposals. In a new twist, several proposals allow states to choose whether to participate in the block grants or continue under current programs.

Block grants were first enacted during the Johnson administration, in 1966. Three subsequent surges in the use of block grants occurred during the Nixon, Reagan, and Clinton administrations. Experience with block grants offers several lessons. The real value of block grant funding tends to diminish over time. Once in operation, Congress gradually erodes the flexibility of block grants. Block grant implementation is smoothest when states can draw upon existing administrative capacities. This study did not find consistent evidence that states use block grants to redirect benefits away from those with the greatest need.

This analysis of seven states (California, Colorado, Florida, Michigan, Mississippi, New Jersey, and Washington) shows that the severity of the current revenue crisis far exceeds that of the recession that triggered it because states cut taxes and expanded programs based on unsustainable revenue growth during the late 1990s. All of the states studied responded to revenue declines with short-term solutions -- using reserves, transferring other funds to the general fund, refinancing debt, and shifting expenditures or revenues across fiscal years. All but New Jersey and Washington cut spending. Only New Jersey relied heavily on tax increases. The authors suggest that states should be realistic about the sustainability of future revenue trends and should not count on federal help. States should also build up reserves and be able to draw on them when needed, and should make tax policies symmetrical rather than place special barriers against tax increases.

In FY 2002 and FY 2003, states responded to fiscal stress by using one-time revenue sources such as reserves and borrowing against future tobacco settlement payments. States took modest steps to increase revenues by increasing cigarette taxes, business taxes, and gambling revenues while avoiding increases in income or sales tax rates. States reduced spending by implementing across-the-board cuts, delaying planned program expansions, and reducing state labor costs and payments to private providers. Federal maintenance of effort requirements in TANF and high matching rates in Medicaid and SCHIP protected these programs to some extent. As the budget crisis deepens in FY 2004, cuts in social programs are likely to be larger. The report is based on visits to 7 states.

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