59

4 Federalism

development responsibilities from the national to the state and local level. Despite
partisan infighting, it is entirely possible that some version of these proposals will be
enacted and that the shift will continue.

But Republican leaders are also proposing to delegate to the states responsibility
for a broad range of social policies that serve low-income citizens. The House has
approved legislation eliminating Aid to Families with Dependent Children, an
entitlemen. program, and replacing it with a fixed block grant that, unlike AFDC, would
not increase or decrease depending on the number of welfare recipients. Under the
proposed block grant program, states could set, within limited guidelines, their own
eligibility standards and benefit levels.

Unlike the Republicans’ proposals to increase the state role in economic
development policymaking, transferring redistributive policy from Washington to the
states would be a mistake. It would defy the logic of the existing division of responsibility
between the national and state level of government and give states responsibility for a

policy role for which they are unsuited.

Dividing Public Responsibilities
As relations between state and national governments have evolved over this century, the
two levels of government have--for very good reasons, as I shall explain shortly--taken

distinctively different domestic policy roles. Traditionally, states and localities have taken

responsibility for managing the country's physical and social infrastructure--roads,


123

decades, To have any chance of success, any proposed solution must aim at reforming the entire
system.

Federalism: The Key to Reform

An essential element to any reform is the restoration of clear limits on the federal
government. This should not be regarded as a partisan matter, nor motivated by an anti-
government rationale, for the federal government has not only a proper role to play in the nation’s
life, but an essential one. Instead, it is an effort to restore the ability of government to carry out
its responsibilities, which it cannot do without enforced restraints on its freedom of action.

If they are to be effective, these limits cannot be dependent upon self-restraint nor held
hostage to the vagaries of future judicial interpretations. Sober in their appreciation of human
nature, the Framers understood that only through the operation of opposing political mechanisms
in which self-interests are pitted against one another can paper restraints be enforced. The key
role in this salutary struggle of contending interests they naturally allocated to the states as the
Parties most interested in restraining Washington's power. It has been the progressive elimination
of the states’ ability to exercise this equal political role that has virtually removed all restraints on
the federal government. In the resulting inexorable march to the current situation, the
Constitution’s written limitations by themselves have proven to be singularly ineffective as
barriers to determine political actors.

The answer is not to be found in a simple repeal of the century’s accumulated errors.
Federalism in its original form cannot be revived, as no argument for repealing the popular
election of senators is likely to be acceptable politically. But the role of the states can
nevertheless be significantly enhanced beyond their current vestigial level, and the powers of the
federal government correspondingly reduced, through other means, including enhancing the role
of the states in the making of national policy and granting them greater autonomy in a broad range
of areas.

‘The goal would not be simply to transfer the operations of the federal government to the
‘states, although the benefits of such a transfer would be several, including an enhancement of
public accountability and flexibility. The far greater benefit would result from their check and
balance of the federal government as consequence of their defense of their own autonomy. By
0 doing, the states would serve to protect civil society from the withering intrusion of
government,



25

RESTRUCTURING MEDICAID: Concepts, Issues, and Alternatives

being served in health maintenance organizations where more than 75 percent of the enrollees are
Medicaid and Medicare beneficiaries. This statutory requirement was thought to assure quality in
such HMOs, but there has been no evidence that this proxy has ever worked. It could be repealed.
States could be given the ability to establish networks of care (including fully and partially
capitated systems) under a restructured Medicaid program as part of its regular program
administration and without any waiver requirements.

Home and Community-Based Care Programs. Home and community-based care (HCBC)
programs are an important alternative to institutional care for frail elderly and persons with
disabilities. However, existing Medicaid statutes have a programmatic bias toward institutional
care. There are more than 100 different HCBC programs across the nation, and each state has at
least one program. States are required to use the waiver process to establish such programs.
Statutes could be revised to give states the authority to establish these programs through a plan
amendment process; however, states must retain the authority to limit the number of individuals
who could enroll for such care.

Nursing Home Reform Mandates in the Omnibus Budget Reconciliation Act of 1987.
Congress mandated extensive new quality assurance measures for the Medicaid nursing home
program in 1987 that allows the federal government to micro-manage state nursing home
programs. States could be given more flexibility to administer their programs efficiently. Toward
that end, Congress could repeal the Preadmission Screening and Annual Resident Review
(PASARR) requirements. PASARR has been costly, and states have developed other strategies to
assure the appropriate placement of individuals with disabilities. In addition, the specialized
annual resident review for mental illness and mental retardation is duplicative of existing annual
review processes and could be eliminated. Serious consideration must be given to the extent to
which quality standards remain mandated by the federal government as compared to a federal
mandate that says that states must have quality assurance systems but the states are given the
freedom to determine what those standards might be.

REIMBURSEMENT SYSTEMS AND RATE SETTING

States remain saddled with the inflexible provider reimbursement standards of the Boren
Amendment. These standards limit states in their ability to establish institutional (e.g. inpatient
hospital and nursing fiome) reimbursement rates. The Boren Amendment could be repealed and
assurances be put in place to protect states from federal and judicial intrusion in the rate setting
process. It should be noted that because of the revolutionary changes in American health care
system, the Boren Amendment is much less relevant today to hospital rates than just a few years
ago. Because of these market changes, states are negotiating with health care networks for more
comprehensive health care packages that include hospital care. As such, the rate negotiation for
hospital care is between the hospital and the health care network not the hospital and the state.
While the impact of the Boren Amendment on hospital rates is declining, the Boren amendment
also applies to nursing homes. Therefore, repeal or other forms of relief are needed.

States could be given the opportunity to explore alternative strategies for provider payment
methods. Though Medicare and most private payers have moved away from cost-based
reimbursement, federal legislation has mandated that certain providers be paid on the basis of
costs. Mandatory “reasonable cost” reimbursement could be repealed. Moreover, strategies that
try to tie access to care to certain reimbursement rates could be eliminated from Medicaid statutes.

NGA Staff Paper 3
Iuily 24, 1995


154

the Federal Government start telling people what is good perform-
ance, you might as well not even talk about devolution.

Mr. Suays. Mr. Pilon.

Mr. PILON. I tend to think that inside the beltway it is not appre-
ciated how fast things are moving in this country. The November
elections were a shock to Washington.

The Lopez case, which we talked about at the outset of these
hearings, was thought to be a very easy one for the Supreme Court.
Most conventional wisdom said that it would be a slam-dunk, 9-zip.
It came out 5 to 4 the other way. Things are moving very fast in
this country toward reduction of government, real limitation of gov-
ernment.

Mr. Sxays. Are you talking about Federal Government again?

Mr. PILON. I am talking about all government.

Mr. SHays. OK.

Mr. Pion. And returning power to the people, which is what the
final words of the 10th amendment speak about.

Earlier Mr. Souder said he is just amazed, the freshmen class,
of which he is a Member, walks around with copies of the Constitu-
tion in their pocket and pull it out. That is a mark of the change
that is taking place. Your colleague, J.D. Hayworth from Arizona,
has led the formation of a constitutional caucus, of which there are
now some 100 members.

Mr. Suays. I might say—and I love the gentleman—the last 2
days he has been on the floor of the House encouraging me not to
cut certain programs.

Mr. PILoN. I will speak to him about that.

My point, though, is very simply this, that things are moving
very fast and we will, I predict, see this policy debate about fed-
eralism very soon—indeed, already, as these hearings are indicat-
ing—become not simply a policy debate but a constitutional debate,
which is where it should always have been, failing which, we got
ourselves into the mess that we are in today, such that we have
to ask, how do we get out of this mess? And there is no easy an-
swer to that, for the reasons that I cited earlier from economic the-
ory which explains why there is no easy answer to that.

The fundamental question again is: Do we have authority to do
what we are doing? I doubt that anyone in this Congress seriously
believes that the Constitution authorizes Congress to create and
expend money on a Corporation for Public Broadcasting, all things
considered. I seriously doubt that anyone seriously believes that
you can find that authority in the Constitution, and yet a thousand
Corporation for Public Broadcasting-type institutions are flourish-
ing as a result of the kinds of power that Washington accrued to
itself after the crucial year of 1937 following Roosevelt’s court pack-
ing scheme. That was the watershed, and that is what we have to
come to grips with if we are going to come to grips with the policy
questions that are vexing this subcommittee.

Thank you.

Mr. SHays. Thank you very much, Mr. Seay.

Mr. Skay. I had indicated earlier I am not a fan of block grants.
I am not a strong opponent. I just believe the results will be some-
what different than what their advocates hope they will be. The
same with term limits. I am not opposed to them. I don’t think that


149

Mr. Suays. Mr. Chrysler, you have been wonderful in listening
to this. Any time you want to weigh in——

Mr. CHRYSLER. I appreciate that, Chris. I did get here a little bit
late because of the same problems that all of us have.

Mr. Suays. Thank you for being here.

Mr. CHRYSLER. In today’s Congress, with three subcommittee
meetings all happening at the same time, and we had a markup
in Banking.

But you know, it is interesting that we could fund these—this
block grant situation, we could give everybody a $2,000 tax cut,
and let the States raise the taxes and write the rules, and I think
it would give—go a long way toward giving us accountability and
responsibility, insight, in this Government and the State govern-
ment.

I think having 50 labs to try out new programs would be helpful,
and I think the fact that we are entering into this, as Newt Ging-
rich would say, the third wave information age, I think with infor-
mation being disseminated as fast as it is today, you would have
a very good opportunity to share that, and I would not worry so
much as we did back in the fifties and sixties as whether one State
wasn’t really up to speed on what another State is doing. I think
it moves much faster these days.

Let me ask a couple of real quick questions. First of all, realisti-
cally, how significant a role can charities be expected to play in a
meeting—in meeting social needs, in your opinion? Start over
there.

Mr. PILON. The book Newt Gingrich speaks about by Marvin
Olasky is an absolutely magnificent statement about how, through
public programs, we all but destroyed private efforts.

Indeed, the effort was made at the beginning of this century,
during the progressive era, and it was consciously made to crowd
out, not from an economic explanation point of view but from a con-
scious political point of view—to crowd out private charities so that
public welfare institutions, professionally trained, would be able to
provide these programs better. Well, we have seen the result of
that.

Mr. Seay in his remarks talked about how so many of these pub-
lic programs destroy what Charles Murray has called the tendrils
of community. They destroy the kinds of private, voluntary institu-
tions that would naturally arise in their absence and would espe-
cially—so if we left the money in the communities to begin with,
rather than draw it all to Washington.

I mean, we all presume that, well, the private charities won't
rise. Of course not if we keep the taxing levels at the level they
are today. But you put the taxing levels at the levels that they
were, and you would see the wherewithall to do this. Already,
though, we have an eleemosynary community which is very sub-
stantial in this country notwithstanding that taxation.

Mr. CHRYSLER. I believe that my colleague, Mr. Souder, has come
up with a program to increase charitable giving.

Would you like to comment on that, Mark?

Mr. Souper. A dollar twenty on the dollar and a couple of other
changes, such as 3 percent—we, in 1990, took the highest income
people out of the charitable giving cycle because we took—exempt-


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, Jr., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, Illinois
DAN BURTON, Indiana HENRY A. WAXMAN, California

J. DENNIS HASTERT, Illinois TOM LANTOS, California

CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York

STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida JOHN M. SPRATT, JR., South Carolina
WILLIAM H. ZELIFF, Jk., New Hampshire | LOUISE McINTOSH SLAUGHTER, New
JOHN M. McHUGH, New York York

STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida GARY A. CONDIT, California

PETER BLUTE, Massachusetts COLLIN C. PETERSON, Minnesota
THOMAS M. DAVIS, Virginia KAREN L. THURMAN, Florida

DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York
JON D. FOX, Pennsylvania THOMAS M. BARRETT, Wisconsin
RANDY TATE, Washington GENE TAYLOR, Mississippi

DICK CHRYSLER, Michigan BARBARA-ROSE COLLINS, Michigan
GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of
MARK E. SOUDER, Indiana Columbia

WILLIAM J. MARTINI, New Jersey JAMES P. MORAN, Virginia

JOE SCARBOROUGH, Florida GENE GREEN, Texas

JOHN B. SHADEGG, Arizona CARRIE P. MEEK, Florida

MICHAEL PATRICK FLANAGAN, Illinois CHAKA FATTAH, Pennsylvania
CHARLES F. BASS, New Hampshire BILL BREWSTER, Oklahoma

STEVEN C. LATOURETTE, Ohio TIM HOLDEN, Pennsylvania

MARSHALL “MARK” SANFORD, South

Carolina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, JR., Maryland (Independent)
James L. CLARKE, Staff Director
Kevin Sapo, General Counsel
dJupita McCoy, Chief Clerk
Bup Myers, Minority Staff Director

SUBCOMMITTEE ON HUMAN RESOURCES AND INTERGOVERNMENTAL RELATIONS
CHRISTOPHER SHAYS, Connecticut, Chairman

MARK E. SHOUDER, Indiana EDOLPHUS TOWNS, New York
STEVEN SCHIFF, New Mexico TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland BERNARD SANDERS, Vermont (Ind.)
THOMAS M. DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
DICK CHRYSLER, Michigan GENE GREEN, Texas
WILLIAM J. MARTINI, New Jersey CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida HENRY A. WAXMAN, California
MARSHALL “MARK” SANFORD, South

Carolina

Ex OFFIcIO

WILLIAM F. CLINGER, JR., Pennsylvania CARDISS COLLINS, Illinois
LAWRENCE J. HALLORAN, Staff Director
CHRISTOPHER ALLRED, Professional Staff Member
‘THoMas M. Costa, Clerk
Kevin Davis, Minority Professional Staff

a)


119

Mr. SoupeER. I would also like to note for the record and welcome
Mr. Chrysler from Michigan to the hearing.

We'll go ahead with Mr. Seay.

And I'll give the chair back to our distinguished chairman.

Mr. Seay. Mr. Chairman and members of the subcommittee,
thank you very much for the opportunity to be able to appear be-
fore you. I’m Douglas Seay, I’m the director of the Governors’
Forum at the Heritage Foundation. There is a liability often to—

Mr. Suays. Can you put the mike a little closer to you?

Mr. Seay. There is a liability often to speaking last. The good
stuff has been said before they get to you, and often said better
than you yourself might have done. So I will try to focus on some
other areas.

I would like to commend the Members here and the others inter-
ested in probing this subject. Long-time federalists, such as myself,
I think, have gotten used to people being turned off by the subject.
But as the chairman had indicated earlier, it is among the most
important that we are facing.

Now the discussions of federalism to the extent that they occur
are usually about who does what, the Federal Government or the
States, about devolving power, how much, in what manner? Even
though I’m a very strong advocate of the States, this issue of devo-
lution I, frankly, don’t know what the result would be if one asked,
will the States do a better job?

Well, in some areas they’re certain to do a worse job. That’s,
going to be quite clear. In some areas, they’ll do better. But overall,
I think that devotion is something that needs to be tried. But we
should be realistic about the results that we expect to obtain.

Also, the debate often focuses on efficiency, and I think that is
a misapplied focus. Obviously it is important to be efficient with
the taxpayers’ money. But government is not about efficiency. Gov-
ernments really can’t be efficient. If we want something done effi-
ciently, we'll give it to the private sector.

Those tasks that the government does are tasks for which effi-
ciency is not the first criterion. I have a number of problems with
block grants. For one thing, I think they dangerously separate the
faxing authority from the spending, and public accountability is
lost.

When Washington raises the money and then gives it to the
States to spend, it is difficult for the public to know who is actually
responsible for the use of their money and for the results that it
obtains. Plus, block granting programs to the States is, in my
mind, not really federalism.

This is federalism as defined by Washington. It assigns the
States roles that can easily be changed by Washington. This may
be a part of federalism, but certainly shouldn’t be confused with
the real thing. But my interests focus on another aspect of federal-
ism besides block grants, and I think it’s one that isn’t often dis-
cussed, but it’s one I think is much more important. And that is
the constitutional role of federalism.

When the Framers of the Constitution were setting up their sys-
tem, having a very sober view of human nature, they did not base
the system on individual self-restraint. Nor did they base it on
written provisions, because neither of these are self-enforcing. In-


68

13 Federalism

reckless) prediction that any policy enacted in the forthcoming Congress that
dramatically shifts the responsibility for welfare downward to states and cities will prove
unworkable and short-lived, simply because such shifts run at odds with the underlying
structure of the federal system. If I am wrong and welfare policy is permanently turned
‘over to the states, the well-being of the most marginal members of society, including
large numbers of children living in poverty, will be adversely affected in serious ways.

States have demonstrated that they are increasingly incapable of sustaining
welfare benefits in an ever more integrated economy. State AFDC benefits are jointly
funded by the national and state governments but set at the state level. For the first 33
years after AFDC was established in 1937, states raised the real value of this benefit
program steadily. The mean benefit paid to a family in the average state was $287 in
1940, $431 in 1950, $520 in 1960, and $608 in 1970 (all figures are in 1993 dollars).

But in 1970 welfare benefits began to decline, partly because states became more
fearful that high benefit levels were attracting and retaining poor people within their
states. In 1969 the Supreme Court decided, in Shapiro_v. Thompson , that newcomers
could not be denied access to state welfare benefits. Over the next twenty years
evidence accumulated that high benefit levels acted as a (low-strength, but nonetheless
detectable) welfare magnet. The debate over the welfare magnet intensified and, after
1970, welfare benefits began to fall--to $497 in 1975, $437 in 1980, $409 in 1985. In 1990
they reached $379, and in 1993 they dropped to $349, not much more than they were in

1940. In the earliest days of this century, states often led the way to innovative social


152

some of these numbers will change with the Senate and the White
House, that you do look at the 182 in Medicaid.

We have just done an analysis that suggests if one makes the
most heroic estimates in managed care and providers savings and
so forth, it is way short of the 182. So you are right that the spend-
ing goes up and your—the rate of growth.

My fear is that 182 is such a big number compared to what one
can get that it could cause a number of States to restrict coverage
and have more uninsured even though the total cost does go up.

But a closing comment I would make is, I think there is actu-
ally—despite all the disagreements—a lot of agreement that there
are a lot of areas, there are too many Federal prescriptive rules.

States should have more flexibility; some things should probably
be completely devolved. There are areas where block grants are
definitely the right way to go.

I just reiterate that as you look for more State flexibility, to look
area by area and see what is the best mechanism.

Again, both houses—the majority in both houses seem to be
headed toward saying we can save money in food stamps and give
States lots of flexibility without block granting them. I think that
was the right decision. I know it is not what you want to do. I
think ultimately it is the right one in Medicaid as well.

I think one needs also, even where you block grant, to be careful
Mr.—about the structure.

Mr. Souder was saying in welfare we want to encourage the right
behavior, we want to put people to work and make them—we all
agree with that.

I think a point where Dick Nathan and I would very much agree
is a concern, for an example, that if one puts in the same block
grant the cash benefits for welfare and the work programs for wel-
fare, when States hit a recession, when they have population
growth and they have more poor people, they will be compas-
sionate, they won’t throw them in the street, and they won’t have
enough money for the work programs.

It is exactly what happened in the recession in the early nineties.
States didn’t draw on the money for the work programs when more
poor people occurred in the recession. If one were to block those,
one would at least want to do two separate block grants.

So I think there are a lot of important questions here in how one
moves the flexibility to States. I would urge one to be particularly
careful in the means-tested entitlements, which I would distinguish
from the discretionary.

But I think there are some real concerns in a block structure in
certain of the means-tested entitlements and that there are other
ways to cut costs and give States a lot of flexibility to experiment
and do a better job in those areas without in every case saying the
financing structure should be a fixed block.

Mr. SHays. Thank you.

Mr. Kilgore.

Mr. Kitcore. Yes. My final comment is, I think there is a real
danger in this whole area of confusing ends and means.

Mr. Chairman, you made a comment earlier——

Mr. SHAYS. Confusing ends and means?

Mr. KiLcore. Right.


79

Mr. Souper [presiding]. Thank you.

I guess I should have worn an orange tie today, since we don’t
have our lights. But I’m trying to give you a 1-minute warning, be-
cause we don’t have the usual light signals.

Mr. Kilgore.

Mr. KILGORE. Thank you, members of the subcommittee. M:
name’s Ed Kilgore. I represent the Forensic Policy Institute, whic!
is the think tank of the Democratic Leadership Council. I guess our
distinctive role in this debate is that—or our position in this debate
is that we urge Democrats to embrace a devolution agenda, not to
imitate or compete with conservatives, because the intergovern-
mental grant tapes that typifies our current model of domestic Gov-
ernors, has become so unwieldy and dysfunctional that it’s all but
destroyed the public’s confidence in the ability of government to
solve any problems at all.

I think most federalism advocates, regardless of their background
this year, feel a little bit like all the attorneys and the law profes-
sors who were on television and radio commenting on the OJ.
Simpson trial. We certainly welcome the opportunity to peddle our
pet ideas, but I think most of us share a lot of misgivings about
the event that’s made that possible.

And make no mistake, event that has created a devolution
debate this year, is the large array of block grant proposals, par-
ticularly in the U.S. House of Representatives, and I don’t think we
can have a useful debate on federalism or devolution unless we
very carefully characterize how those block grants do, and do not,
fit into a genuine debate on federalism.

Kathleen Sylvester of the Progressive Policy Institute and I pub-
lished a paper earlier this year called blocking devolution, where
we argue that block grants as proposed in the 104th Congress are,
in fact, a step back from genuine devolution, and an obstacle to any
real discussion on the subject. And I’d like to devote the balance
of my testimony to a justification of that critical assessment.

You cannot have a debate without some agreement on the terms.
To make it clear that our opposition to block grants or our concerns
about them is not a partisan matter, I think it might be useful to
compare this year’s federalism debate in Congress with the one
that was initiated in 1981 and 1982 by President Ronald Reagan.

The Reagan administration proposed a number of block grants in
its first budget and a broader array in President Reagan’s 1982
State of the Union Address. The block grants were never adver-
tised as a centerpiece of President Reagan’s new federalism con-
cept, much less as its sum total. Generally speaking, the Reagan
administration block grants were, as Dr. Greenstein suggested, in
areas with an unusually large number of small, narrow, and out-
dated categorical grants.

Their purpose was not to give States total control of Federal
funds, but instead to allow their more flexible use by States to ac-
complish broad Federal goals. This year’s block tt proposals are
radically different in two respects, beyond the claim that they rep-
resent a comprehensive agenda for devolution.

First, block grants are being proposed as a scheme to convert
major entitlements into discretionary programs. Whether or not
you think that’s a good idea, it’s certainly remote from the original


15

Statement of

James L. Martin

Director

State-Federal Relations

Good moming Mr. Chairman and Members of the Committee. Thank you for inviting the National
Governors” Association to share with the committee a few comments on the leading state concems about

federalism.

Federalism is a term with the potential of covering a wide and deep range of issues to a narrow and
targeted set of specific concerns. Federalism covers Anticle V of the U.S. Constitution on how to call a
Constitutional Convention to the Tenth Amendment, which reserves all powers to the states except those
delegated to the federal government, These are fundamental questions of the “balance” of powers. roles of
the citizen. values and vines. and the “sorting out” of responsibilities between individuals and their

governments.

Federalism also includes specific legislative actions such as balanced budgets, the extent of mandates and
regulations. block grants, who pays for what. formulas for distribution of federal funds, preemption of

states laws. and tax policies.

States are concerned about both the broad and specific aspects of federalism. This short paper deals with
the immediate issues that impact states in the near term. These include a strong, growing national
economy. reducing the 10 percent annual growth rate in the cost of Medicaid and Medicare, which will
total $332 billion in fiscal 1996, real welfare reform, design and implementation of several new block

grants, and tax reforms that could dramatically impact federalism for years to come.

‘Sustained national economic growth stands alone as the leading concern of state government in federalism.
State and local finance in 1992 nearly equaled federal finance at $1.2 trillion, while federal aid to all
governments for all purposes was only $180 billion. If the national economy dips, state revenues also dip,
and state costs go up for many kinds of welfare and job assistance programs. The train of job creation,
consumer spending. and new revenues for government services is pulled forward by sustained growth
U.S. leadership in a world-wide competitive marketplace directly impacts job growth, state revenues, and

eventually state-federal relationships.

Madicaid is the second major concem of state officials in federalism. Medicaid alone represents 40

percent of all federal aid to all governments for all purposes.


128

making centralized in Washington, away from scrutiny and outside control, these interest groups =
+ economic, social, political, and ideological — wield enormous influence. Virtually all are aware
that their agendas cannot be implemented through the electoral process because they do not
benefit the public.

The negative effects are evident in every area of society: Rampant crime, mediocre public
education, a welfare system that has created a seemingly permanent American underclass, an ever-
increasing federal tax burden, and enormous budget deficits that mortgage future generations.
Nor can the federal government ever have sufficient competence to ensure a positive impact on
such public policy areas as America’s global competitiveness of revitalization of the community
and family. The federal government has consciously preempted state, local, and private control
‘over most of these issues as it has taken upon itself the role of imposing open-ended social and
political reforms on American society. Washington's involvement in these and other areas has,
diverted scarce resources from state and local governments and other organizations that are far
Detter equipped to solve these problems. The federal government cannot solve them, but as long
as it has the power to try, it will; and it is this heavy-handed approach which will ensure that no
real solutions are possible. In fact, often the most positive action the federal government can take
in these areas is to remove itself from policy-making.

Deligitimizing Society

The growth of Washington has had the effect of rendering the individual and society
helpless and passive. Originally, the Constitution was written to guarantee the liberty of the
individual and the free workings of society; government was established to guarantee the larger
framework in which these operated. Now, however, the same document is used to empower the
federal government's assumption of ever-greater responsibilities over each, as its provisions are
used by the federal courts, Congress, and the executive branch to justify their impositions on
society, down to the smallest details.

Even as ever-greater areas of their lives are subject to increased legislation and regulation,
no individual or group of individuals is likely to regard themselves as able to affect the far-off,
mysterious process of rule-making. Their participation is limited to a choice of either protesting
or ratifying the entire package, with little or no possibility of having a specific effect on anything,
In effect, they cannot have any role in determining anything which affects them directly: none of
the laws produced by their elected representatives to govern the communities they live in can
withstand the displeasure of Washington and must conform to the parameters that are established
for them.

Instead of being protected and allowed to regulate itself, society, in the form of social
institutions and local government, has been almost entirely emasculated. The federal
government's responsibility to protect society has transmuted into an ambitious effort to displace
it; the autonomous workings of society, moderated by local governments directly accountable to
their citizens, have been suppressed by unchallengeable federal regulations, directives, and court
orders.

Unable to exercise any substantial control over their community, the average citizen has
little option but resignation and a growing resentment stemming from watching the ongoing



134

to my left saying his comments were something completely dif-
ferent. I thought they were petty much on point. But I'd like to re-
spond to what Paul Peterson said. And I most—I commented, I
said when I gave my testimony, that there are things on page 6
of his statement that I disagree with. And he—you know, what
Emerson said about hobgoblins of small minds, I was on that Rob
Evans Commission. And I always thought that AFDC should be,
and Bob Greenstein will be interested in this, should be a national
program, because it’s redistributive to the poor. It gives money to
the poor.

But all the debate about welfare, since 1988, since the Family
Support Act, has been about changing behavior. How do you deal
with out-of-wedlock births? How do you get people trained for jobs?
How do you teach them to read? There are three types of Federal
grants. There are grants for operating purposes, capital purposes,
and entitlement or income transfer purposes.

The way people think about income, about AFDC today and wel-
fare for families, the nonaged, nondisabled family category, has
changed. And I think we have to recognize that it is very much a
service challenge that everybody in Washington is talking about.

I testified before the Finance Committee with Charlie Murray,
and all anybody could talk about was out-of-wedlock births. And
about 12 Senators came and that’s what they talked about. Now,
that is not an appropriate national function, to agree with my col-
leagues here.

I don’t think that the National Government can deal with the be-
havior problems of the poor people in distressed areas where we
have some ideas about Fow we want to change their behavior in
line with national values about family life and work and staying
in school.

Mr. SHays. Mr. Nathan, thank you for your comments. I’m going
to try to ask you to be a little shorter just because I’m going to try
to get all six of you, then I’m going to yield to my colleagues.

Mr. GREENSTEIN. I'm going to continue along the same line of
discussion and say that I think some of the comments, and includ-
ing some of Dick Nathan’s, and Dick and I talk a lot about these
issues, to me, are both part on target and part miss the point. And
that is the following, and I’m going to be a broken record here.

The point I tried to make in my testimony was that we really
need to distinguish financing structures, like block grants, from the
according the flexibility to States. The commission on which Dick
Nathan served in the mid-eighties, Ronald Reagan’s chief federal-
ism expert was on it. It was across the political spectrum, called
for taking some broad areas of the Federal Government, not block
granting them, but completely devolving them, and others that
there was a very important Federal role and that was most par-
ticularly true of some programs for low-income families where some
States have more poor people and less tax capacity than others.
That hasn’t changed.

Dick Nathan makes a very good point that there’s now more in-
terest in how to affect behavior through these programs, and that
that probably shouldn’t be dictated by the Federal Government.
The point that I was trying to make is that in areas like AFDC and
Medicaid and food stamps, one can give States the flexibility to set


74

taxes in a recession, cutting benefits across the board, or turning
away newly unemployed families who worked and supported the
programs for years with their taxes.

In such circumstances, I think Governors of both parties will
come to Washington seeking additional funding. That funding, if
granted, will be accompanied by a new set of strings, and it would
be better if we’re at long last fundamentally rethinking Federal
and State roles to kind of get the design structure in the appro-
priate place from the start. Thank you.

[The prepared statement of Mr. Greenstein follows:]


32

DRAFT
‘Dates:

December 19, 1994
‘March 24, 1995

“A Five-Year Welfare/A-B-D Medicaid Swap”
“Fiscal Federalism in the Year 2000"
“Federalism in a Balanced Budget Context”

Assumptions:
The problems of welfare and health care reforms cannot be fixed separately.

‘Assuming the balanced budget amendment will be enacted to balance the budget by 2002 in response
to the demands of the taxpaying voters.

* Assuming Congress will stay commited to the balance by 2002 regardless of whether or not an
amendment is ratified by the states.

‘Then:

Payment for all programs for the aged, blind, and disabled (A-B-D) must be slowed down within the next
five years to even stay on a downward glide path toward budget balance,

However:

It is more likely the federal government rein in its expenditures for the A-B-D in Medicare but not
the states’ cost under Medicaid. This will leave the states with a ten percent annual growth problem for
two-thirds of its cost in Medicaid for the A-B-D. In addition, chances are high that in the next five years,
the federal government will also enact some form of a flat or consumption tax. The sales tax is currently
the states’ largest source of revenues and chances are growing that Congress will also curtail the $73
billion in tax expenditures to state and local governments that are highlighted in the President's fiscal
1996 budget.

In addition, there will be a cumulative impact upon the states of current rescissions of $17 billion, tax
changes of $5-8 billion, FY 1996 cuts in categorical programs and entitlements, and possibly line-item
veto authority. All of these changes assume no large cylical impacts due to economic conditions.

In combination, « further invasion of the states’ sales tax turf and a required sharing of the most
expensive entitlement program (A-B-D of Medicaid) will over time contribute to an inability of states to
‘take-on responsibilities for the non-A-B-D poor, as well as sustained reduction of the role of the states in
the federal system.

States will spend approximately $55 billion in fiscal 1996 for Medicaid services to the A-B-D population
and cannot possibly continue these Medicaid services to the A-B-D, with their high projected cost
increases over the next five years, and atthe same time assume federal welfare functions as block grants
with reduced funding.


103

A COMPARISON OF H.R. 1617 and S, 143

ELEMENT _|H.R. 1617 [s. 143
INTRODUCTION
NAME Ea Workforce De Act of 1995

and
Employment, and Rehabilitation Systems
‘Act; or CAREERS Act

EFFECTIVE DATE

‘October 1, 1996 (FY 97%), Secretaries given
broad transition authority.

‘July 1, 1998 (FY 98), waivers available for
FY 96 and 97.

PURPOSE The purpose of this Act is fo transform the | 1) to make the U.S. more competitive In
the world economy by eliminating the
fragmentation in Federal employment

Wg efforts and creating coherent,
workforce
development systems designed to
develop more fully the
‘occupational, and literacy skills of all
of the workforce;
2) to ensure that all segments of the
workforce will obtain the skills
competi necessary 10 earn wages sufficient to
“Employers ofthe US bth today and in the | maintain the highest quality of living in
future. ‘the world; and
3) 0 promote the economic development
of each State by developing a skilled
that is responsive to the labor
‘market needs of the businesses of each
State,
FUNDING FY 97: Youth Grant 32,3086. (20% cull; | 37° for consolidated system and 32.1b Jor
AUTHORIZATION | Adutt Grant 52.2635. (20% cut): Literary | at-risk youth with 7% reserved for national
$280m. (10% cut). Otherwise, such sums | activities and 93% allocated to States.
for FY 98 - 2002 as may be:
SYSTEM STRUCTURE
‘CORE APPROACH | Over 100 ‘consolidated into 4] Over 91 programs consolidated into one

grants to States: Adult Training, Adult
Education and Literacy, Voc Rekab, and
Youth Workforce Preparation.

‘block grant with two streams;
workforce education 25%, and workforce
‘employment 25% and a “flex” account of

S09 tat con be used for ether
FEDERAL ROLE | Includes i na Role performed Governing
national activites, LMI, ating | Board, comprised of Secs of Ed and Labor
for provider eligibility | and 3 reps from private sector, two Govs,
ion and MIS. Se shall } two local and fat momrtng

in setting procedure Chairs and ranking

for with r House and Senate authorizing
They also set core indicators and world | The Board Sate plan:

lass performance levels in order to ensure
‘nationwide per system

‘makes allocations to States; oversees LMI;

‘State performance b ks,
and initiatives

To receive a grant, the Governor has 10
submit a State workforce and
literacy plan to the Secs of Labor and Ed
which includes:

submit @ plan to the Governing Board,
including:
+ overall strategic plan for workforce



39

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REPRATRABVSSATAARGARARKBRIRASGEARIIARS PHONSBIISIRG

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3136

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64

9 Federalism

famous Kennedy tax cut of 1963, for example, was in fact nothing other than an offset
against bracket increase).

But in 1981 income taxes were sharply reduced, brackets were indexed to
inflation, and fiscal deficits mounted. In subsequent years, every new federal program
had to be paid for with a tax increase. Even existing programs were endangered by the
squeeze created by the pressing demand for tax cuts and the rising cost of senior-citizen
entitlements. Developmental pork lost its allure. The size of the intergovernmental
grant program dropped precipitously, and the percentage of the remaining grants that
were developmental (as distinct from redistributive) declined from a high of 59.5 in 1977
to 43,1 in 1990, Far from being a radical departure from past practice, the recent cuts in
developmental spending proposed by both Republican leaders and the Clinton
administration are just the latest in a decade-long series of like-minded decisions.

Not that Washington should play no rote in economic development. Some
policies, such as investment in scientific research, have such broad and far-reaching
consequences that they must be carried out by the national government. Others, such as
certain components of the communication and transportation system, must be
coordinated in Washington to achieve a desired degree of national integration. Still other
development aid to states and localities allows the national government to minimize the

adverse effects of economic development on the environment.


148

many of them can—and then you are left with only the small core,
the hard-core welfare problem.

I do think that federalism in this sense can be used very effec-
tively in the laboratory of experiment model that the Founders
spoke about to provide optimal programs at the State and local
level that will address many of the problems that have arisen from
attempting to federalize so many of these programs where you
have, as a result of that, instituted the genuinely perverse incen-
tives.

Mr. Seay. There are a number of points obviously that you have
raised. Just a couple. I think one of them comes down to the—your
view of the Constitution. Is this a set of rules that we actually
agree to abide by, or is it merely a set of suggestions that we would
like to follow if we could but they need not be binding?

The Constitution is supposed to be self enforcing. As I mentioned
in my opening statement, the checks and balances between the
States and Federal Government are meant to limit the Federal
Government’s power to do certain things as well as to limit that
of the States.

The situation we have now is that the Federal Government is es-
sentially unrestrained, and therefore the debate is how should we
use this power? Should we use it this way, or should we use it that
way? That is simply the wrong debate. Even for conservatives, such
as yourself, and I know of many others, once they have grasped the
levers of power, suddenly are overwhelmed with a desire to do
good, and I think their motives are often quite positive, but the fact
is that they do damage simply by continuing to expand the role of
government.

You can’t have a vigorous social——

Mr. Says. Are you referring to the Federal Government when
you say “government”?

Mr. Seay. Yes, exactly—a vigorous social set of institutions and
a vigorous government at the same time, one of them has to go,
and so far it has been the social end that has suffered. And, that
can’t be put right by the Federal Government simply agreeing to
restrain itself because it won’t, it can’t; the political pressures are
all in the other direction.

You can’t go before your electorate and say, “Elect me and I will
do less,” or, “Elect me, and even though we have this power to cor-
rect things in your lives, we are not going to use it because philo-
sophically that is a bad thing to do.”

So when you are talking about the local governments, it is easy
to find problems all over the place, problems that I would agree are
problems. Simply because the Federal Government can do some-
thing about them doesn’t mean that it should, and that may mean
that some problems go unsolved.

Mr. PILON. Could I make a quick point? “Elect me, and I will do
less”; it seems to me that is what the 1994 election was about, if
I understood it correctly.

Mr. Kilgore said there is no constituency for the 10th amend-
ment. I thought that the 1994 election was about just such a con-
stituency: Less government, get government off our backs. Maybe
I completely misread the 1994 elections.

Mr. GREENSTEIN. Can I make a comment on this welfare issue?


35

© A different mix of “swap” programs, such as: trade Food Stamps for certain job training and
education programs; divide Food Stamps by A-B-D eligibility and pay the states to run the A-B-D
program for the federal government.

Jim Martin, 202/624-5315


67

42 Federalism

globally at low cost. Capital also flows freely. Nevertheless, as long as the U. S. political
economy remains healthy and stable, the national government will continue to have the
capability of redistributing substantial amounts of the national income.

Current economic trends are having a considerably more powerful effect at state
and local levels. The improvements in transportation and communication systems that
have produced an increasingly integrated world economy are also at work among states
and localitics within the United States itself. Capital, entrepreneurial activity, and skilled
labor have become ever more mobile. State and local governments now face increasingly
competitive relationships with each other and must attend ever more strictly to economic
development. The result is that they are growing ever more reluctant to provide for the

needy within their ranks.

Making the Best of Federalism
The Republican proposals for wholesale policy shifts from Washington to the states and
localities have grabbed their share of headlines, and many are likely to be signed, sealed,
and delivered. Plans to transfer economic development functions to the states are not
only politically feasible but also smart policy, for they place economic development in
the hands of those policymakers best able to manage it.

But the Republican plans to move welfare policymaking to the nation’s
statehouses are more dubious, if for no other reason than that state and local officials

have become increasingly reluctant to pay for the cost of social policy. It is my (perhaps


@ voc rehab info system, performance indicators, LMI,
2 haw it be 7) ui
© public input to plan + ‘workforce education activites,
: ‘oi business ond Including elloomant of ;
5 meus Tat goal for eis youth, eves,
‘State may imp technical assistance, assesment of
prowess in
Performance measures
FLAN DURATION | remains iv eject until mod submited | three years
"AUTHORITY OF _| If Governor cannot get agreement through | After 7 ‘cannot
GOVERNOR collaborative process, hat final authority to| get agreement, can submit plan with any
submit plan _* such
‘WORKFORCE | Set by Governor; to Tabor | Governor sets ‘reas taking into
DEVELOPMENT | market areas, units of government, areas | account labor market arces
AREAS served by ed agencies, SDAx under former
STPA
STATE BOARD | Requires Gov to bring togeher @ specified | Governor as to develop srategic plan
rong of rene work with hime in | and bin spre rom: the Se od
‘agency, business reps, labor and
ite rennin png of local ‘elected officals, voc ed officials,
the workforce system; include | postsecondary ed official, other officials,
of business, local. elected | including development ax the
official, lacal ed agencies, Governor may designate. The Governor
insitutions, rehab council, orgs. | may establish State Workforce
: ‘served by | De ix the above
‘and lead State | officials, and a majority of business
effcials for education, econ dev, | members, at leat 25% labor and
ry ed, voc rehab, ‘bated org rept. Gov. must
‘welfare, and vets 0: ‘establish the Board if any funds ore to used
develop the State workforce | for econ, dev. This board, chaired by @
development and literacy plan ‘business person, would:
«otherwise comply withthe Act @ advise Gov on workforce dev system,
Gov. may use existing group to provide this | the State plan, and State goals and
function benchmarks
+ ssid’ in developing performance
indicators
@ serve as link between business and
yatem
«© exsist in preparing annual report
+ receive and comment on Siate rehab
plan
asia in developing LHI system
+ assist in monitoring and continuous
improvement
TOCAL Governor ensures establishment of local]| Governor negotaics and enters into a Tocal
sTRuCTURE | workforce board, selected by | agreement with local ip or local



126

whereby the federal government became synonymous with government in general, and it became
regarded as the principal decision-maker in all areas of social and public concern. As a result,
action by Washington became the only effective vehicle for addressing the wide range of social
and economic problems.

This included an ever-broader definition of the parameters of those powers traditionally
exercised by the federal government, with intentions increasingly at odds with their formal
purposes. For example, whereas in the early 19th century, Henry Clay's call for the federal
government to undertake a system of limited internal improvements such as tumpikes and canals
was bitterly assailed as an unwarranted and unconstitutional expansion of the federal government's
powers, the 1950's witnessed Washington's largely uncontested inauguration of the massive
interstate highway system under the guise of the National Defense Highway Act.

Courts Create Federal-State Imbalance

Although during this time of transition the states retained the bulk of their formal authority
within their own borders, the change in public attitudes set the stage for the next revolution: the
vast inflation of the federal government's powers, and the deliberate diminution of those of the
states, by the federal judiciary’s radical reinterpretation of the Constitution. Not content with
removing restraints on the executive and legislative, the Supreme Court and the federal judiciary
embarked upon an unprecedentedly activist role, striking down reams of state and loca! law, and
replacing these with increasingly detailed and broad court orders, the effect of which has been to
subject all aspects of society, from government to private activity, to detailed review and
corrective intervention by the courts.

Although much of the Supreme Court's activity in this area was stimulated by the civil
rights movement, federal court rulings have reached into all areas. As the activity of the federal
courts has grown, the states have been emasculated and forced into a wholly subordinate role;
‘even their constitutions are amended by the federal courts at will. Given that the responsibility for
interpreting the Constitution has traditionally been the prerogative of the Supreme Court, its
assumption of activist role, and its willingness to assist the federal government's expansion of
power, has meant that there is no practicable limit to its powers. This revolution carried out by
the federal courts has perhaps been the most damaging blow to federalism over the long term, for
Congress and the executive branch could not have expanded their powers over the past few
decades without the consent and active support of the federal courts.

In effect, there has been a radical revision of the Constitution, one not only approved by,
but in large part carried out by, its self-appointed keeper, the Supreme Court. And the process
shows few signs of slowing: new powers are annually granted by the federal government to itself.

This de facto amending of the Constitution has occurred without any public vote or formal
amendment. Those provisions such as the 10th Amendment that had been intended as absolute
guarantees have been totally eviscerated. The result is one wholly counter to that intended by the
Framers.

From a system of enumerated powers with a self-evident content and application, the
integrity of which was maintained by the actions of contending political powers, the Constitutional
system now in effect is one whose expanse and guarantees are entirely defined by interpretation by

6



45

As Governor Nelson says, don’t balance your budget and bust
ours. And you can’t do that because the taxpayers aren’t going to
allow it. So the rebellion is at every point in the pie. So, therefore,
the functional fatalists want to come off budget. Let’s take high-
ways off budget and let the kids suffer, or let’s take kids off budget
and let highways suffer. So we are back to the point where we have
a stable pie and the old folks are—they get first bite.

Mr. Davis. Thank you very much.

Mr. SuHays. The gentlelady—I always feel strange saying the gen-
tlewoman, the strong woman from Maryland.

Mr. Davis. Strong and gentle.

Mrs. MoreLLa. Thank you. I like that.

Thank you very much, Mr. Chairman, and thanks for calling this
meeting. And I will be very brief.

I would like to ask unanimous consent that an opening state-
ment be included in the record.

[The prepared statement of Hon. Constance A. Morella follows:]


87

narrow interest in federal budget savings, and by the usefulness of block grants as a
way to avoid difficult federal policy questions that happen to divide Republicans.
Meanwhile, state officials supporting block grants appear motivated by a narrow
interest in controlling federal funds, in part because they believe the money's going
to be cut in any event. Many block grant opponents are in fact opposed to any
change in the status quo, and are happy to retail all the old horror stories about the
alleged incompetence of the states.

In other words, Mr. Chairman, the block grant fashion really is “blocking
devolution” at both the intellectual and political levels. This country needs a broad
debate on devolution that goes far beyond the inside-the-boxes reorganization
schemes of federalism scholars, and addresses the challenge faced by government
officials at all levels in adjusting to the economic and social forces that are producing
a radical decentralization of private institutions. Instead we are arguing about
funding formulas for block grants.

Debating federalism and devolution in the context of the block grant approach
is a bit like debating the American system of justice through the optic of the OJ.
Simpson trial. It provides a departure point and stimulates public interest, but you
pay a high price in clarity and mixed motives. I hope a real debate in the 104th
Congress can begin with this hearing.


Back in the late 1960's the Cayuhoga River burst into flames. It was spontaneous
combustion! That picture catapulted industrial pollution onto the front page of the papers. This
was followed by headlines of Love Canal and then stories of children and senior citizens made ill
by urban smog. All this added to the public's passion for intervention. Their outrage led us to a
series of laws that have been powerful, successful tools. Government clearly had a role to play

here.

But times have changed. The system that brought us exceptional success in the 70's and
80's is no longer a system that satisfies, Traditional command and control regulations and rigid
federal delivery systems now are outmoded and need to be replaced by new models.

I think that the reason for the current hostility toward the federal government is the
public's perception that Washington is so distant and so unrelated to the real world that federal
government is not only irrelevant, but hostile. This feeds the fire of anger, frustration and distrust.
The $64,000 question is : "How do we fashion a government that responds to the changes that
are obviously needed, and do so without "throwing out the baby with the bath water?"

In many cases, states want the federal government to get out of their way. States are
asserting their rights and in most cases the states are ready to take the lead. They want and
expect the federal agency to delegate the responsibility to them. Does this make sense? Does it
respond to the public's cry for more responsive, less intrusive government?

I think it does. But let's look to history because it has a major bearing on where we are
today. In the early days, EPA was established before many states had environmental agencies.
Because EPA was up and running, states looked to the federal agency for assistance and
guidance. They needed help and money and it was clear that this relationship would call for
oversight on the part of the federal government.

This relationship was constructive and valued, but over the years it grew more and more


THE FEDERALISM DEBATE: WHY DOESN’T
WASHINGTON TRUST THE STATES?

THURSDAY, JULY 20, 1995

House OF REPRESENTATIVES,
SUBCOMMITTEE ON HUMAN RESOURCES AND
INTERGOVERNMENTAL RELATIONS,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a.m., in room
2247, Rayburn House Office Building, Hon. Christopher Shays
(chairman of the subcommittee) presiding.

Present: Representatives Shays, Souder, Morella, Davis, Chrys-
ler, Martini, and Towns.

Staff present: Lawrence J. Halloran, staff director and counsel;
Doris F. Jacobs, associate counsel; Christopher Allred, professional
staff member; Thomas M. Costa, clerk; Liz Campbell, minority staff
assistant; and Kevin Davis, minority professional staff.

Mr. Suays. I would like to call this hearing to order and to wel-
come our guests and panelists, welcome my colleague Tom Davis
from Virginia. We will be having other Members who will join us
shortly.

Under the rules of the House we are charged with the respon-
sibility of studying the intergovernmental relations between the
United States and the States and municipalities. We begin that
study today with a debate and we will continue this study for the
next 2 years.

We have invited our witnesses to debate the principles that
should guide Congress in balancing the relationship between the
National Government, and the States, counties, cities, and towns.
It is a debate launched by the ratification of the Constitution,
waged fiercely in the Civil War, reshaped by the exigencies of the
Depression and a World War, and one which continues today in
discussions of Government reinvention and devolution.

The debate is over the meaning of the term “federalism,” a
unique system of shared sovereignty that unites the United States
into one nation. The Bill of Rights placed nine explicit limits on the
Federal Government and ends with the 10th amendment’s reserva-
tion of power to the States or the ple. That system protects fun-
damental freedoms, according to James Madison, because, “In the
compound Republic of America, the power surrendered by the peo-
ple is first divided between two distinct governments. The different
governments will control each other at the same time that each
will be controlled by itself.”

(33)


150

ed the first 3 percent from being deductible, which resulted in some
degree in a decline in giving and, also allowing nonitemizers to
take up to $1,000.

I think as we look at changing the structure of government and
as we move more back to the States, we have to look at the private
sector and how to fill it. The charitable giving has stayed relatively
flat. We need to look at ways to boost it.

Mr. GREENSTEIN. Could I just add, there was some very interest-
ing work done by the Urban Institute in the early eighties follow-
ing some of the changes made in the early Reagan years to see how
charitable giving responded, and what they found is, in areas like
the arts and the symphony and areas of those sorts, the charitable
giving did respond quite significantly when Federal funding for
those areas went down.

In programs providing basic services and needs for the very poor,
that generally didn’t occur in the same fashion. In fact, two things
happened there. There was some increase in charitable contribu-
tions. It was far less, though, than the amount that was with-
drawn.

Of course the second thing that we often forget is that many of
the programs that are federally funded that are aimed at the needy
go throwgh States and then in turn through charitable organiza-
tions. Many charitable organizations deliver some of those services.
So that some of the very charities lost more money as the grants
were withdrawn than they got in additional contributions. And my
sense will be that we will probably see a repeat of this in the fu-
ture.

If the funding goes down for National Endowments for the Arts
and things of that sort, you know, some of that will get raised in
terms of private giving. I think the degree to which that’s true on
things like job training programs for the very poor will probably be
far smaller.

Mr. Suays. Mr. Souder, do you have any comments before we
kind of close up here? I would be happy if each of you would make
a short closing comment. Why don’t we start with Mr. Peterson.

Mr. PETERSON. I just have one general comment which has to do
with, if you look at the domestic budget of the National Govern-
ment, about two-thirds of it is going to finance programs serving
people over the age of 65. Now, we have said that a big portion of
those programs is not to be touched by

Mr. Snays. Are you saying two-thirds of the entitlements?

Mr. PETERSON. Two-thirds of all the domestic spending of the
Federal Government is going for programs serving people over the
age of 65. That includes Social Security, that includes Medicare, it
includes lots of Medicaid, it includes veterans programs, and so
forth.

Mr. Suays. I understand.

Mr. PETERSON. Now what we have decided is that a lot of that
is not on the table. We are making fairly modest cuts in that por-
tion of the budget. We are trying to get the budget balanced by cut-
ting back on the remaining one-third in a very heavy way. Now,
that’s what has happened in the past.

I mean the amount of money that we are spending on people
over the age of 65 is 10, 15 to 1, compared to what we are spending


42

Mr. Suays. I want to thank both of you for very excellent state-
ments. They were compatible. You have launched us into this dis-
cussion. It will be my intention not to ask either of you many ques-
tions. We are going to try to get to our six other panelists and
hopefully there will be little sparks flying between them and
among them.

I would make this comment to you. We have had a number of
hearings. In one of the hearings we had, it was pointed out that
the Departments of HHS, Health and Human Services budget
when it included Social Security was bigger than the gross domes-
tic product of Canada. Not bigger than the entire budget of Can-
ada, bigger than the gross domestic product of Canada.

And we had someone who testified in the planning department
of HHS that he, during the entire time he was there, did not have
a full handle on all the things HHS did, he said the task was so
mammoth.

I basically am comfortable with what both of you have said. I
note, Ms. Belaga, that it strikes me that you are basically makin,
the argument that where there is a spillover effect—where as witl
New Jersey pollution, the air brings it over Connecticut and New
York—you can’t have Connecticut deal with this environmental
challenge if it is a spillover effect.

Ms. BELAGA. Right.

Mr. Says. So that to me is an obvious given that there you have
to have the Federal Government step in. I have no questions to ask
either of you. Your statements were quite outstanding. I just want
to note for the record, that Connie Morella, distinguished Member
from Maryland is here, and also is a very close neighbor of the Dis-
trict of Columbia.

With that, I will invite my colleague Mr. Towns, if he would like
to ask any question of this panelist.

Mr. Towns. No, Mr. Chairman.

I would just like to thank both of them for their testimony, it was
very thoughtful testimony. And, of course, they also pointed out
some areas that we really have some serious problems that we
need to address, and I appreciate your comments in that area.

What I would like to No. though, is to—being I know Mr. Martin
has had a lot of experience and I have a lot of respect for him, he
mentioned that health care cost is going to eat us alive. You know,
if you have any thoughts—I won’t ask you this morning. But if you
would send me—actually the record.

Mr. SHays. He can submit it for the record.

Mr. Towns. For the record, any thoughts that you have on what
we might be able to do in terms of health care. I know these waiv-
ers, but I feel very uncomfortable with some of the waivers, I will
be honest with you. Because if waivers are not going to be mon-
itored, you know, what do we really learn from them?

And that’s a concern I have as well. So what I would like to ask,
if we would leave the record open for additional thoughts on that,
along those lines.

ink you very much, both of you, for your testimony.

Mr. MARTIN. Thank you, Mr. Towns.

Mr. Suays. I recognize the gentleman from Virginia.

Mr. Davis. I will be brief, too, but I want to thank both panelists.


73

converting the financing structure of a program like food stamps to
a block grant gives you some undesirable effects.

Under the current financing structure for such a program, Fed-
eral funding rises when poverty and need increase in a State, such
as during recession, and fall when need recedes during a recovery.
Similarly, Federal funding rises when the number of poor people
rise in a State during rapid population growth and decline with
population in those States in which populations are falling.

Entitlement financing structure automatically shifts funds
among States as relative need changes due to economic or demo-
graphic shifts. But a block grant by contrast has to use a fixed-
funding formula that’s necessarily out of date when determining
what share each State gets.

At any point in time, the latest State-by-State data on poverty
and average income are 3 to 5 years old. For example, some of the
proposals now before Congress to block grant the means-tested en-
titlements would give each State the share of the funds in the fu-
ture that it got in fiscal 1994. That creates serious equity problems.

States that would be inequitably treated would be those that ex-
perience a serious recession in the future, have rapid population
growth, had an unusually robust economy and therefore unusually
low poverty last year, or those in which conditions changed for
other reasons. So business like the Lugar food stamp bill avoids
these adverse side effects of block grants while according States
sweeping flexibility and saving Federal money.

Again, the basic point, the need to distinguish between flexibility
in designing and operating means-tested entitlements, and whether
the financing structure should be converted to a block grant. Simi-
lar issues arise with regard to Medicaid.

At the present time the Federal Government and States have a
financing partnership. They share in Medicaid costs. If costs rise
in a State due to recessions, populations, fewer employers provid-
ing coverage, advances in medical technology that save life but
have costs, onset of new diseases like AIDS, both parties share. If
you have a block grant in a program like Medicaid or food stamps
and a recession comes or population grows, one of these things oc-
curs. The State must bear 100 percent of the added costs, including
those due to factors beyond its control such as the business cycle.

In Medicaid, as in food stamps, States can be given sweeping
flexibility of large Federal savings extracted without terminating
the financing partnership and shifting all risk to States. States can
be given more flexibility to go to managed care, reduce payment
rates to providers, freed from Federal mandates, without convert-
ing Medicaid to a block grant that fails to respond to shifts and
needs among States.

Last year’s Chafee health care bill is an example of such ap-
proach. So in short, I will close, flexibility within a financing struc-
ture that maintains a Federal partnership of sharing the unex-
pected costs and savings stemming from fluctuations in these ap-
pears to be the wisest course to follow in these programs, as distin-
guished from others where a pure block does make sense.

If we simply convert these means-tested programs to blocks, I be-
lieve such a structure won't withstand the first substantial reces-
sion, At that time, Governors will be faced with choices of raising


82

Ed Kilgore
Senior Fellow
Progressive Policy Institute
Chairman Shays, and members of the Subcommittee on Human Resources and
Intergovernmental Relations. I appreciate this opportunity to testify on the future of
American federalism.

I must begin with a couple of disclaimers.

Despite what you might infer from my placement on this panel, I am not
testifying on Washington's behalf in a debate on the relative power of federal and
state governments.

The Progressive Policy Institute, which is the think tank of the Democratic
Leadership Council, is strongly in favor of a real devolution of power from the
current regime of centralized bureaucratic institutions, not just to state and local
governments, but to private civic enterprises and to citizens themselves.

We urge Democrats in particular to embrace a devolution agenda not to
imitate or compete with conservatives, but because the intergovernmental grant
system that typifies our current model of domestic governance has become so
unwieldy and dysfunctional that it has all but destroyed the public’s confidence in
the ability of government to solve any problems at all.

Like everyone else in political life, we are struck by the conflict in public
opinion polls between the strong and continuing support for a positive government
role in national life, and the willingness of voters in 1994 to embrace a strongly anti-
government agenda. But while some observers view this conflict as a sign of popular
ignorance, confusion, or even dishonesty, we believe it indicates so powerful a

frustration with the poor performance of government institutions that Americans are

a


THE FEDERALISM DEBATE: WHY DOESN'T
WASHINGTON TRUST THE STATES?

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES
AND INTERGOVERNMENTAL RELATIONS

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

JULY 20, 1995

Printed for the use of the Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
37-437 WASHINGTON : 1997

For sale by the U.S, Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-054147-6
a



108

Selected Publications
Field Network Evaluation Studies

Revenue Sharing

Revenue Sharing: The Second Round. Richard P. Nathan, Charles F, Adams, Jr., and
Associates,(Washington, D.C.: The Brookings Institution, 1977.)

Monitoring Revenue Sharing. Richard P. Nathan, Allen D. Manvel, Susannah E. Calkins,
and Associates, (Washington, D.C.: The Brookings Institution, 1975.)

Community Development Block Grants

Decentralizing Urban Policy: Case Studies in Community Development. Paul R. Dommel,
and Associates, (Washington, D.C.: The Brookings institution. 1982.)

Block Grants for Community Development, Richard P. Nathan, Paul R, Dommel, Sarah F.
Liebschutz, Milton D, Morris and Associates, (Washington, D(C: The Brookings

ion: prepared for the U.S. Department of Housing and Urban Development,
Washington D.C, 1977.)

Public Service Employment

Public Service Employment: The Experience of a Decade, Robert F. Cook, Charles F.
‘Adams, Jr, V. Lane Rawlins, and Associates, (Kalamazoo, Michigan: W.E. Upjohn
Institute for Employment Research, 1985.)

Public Service Employment: A Field Evaluation, Richard P. Nathan, Robert F. Cook, V.
Lane Rawlins, and Associates, (Washington, D.C.: The Brookings Institution, 1981.)

Federal Aid to Cities

Federal Aid to Big Cities: The Politics of Dependence. James W. Fossett, (Washington,
D.C: The Brookings Institution, 1983.

Federal Aid to Detroit, Thomas J. Anton
Federal Aid to Rochester, Sarah F. Liebschutz


131

‘even the most minor of issues, it may surprise them to learn that the states already possess the
requisite power to force changes upon Washington. Largely unrecognized by state officials and
others is the fact that the states, specifically their legislatures, not only share the amending power
with Congress but, uniquely, have the unique ability to amend the Constitution by themselves,
Congress alone cannot amend the Constitution; it can only pass its recommendations on to the
states for their ratification. But the Constitution provides the authority to the states to propose
and ratify amendments. In a sense, the states comprise the Board of Trustees of the Constitution,
and they have the clear constitutional authority to alter it to suit their wishes without restriction.
Although it is popularly said that the Constitution is whatever the Supreme Court says it is, the
truth is that the Constitution is whatever a constitutional majority of the states -- 38, the current
minimum needed to secure passage of an amendment ~ say it is.

This unlimited latent power, however, is difficult to use, for it can only be employed
collectively. Establishing a consensus among 38 states and thousands of legislators is difficult
enough. More serious is the fact that this process has never been used, and would seem to require
a Constitutional Convention to employ. The very thought of such a convention is troubling to
many on both the left and the right who worry about their opponents’ ability to bring forward
unwanted amendments, such as a provision for or against abortion, or a runaway convention
which would radically alter the Constitution. Fears of the latter do have precedent: the original
Constitutional Convention was called to make only limited improvements to the Articles of
Confederation, but ending up scrapping the older document altogether. There are ways to
substantially eliminate this possibility, but it remains a troubling concem for many would-be allies
of federalism.

A far greater obstacle, however, will be the resources and efforts employed by organized
interest groups to block either a revival of federalism or any particular amendment. Restrictions
‘on Washington's power will be particularly opposed, as these groups understand that their
agendas cannot be implemented through the ballot box, but only through imposition by
Washington.

Conclusion

The self-described intention of the Framers of the Constitution was to establish a system.
that would last “for the ages.” Unwilling to rely upon the self-restraint of individuals wielding
governmental power, they sef up an elegant and self-correcting set of balancing forces, both
within the federal government and between it and the states, hoping thereby to reduce, if not
eliminate, the ability of government -- whether for perverse purposes or good -- to exercise its
coercive powers unrestrained.

Major elements of that original design remain in robust health after over two centuries, but
certain others, including those vital to the system’s integrity, have been effectively nullified and by
the very government they were inteded to constrain. Were they to survey the operation of the
system they set in motion, the Framers might not be surprised by the deleterious effects of this
constitutional revolution -- after all, they had given warning against them -- but they would very
likely be genuinely troubled by the passive complicity of the people in the dismantling of the
central elements of their wondrous engineering achievement, the protective structure which keeps

1





109

Federal Aid to Houston, Susan A. MacManus
Federal Aid to Chicago, Charles J. Orlebeke
Federal Aid to St. Louis, Henry J. Schmandt, and Associates

Reagan's New Federalism

Reagan and the States. Richard P. Nathan, Fred C. Doolittle, and Associates, (Princeton,
New Jersey: Princeton University Press, 1987.)

The Consequence of Cuts: The Effects of the Domestic Program on State and Local
Cosette acd B Nathan Ered C. Delite, and Atsocines, (Princeton, New
Jersey: Princeton Urban and Regional Research Center, 1983.)

Reductions in U.S. Domestic Spending. John William Ellwood, ed., (New Brunswick, New
Jersey: Transaction Press, 1982.)

Welfare

Implementing JOBS: Progress and Promise. Jan L. Hagen and Irene Lurie, (Albany, New
York: The Nelson A. Rockefeller Institute of Government, 1994.)

Tuming Promises Into Performance: The Management Challenge of Implementing Workfare.
Richard P. Nathan, (New York, New York: Columbia University Press, 1993.) A
Twentieth Century Fund Book.

‘State Government Finances

The Fiscal Crisis of the States: Lessons for the Future, edited by Steven D. Gold,
(Washington, D.C.: Georgetown University Press, 1995).

Research Methodology

The Meth ‘for Field Network Evaluation Studies, Richard P. Nathan (Albany, New
York: Rockefeller Institute of Government). Reprint with permission from. ir
Implementation: Methodological and Administrative Issues, edited by Walter Williams,
Chatham House Publishers, Inc., Chatham, New Jersey, 1982.


30

RESTRUCTURING MEDICAID: Concepts, Issues, and Alternatives Appendix

Growth and Trends
© Between 1988 and 1992 Medicaid costs grew nationally, on average, about 20 percent per
year. In 1993 Medicaid growth dropped to 9 percent.
«Recent Congressional Budget Office (CBO) estimates show that:
=> despite the 1993 drop, Medicaid is expected to grow nationally at an annual rate of
about 10.3 percent for the next five to seven years;
“= about 33 percent of the growth in the program over the next five years can be
accounted for because of more beneficiaries coming onto the rolls; and
=> the average annual growth in the gross domestic product over the next seven years is
‘expected to be about 5.1 percent.
© States differ significantly in their projected growth rates for this program.
Medicaid represents, on average, about 20 percent of total state spending and comprises
about 38 percent of all federal funds to state and local government.
Medicaid Waivers

In recent years, a growing number of states are making fundamental changes to their program
through research and demonstration authority under Section 1115(a) of the Social Security Act.
This section gives states broad authority to test innovative strategies in administering their
programs. States have been most interested in two types of changes. First, they are interested in
broadening the eligibility criteria to some more uniform level of poverty. Second, they are
interested using managed care in their programs.

In many cases, these waivers make fundamental changes in the service delivery system and have
explicit agreements with the federal government on growth rates and eligible populations.

NGA Staff Paper ii
Iuly 24, 1995


89

insurance. And then the next line on my statement is where I part
a little company with Mr. Peterson. And it’s my favorite line in my
testimony.

I say this, which I never said publicly before, policy analysts
have to be honest. Now, I never said that before. And the reason
I want to highlight that is that we tend to think of AFDC as a pure
income transfer. And yet what the debate about it is about on wel-
fare this year is changing behavior, is providing services so that we
stop teenagers from having babies out of wedlock, get them to stay
in school, get them into jobs. These are not income transfer func-
tions.

The same, I think, can be said of Medicaid. It is very much a
service mix, redistributive and service program, so that you've got
to be careful not to oversimplify. Food stamps, I agree with Mr.
Greenstein, I’m on his board and I speak like this just to give credi-
bility to his wonderful center.

Food stamps are a pure transfer. And I personally have the most
reservation about that, about devolving food stamps. So I am on
the—I’m on the fence in the devolution revolution of 1995, which
is a phrase I like.

I am concerned, like Mr. Peterson, about the race to bond. But
I also in my statement in three pages talk about the opportunity
that comes from block granting the programs that are the center
of focus now for block grants, AFDC and Medicaid, and I think
work force development, too, the opportunity to have truly inte-
grated one-stop automated service systems.

In my testimony I talk about how caseworkers go out and they
can’t get parking places because there’s so many people serving the
same clients in our social programs. And there could be something
really good that comes out of, I think, very possible big changes
this year.

Commenting on Mr. Peterson’s statement, and just to make the
discussion interesting and like a seminar at Harvard or SUNY, he
talks about governments doing what they do best. Now, I don’t
think that the Federal Government has a whole lot of glory to wrap
itself in for what it’s done in Medicaid or AFDC. Those are troubled
programs.

And in AFDC, where the Federal role is what it has been, we
have situations like in Mississippi, for example, just to show the
contrast, benefits are so low that you get two and three times as
much in food stamps as you do in cash, which is very unusual and
I think a questionable arrangement. So I don’t think it’s as simple
as some sorting-out theories often indicate, and I’m very unsure
myself about what—and we're going to have a hearing next week
in the Senate on this, on how this might all end up.

And just as a final comment, the hearing in the Senate next
week is on formulas. And I, myself, have been doing some new for-
mula runs to figure out ways to deal with this Pandora’s box issue.

Once you open the Pandora’s box and let Mrs. Hutchinson and
her people go after the Northeasterners, Mr. Towns, you wonder if
they can ever close the box. I have some ideas which I'll be happy
to discuss with this committee which I’m working on for actually
for next week, but very pertinent to the discussion today so far,


84

proposed block grants in areas with an unusually large number of small, narrow, and
outdated categorical grants. Their purpose was not to give states total control of
federal funds, but instead to allow more their flexible use by states to accomplish
broad federal goals.

This year’s block grant proposals are radically different in two respects,
beyond the claim that they represent a comprehensive agenda for devolution. First,
block grants are being proposed as a scheme to convert major entitlements into
discretionary programs. Abolishing a federal entitlement to cash public assistance or
to health care may or may not be a good idea, but's it’s certainly remote from the
traditional purpose of block grants, which is simply an administrative reform to
promote more flexible management of federal-state grants. Second, the block grant
legislation we've seen so far does not liberate state administrators of federal grants to
focus on achievement of broad national objectives—those broad national objectives
are themselves eliminated, and with them, any coherent rationale for providing
federal funds in the first place.

Both in the Reagan budgets and in the 1982 State of the Union Address, block
grants were clearly and honestly described as interim way stations towards full state
assumption of selected federal responsibilities. Indeed, in the 1982 “swap” proposal,
President Reagan laid out a carefully calibrated timetable for turning back both
program responsibilities and the revenues to pay for them.

Thave no doubt there are members of Congress who privately view this year’s

block grant proposals as a way station for eventual abandonment of federal


12

Treasury said about the registration, therefore, we must do that.
And the Supreme Court said the 10th amendment had nothing to
do with our bonds. So our personnel—it was now up to Congress
to determine how we would run our personnel.

And then in South Carolina they said our finances, our bonds
were also the subject for congressional concern. In 1972—in 1992
the Supreme Court came around, made a small correction in a New
York decision which said that the Federal Government couldn't
commandeer the States to do their business. Grants, as you know,
are voluntary and it isn’t a club of grants. Most recently, just a
couple months ago, the Supreme Court in Lopez ruled that the Fed-
eral Government couldn’t regulate the police activities around
schools in terms of guns. If essentially had they ruled the other
way—it was a close decision 5 to 4, it would have said the Federal
Government can regulate police activities around every school in
the Nation. So the Governors aren’t sure. The leadership of NGA
and the National Conference of State Legislators aren’t sure that
the Supreme Court is ready to continue this look at the 10th
amendment.

They like the Lopez decision. They like that deference, and tere
is some meaning to the 10th amendment. But they are still not
sure because Usery said the same thing and they came right
around and reversed it, and they could reverse that one.

Federalism also concerns the details of the work you are doing
every day, all the work on block grants, all the work on formulas,
all the work on how we relate to the welfare system and the health
care system.

There is all the talk in Washington about Medicaid. Medicaid is
$173 billion—Medicare is $178 billion, the papers are full every day
about the changes in Medicare. Nobody talks about Medicaid in
Washington. Medicaid is $173 billion. Medicaid is as big as Medi-
care.

Medicaid, nobody cares about that in Washington because that is
paid for, half of it, 43 percent of it, by State government and, in
many cases, by county governments where the States and the coun-
ties have to share in that.

So this morning I would just like to concentrate on four short
things: The national economic growth, nothing is more important
to federalism than sustained national economic growth. In 1992,
the latest census figures, which are not published yet, they will be
in probably another 2 months, State and local government had $1.2
trillion in revenues including about $180 in Federal aid.

The Federal budget in 1982 was $1.3 trillion, and very few peo-
ple realize that the State and local budgets, the State and local fi-
nance systems are as big as the Federal system. So when the na-
tional economy dips or drops, there are enormous impacts at the
State level. Our welfare costs go way up and our revenues go way

lown.

Because the economy has improved over the last year, at the
NCSL meeting in Milwaukee just yesterday, the legislators re-
ported from 34 States that their balances were up to 5.6 percent,
the highest level in 15 years. And that’s because their economies
are improving. there are more jobs, more people going to work and
our welfare billings are going down. So nothing compares to a sus-


54

X, Y, Z, and then people that have X, Y, Z would have to pick up
and move to another State in order to be treated. That is a concern
ave.

I think that, you know, when you start talking about waivers
and cutting costs and saving money, I mean, you just could exclude
a whole group and that group would have to scramble and go to
another State that will provide the service, and then you create a
problem for that State. So I don’t know in terms of what the an-
swer is, but waivers without any kind of monitoring really sort of
frightens me.

Mr. Martin. Well, what I hear Governors saying is they are pre-
pared to take some.

Mr. SHAYS. Would you put the mike in front of you?

Mr. MartIN. They are prepared to take minimum national per-
formance standards so the cross-State problem wouldn't encourage
that. It is what we have now is a maximum Federal management
instead of the min—you know, the standard, minimum standards
to guarantee that. It is not a matter of either/or. I] hear Governors
saying at both ends they need flexibility but they are willing to
abide by some performance standards and at the end how many
people are being helped instead of the process in between, and
guarantee that their money is producing something.

And I think that we can work that out. There are a lot of block
grants now that are working. I think we can make that work. But
I share your concerns and I think the Governors share your con-
cerns that they—it is not a wholesale throwing things out.

Mr. Towns. I would feel a little better—and then I will let you
move on, Mr. Chairman—if the legislators were involved in the
process, I think I would feel a little better because I think there
would be a little more accountability. But when you have a situa-
tion where the administrator of the State can just make a decision
and move forward, you know, I really have trouble with it. I have
a lot of problems with that, you know, because we are still talking
about accountability at every level, and when you exclude a large
group like that, you know, it bothers me. This is going on as you
know. I don’t have to tell you, I’m sure you know that this is hap-
pening right now with waivers.

Mr. Martin. With some of ours. But the waivers, the money that
is spent on those waivers is not going—in Medicaid is not going to
bypass the State legislator. It is billions and they are involved in
that.

Mr. Towns. Let me put it this way, there is nobody from the
State of Tennessee, but they have done it already. I can name some
other States. But I happened to pick one State that there is nobody
present so nobody can defend it.

Mr. Suays. That is what I did with New Jersey a while ago.

Mr. Martin. My guess is there are a lot of legislatures that
would like to have the Tennessee plan waiver.

Mr. Suays. You know, as I am thinking——

Mr. MartTIN. I better shut up.

Mr. Suays. I find this dialog extraordinarily interesting. As we
are having this very thoughtful hearing in this building, there is
a hearing on Waco, and what a gigantic distraction from this issue.
I mean, we are getting into issues about block grants with Medi-


96

public sector, it is in state legislatures that big steps have to be agreed upon to capitalize
on the kinds of non-incremental decisions for policy devolution now being considered in
Washington.

‘The Accountability Challenge
Speaking of federalism, John Stuart Mill said that one function that has to be
centralized is the intellectual one, namely, the job of designing actions for and assessing
societal matters. You can't have the brains everywhere. The supply may be short, and
it may not be worth the price anyway. The center should be the place where we decide
how to define problems, how to assess what conditions are and where progress is being
made in pursuing goals (both public and private). This is especially so with the kinds of
big and bold new block grants now being considered. You should make sure there is
feedback so the Congress and the public at large can understand and assess the different
ways different states interpret and implement their mission under new block grants.
How do you do this? As a self-serving advocate of the business at which I make
my living, [ believe the new block grants should include requirements on the states, plus
authority and money for data systems, regular evaluative reports, and research on what
happens AFTER the revolution. I believe furthermore that you can't do this job the
way the administration wants to do it with federally prescribed national performance
measurement systems, which are an integral part of the administration's proposals for
grant-consolidation packages. (I am not a fan of "GPRA" - the Government
Performance and Results Act of 1993.) The states will "game" federally-prescribed
systems for performance measurement every time, or at least most of the time. This is
especially the case for service-type social programs like welfare, job placement and
training, health care, education, etc. (Witness the history of the JTPA performance

measurement system.)


15

TESTIMONY OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR
CENTER ON BUDGET AND POLICY PRIORITIES
before the
Subcommittees on Human Resources and Intergovernmental Relations
House Committee on Government Reform and Oversight
July 20, 1995

I appreciate the opportunity to testify here today on the important question of
federalism. I commend the chairman for scheduling a hearing on this matter.

In general, I believe that:

1. States should be accorded more authority in an array of areas.

2. Some areas should probably be largely shifted or devolved to states.
3. Block grants are desirable in some areas and unwise in others.

4, Ina number of important areas, we need to distinguish the question of
whether to convert the financing structure of a program to a block grant
from the separate question of whether to give states flexibility and
authority in designing and operating the program. In some areas, the best
policy mix may be to accord states broad flexibility in designing and
operating a program without changing the program’s financial structure
to that of a block grant. Broad state flexibility can be provided without a
block grant, while a block grant can come with strings that greatly restrict
state authority.

I generally concur with the analysis of my fellow panelist this morning Paul
Peterson on the appropriate divisions of federal and state roles. Areas such as
economic development and local infrastructure can be shifted — perhaps entirely
devolved — to states. At the same time, basic programs for the poor should not be
devolved. Some states have more poor people and less fiscal capacity to aid them than
do other states. Moreover, as Peterson has trenchantly explained, shifting to states the
basic programs to support low-income households can trigger a “race to the bottom,”
not because states are less compassionate than the federal government but because the
wide disparities that will quickly develop among states will set off fears that if more
generous states do not lower their benefit levels, they will attract increased numbers of
the poor to their borders.

There are many facets to the federalism debate and to how to restructure federal
and state roles. Id like to focus this morning on issues relating to programs targeted on
those with low incomes.


| aie seated

il
qi


48

I WELCOME TODAY’S HEARING, MR. CHAIRMAN, AND
I LOOK FORWARD TO THE TESTIMONY OF OUR
WITNESSES.


17

into a sword, enabling Congress, through regulation, to try to
bring about all manner of social and economic ends. Yet today,
following the Supreme Court’s reversal in 1937,' that is just what
has happened as Congress claims power to regulate anything that
even “affects" interstate commerce, which in principle is
everything.

The General Welfare Clause of Article 1, section 8, was also
intended as a shield, to ensure that Congress, in the exercise of
any of its enumerated powers, would act for the general rather than
for any particular welfare. Here, however, Hamilton stood opposite
Madison, Jefferson, and others in thinking that the clause amounted
to an independent, enumerated power--albeit limited to serving the
general welfare. But as Congressman William Drayton noted in 1828,
if Hamilton were right, then whatever Congress is barred from doing
because there is no power with which to do it, it could accomplish
by simply appropriating the money with which to do it.’ That, of
course, is precisely what happened, which the Court sanctioned when
it came down on Hamilton’s side in 1936," then a year later went
Hamilton one better by saying that although the distinction between
general and particular welfare must be maintained, the Court would
not itself police that distinction." congress, the very branch
that was redistributing with ever-greater particularity, would be
left to police itself.

With the Court’s evisceration of the doctrine of enumerated
powers, the modern regulatory and redistributive state poured
through the opening. One result of the subsequent explosion of
federal power, of course, was the contraction of state power where
the two conflicted--and the attendant federalism dilemmas. At the
same time, individual liberty contracted as well--the preservation
of which was supposed to be the very purpose of government. And
finally, questions about constitutional legitimacy never did go
away. As government grew, the idea that a Constitution designed
for limited government had authorized that growth of power became
increasingly difficult to sustain.

III, Federalism and "states’ Rights"
But what about the sorry history of "states’ rights" as a

doctrine that southern states invoked by way of defending slavery
and then, after the Civil War, the reign of Jim Crow? Does this

* NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937).
* 4 Congressional Debates 1632-34 (1828).

© united states v. Butler, 297 U.S. 1, 65-66 (1936).
“ Helvering v. Davis, 301 U.S. 619, 640 (1937).

5


53

They are for balanced budgets at all levels of government and
they are not about to pay for it with a property tax. So, therefore,
if we are going to balance the budget, if Congress is going to bal-
ance the budget, something is going to have to be cut, and if some-
thing is going to have to be cut, somebody is going to have to be
given a lot of flexibility to figure out new ways to save money and.
they are not going to be the same for New York City as they are
for Albuquerque or Cape May. They are going to be different, and
we are going to have to put a lot of trust back in government.

There is not much of it left there, as Ms. Belaga said, there is
a new need for some intergovernmental trust. And I understand
Mr. Towns’ comments about civil rights. Roger Taney who was the
judge who did the Dred Scott decision. It wasn’t until last year that
they changed the name of the Roger Taney Middle School in Prince
George’s County to the Thurgood Marshall School. So we are still
a long ways to go in a lot of places and we've got to be careful
about that. And there is not a Governor I know that isn’t firmly
ready to stand up for every civil right that we need. So I don’t
think we are talking about civil rights in all this, but we’ve got to
be careful that it doesn’t hurt that. But we do need a lot of trust
put back into each level of government, trusting each other instead.
of checking each other.

Ms. BELAGA. I would like to add to that, I think there are two
questions, two real answers to what you have addressed. And one
is the issue of trust, which Jim reiterates, but I also think you used
the word “priority,” establishing priorities and making choices. And
I think that is clearly what we are going to have to do.

There are two categories. There are new programs and anything
that is new really needs to get a very firm assessment. But some
of the programs that we have existing today could be far more cost-
effective if the implementation of it was done closer to home.

I think those are the decisions that are going to challenge you
all, but they need not be adding to the budget constraints of the
States and local governments and they need not be unfunded man-
dates. There can be better ways to do what we are doing now and
prevent overlapping.

Mr. Martini. Thank you very much.

Mr. Towns. Mr. Chairman.

Mr. Suays. The gentleman from New York.

Mr. Towns. Yeah, right.

I appreciate the statement made by Mr. Martin. I think that
what I am really saying is that we can’t forget the history in terms
of how we got to this point. But talking about the waivers, I really
have some concerns.

Mr. SHays. What the gentleman wants to say is that the North
won the war. And we freed the slaves.

Mr. Towns. Good way to put it.

Anyway, but aside from that, what I wanted to say is that when
I look at waivers and I look in terms of how this is coming about
in some instances, where in some instances the legislature is not
even involved in it, in the process, so it is just a decision made ad-
ministratively.

Of course, when you talk about the lack of funds, lack of re-
sources and that a State can very well say we are not going to treat


138

any attention on this subject this year is that the subject of federal-
ism happens to coincide with the political agenda of the party that
happens to control the House and the Senate of Congress. So we
have to—we have to begin with—if you’re concerned with a long-
term institutional solution to our system of federalism, you have to
begin with how you build a political constituency so that the public
knows what you're talking about.

Mr. SHAYS. Interesting.

Mr. Seay. Well, as Ed Kilgore knows, a veteran of a very bloody
institutional battle on this subject, having been deeply involved for
several months with the Conference of the States project, which
those of you who have heard of that will probably shrink in horror,
my simply mentioning the name. I know I do.

What I wanted to address isn’t really so much a disagreement,
is what some of a number of the other panelists have already ad-
dressed, why doesn’t Washington trust the States? I think there’s
an implicit assumption on the part of many who advocate or who
worry about the States, can they carry out these responsibilities,
and because they may not be able to meet a standard that it should
be retained by the Federal Government.

Well, it is not the States that aren’t being trusted. It is the popu-
lation. Because what is actually being implied, whether delib-
erately or not, is that the populations, the electorate, the tax-
payers, either are too ignorant or too mean-spirited to do these
things. And if they don’t want to do them, then Washington will
simply force them to do them. And that, I think, is a very dan-
gerous assumption to make. But it’s one that I think is implicit in
the position of those who question the States ability to carry out
these functions.

Mr. Suays. Mr. Chrysler.

Mr. CHRYSLER. No questions.

Mr. SHays. Mr. Souder, I will ask a question, too, unless you’re
prepared to jump in.

Mr. SouDER. Why don’t you go ahead.

Mr. SHAys. OK. What value does—well, let me put it this way.
IT have different areas that I want to talk about. I want to talk
about block grants, because I’m fascinated—my background is I
have an MBA, an MPA. My MPA is in public finance. We got a lit-
tle issue of spillover effects and the kinds of revenue and their pur-
poses and so on and so on. Some Members have said, listen, if we
raise the money, why don’t we have the right to tell the States how
to spend the money.

I think that’s a pretty logical argument on its face. The problem
is, my challenge with that view is that which Julie Belaga has ex-
pressed pretty soundly. I am someone who does not find govern-
ment offensive, and feels that government has a role to play, a
positive role. The challenge is in trying to sort out what that role
is. I have had to wrestle with the fact that the Federal Government
doesn’t handle this responsibility very well.

It does some things well. But for most things, what it ultimately
does is adopt a one-size-fits-all approach. We have shoe sizes, 3 to
8 eth the Federal Government there’s a size 9 and everybody has

it it.


49

Mr. SHAYS. That has already happened.

Mrs. MoRELLA. Great, thank you.

I am a former State legislator, as you are, too, and other mem-
bers of this panel. And so I recognize the need for not having un-
funded mandat ites as well as the fact that States can become great
laboratories to try different concepts and ideas as we talk about
welfare reform.

Thinking of Medicaid, as somebody who was on the Steering
Committee on the White House Conference on Aging, their No. 1
concern is long-term care, and you find that reflected in the Medic-
aid statistics. Right now, there are even 37,000 people receiving So-
cial Security and SSI who are centenarians, and that is only the
beginning.

I mean, this is going to continue with strides in medical science
and research, this is going to continue. People are going—are going
to be on average living well above 100. So we need to look at some
innovative ideas in terms of how to handle it.

I think States can do that. I do think on a Federal level we may
want to begin to think of maybe some tax deductions for long-term
care insurance or other kinds of incentives.

But I appreciate it very much the fact that you talked about the
duplication of many of the programs that we have and the need to
come to grips with it and recognize what we are requiring our
States to do.

And, Ms. Belaga, I think your point is very well taken in terms
of the fact that we’ve got to sort of be a partnership, there has to
be a balance. We have to give oversight but not duplication, and
I think that is a key point that we have to remember.

I have never seen such an environment or a climate where we
are moving everything back to the States and that is why I think
this hearing is of particular importance to us, so I thank you both

ery mucl

Mr. Suays. Thank you very much.

I welcome the gentleman from New Jersey. I am happy you came
in after we discussed a comment about the State of New Jersey.

Mr. Martini. I didn’t hear it.

Mr. Suays. It is a great State. I welcome the gentleman.

Mr. Martini. Thank you, Mr. Chairman, and I also ask unani-
mous consent to submit an opening statement.

[The prepared statement of Hon. William Martini follows:]


18

could not respond to such a development and would necessarily misallocate lunch
fands among states as state economies and school-age populations grew at different
rates.

Moreover, the school lunch block grant in H.R. 4 illustrates the pitfalls of this
approach. Its designers struggled mightily in an effort to craft an equitable funding
formula but ultimately could not do so. The formula in H.R. 4 would have the
unintended side-effects of shifting school lunch funds from poorer states to more
affluent states and from states serving full meals to states selling large numbers of less
costly, less nutritious snacks or partial meals.

The program in which the question of whether to block grant may be most
important is Medicaid. At the present time, the federal government and states have a
financial partnership — they both share in Medicaid costs. When costs rise in a state
due to recessions, population growth, employer “dumping,” advances in medical
technology that save or prolong life but at high cost, or the onset of new diseases such
as AIDS, both parties share. By contrast, under a block grant, states would bear 100
percent of such increased costs.

In Medicaid, as in food stamps, states can be given sweeping flexibility — and
large federal savings extracted — without terminating the financing partnership and
shifting all risk to states. States can be given flexibility to move to managed care and
reduce payment rates to providers and can be freed from various federal mandates and
requirements without converting Medicaid to a block grant that fails to respond to
increases and decreases in need among states. This can be accomplished while saving
substantial amounts for the federal government through reductions in federal Medicaid
matching rates or through imposition of a “per beneficiary cap” on federal Medicaid
payments to states, as last year’s Chafee health care bill would have done.

In short, when it comes to means-tested entitlements, flexibility within a
financing structure that maintains a federal partnership of sharing in unexpected costs
and savings stemming from fluctuations in need appears the wisest course to follow. If
instead we simply convert these programs to block grants, I believe such a structure
will not fully withstand the first substantial recession. At that time, governors will be
faced with such choices as raising taxes in a recession to cover increased need, cutting
benefits across-the-board, or turning away newly unemployed families who worked
and supported these programs for years with their taxes. It is likely that in such
circumstances, governors will come back to Washington seeking help. If such help is
granted, it likely will come with a new array of strings. Ata time when we are
fundamentally rethinking federal and state roles, it would be better to design these
structures more appropriately from the start.


88

Mr. Souper. If it’s acceptable to the ranking member, Mr.
Towns, and Mrs. Morella, I think what we’ll do is we'll go ahead
to the third panel. We have an unusual opportunity. I don’t think
it’s completely accidental that we started with what at least would
be a more traditional, moving to the neoliberal, to the neoconserv-
ative, to the libertarian and traditional conservative, and it should
be a very interesting comparison.

Mr. Towns. By all means, do that.

Mr. SouDER. Mr. Nathan.

Mrs. Moretia. Mr. Chairman, may I just acknowledge that
among the groups that you considered kind of the real conservative
is a constituent of mine, Roger Pilon.

Mr. SoupDER. Dr. Nathan.

Mr. NATHAN. As a former constituent of yours, I’m——

Mrs. MORELLA. And a former constituent.

STATEMENTS OF RICHARD P. NATHAN, DIRECTOR, NELSON A.
ROCKEFELLER INSTITUTE OF GOVERNMENT; ROGER PILON,
DIRECTOR, CENTER FOR CONSTITUTIONAL STUDIES, CATO
INSTITUTE; AND DOUGLAS SEAY, DIRECTOR, THE GOV-
ERNORS' FORUM, THE HERITAGE FOUNDATION

Mr. NATHAN. I'm glad you’re having these hearings, and I think
your characterization of the way we're lined up is a good one. I no-
ticed, | want to start with what the chairman said in his letter, in-
viting me to participate. He gave me an assignment.

He said you will be participating in the panel advocating the
devolution of current programs to the States. Now, I advocate some
but not others, and I’m not as easy to position. None of my associ-
ates are either, as all of that. So I favor blocking some programs
and not others, and there are important differences actually be-
tween me and I want to talk about some things in Mr. Peterson’s
testimony that hopefully will start on a discussion that has some
liveliness.

Perhaps I should have been asked to be the referee. I could do
that. But the first sort of conceptual point I'd make is that there’s
no one sorting out for all time. I have always thought that some
functions should be centralized and some decentralized, going back
to Nixon’s New Federalism, when I worked in OMB on exactly
these formula and allocation issues.

The remarkable thing about what I call the New(t) Federalism
this year is that it is so broad. It takes a giant leap into the un-
known, proposing to devolve to the States entitlement-type safety
net functions, which is roughly two-thirds of all grants, as others
have said.

There’s the three C’s of grant blocking. You cut, you cap, and you
close the end. When you do that with these entitlement programs,
I don’t know what’s going to happen. The bottom of page 2—one
of my statements, says I’ll be damned if I know what’s going to
happen, but it looks to me like we’re headed toward radical non-
incremental domestic policy this year in a way that is very exciting
and very unusual.

The top of the second page of my testimony I say that when I
worked on these issues on Nixon’s New Federalism, we had FAP
and FHIP, which Nixon wanted to centralize, welfare and health


43

Mr. Martin, you talk about Medicaid. That really is missing from
a lot of the debate we hear on health care and on Medicare. I re-
cently did a town meeting, had more questions on Medicaid from
recipients and providers alike in terms of what was the future of
that, the growth in those areas. And I think you have hit it on the
head in calling attention to that. And I feel, at least from a District
of Columbia budget perspective, it is Medicaid has really out-
stripped everything else in the increase in spending. We have prob-
lems across the board, but Medicaid is something this city has not
been able to get a hold on, as a number of States haven’t across
the country. It is something by going like this and sending it to the
States we think we solved it. There are still a lot of problems with
the rules and the regulations and the mandates that come with
that.

T have—Ms. Belaga, you talk about the EPA. That is a very good
example of Federal-State issues that we have had and unfunded
mandates, regulatory reform, and the like. And it seems to me that
it’s dollar-driven.

We don’t have the money at the Federal level to do a lot of the
things that we want to do so we have resorted to unfunded man-
dates, regulations, and sending that bill on down to State and local
governments and they have become tremendously expensive.

I know in Fairfax County we have just a number of pretty stupid
regulations we had to comply with, we felt we could have accom-
plished in a better way. And I just think if the Federal Government.
is going to continue to do that, we’ve got to be more flexible in how
these areas are administered.

Any thoughts on that?

Ms. BELAGA. I would agree with you that the magic word there
is flexibility. And in some instances, the agencies themselves are
the culprits, if you will, in terms of establishing such rigorous
standards that they are not meetable.

But in some instances, Congress has put into the law some in-
credibly rigorous standards that are impossible to meet. And, so I
think, when you take a look at this issue, you really need to look
at the whole—the whole array, not only the agency’s implementa-
tion but also the language in the statute so that we don’t continue
to foster this. When you look at a lot of laws you see this problem.

Mr. Davis. I was just wondering, the sponsors of the Unfunded
Mandates Reform Act and the thing that caught—that, I think,
didn’t get paid enough attention to but really makes a lot of sense
is, if you are going to mandate and you don’t have to worry about
the bill, you will get a different kind of mandate than if you worry
about paying for it.

Ms. BELAGA. Right.

Mr. Davis. That is what is missing is the financial accountability
for these decisions. If you get the financial accountability, you get
sounder decisions.

Ms. BELaGa. Right.

Mr. Davis. Whatever level of government, it doesn’t make any
difference what it is, but you will get better decisions across the
board and that is what has been missing. But I agree that stand-
ards is something that the Federal Government is going to have a
continuing role in how they meet that and who pays for it is some-


129

breakdown of society. The large-scale effort needed to engage the federal government's attention
is beyond all but the largest organizations. Even identifying the source of the problem is virtually
impossible, beyond "Washington" or “the government." As a result, there is a perennial sentiment
to "throw the bums out," creating endless opportunities for anyone, even incumbents, who run

“against Washington, but such expressions of discontent have no possibility of producing true
change.

Correcting the Problem

The restoration of limits on the federal government entails restoring a balance between the
powers of the federal government and those of the states. The durability and effectiveness of
these limits, in tu, depend upon the states reclaiming a collective authority sufficient to treat
with Washington as an equal. Only then can a revival of civil society and of the individual's
control over their community be effected. The means for accomplishing these varied tasks is
through a revival of federalism.

This will be a difficult and complex endeavor. Not only have the institutional and
conceptual frameworks been so profoundly altered as to now depict the vastly expanded range of
the federal government's powers as normal and constitutional, but a host of powerful interest
groups which have an enormous stake in preventing any dilution of Washington's power are
arrayed against any such attempt. These include not only economic and political interests, but
ideological ones as well. Their determined and well-organized resistance to change must be
assumed.

Given the extent to which the provisions of the Constitution have been hamessed to serve
Washington's interests, and the profound alteration of national institutions, the necessary degree
of change probably cannot be secured through existing channels. The electoral process is unlikely
to provide an avenue for a restoration of federalism or even for a halt in the expansion of
Washington's power. There are no organized groups in Washington, including those charged with
the responsibility of representing the interests of the states, that have a compelling interest in
promoting federalism. One administration may prove more or less accommodating to the
interests of the states than another, but only within very narrow parameters. Members of
Congress may be attentive to the needs of their home state, but have little incentive to advance the
interests of the states as a whole. And the extension of federal power by statute, bureaucratic
regulation, and court rulings, continues to grow. The last vestiges of state responsibility in areas
such as crime, education, and welfare, continue to erode. The political process has become so.
tilted toward Washington that even conservatives focus their energies and attention on capturing
power in the national government and base much of their platforms on replacing the imposition of
liberal Washington policies on the states with conservative ones. But the fundamental relationship
would remain the same. Thus, even the natural allies of federalism now concentrate their
attention on national agendas.

Given the fact that the public has come to see Washington as the principal governmental
actor across the range of issues, and as unhappiness with the current state of affairs tends to
devolve upon incumbents as opposed to the system itself, itis unlikely that any candidate for

9



113

STATEMENT
of

Roger Pilon, Ph.D., J.D.
Senior Fellow and Director
Center for Constitutional Studies
cato Institute
Washington, D.C.

before the
Subcommittee on Human Resources and Intergovernmental Relations
Committee on Government Reform and Oversight
United States House of Representatives

July, 20, 1995 -

Mr. Chairman, distinguished members of the subcommittee:

My name is Roger Pilon. I ama senior fellow at the Cato
Institute and the director of Cato’s Center for Constitutional
Studies.

I want to thank Congressman Shays for inviting me to testify
on the subject of these hearings, "The Federalism Debate: Why
Doesn't Washington Trust the States?" I want also to commend the
subcommittee for holding these hearings, for the federalism debate
is, without doubt, the most important political, legal, and
constitutional debate taking place in America today, going to our
very roots as a nation.

At the same time, I would have thought, especially following
last November's elections, that the proper question was not "Why
doesn’t Washington trust the states?" but "Why don’t the people and
the states trust Washington?" For surely, it is distrust of
Washington that drives the debate today.

And the answer to that question, I submit, has rather less to
do, in the final analysis, with the policy concerns that infuse the
subcommittee’s statements to date on the subject than with a much
more basic concern about political and constitutional legitimacy.
In a word, the people and the states no longer trust Washington not
simply because Washington has been doing a less than satisfactory
job but, more deeply, because Washington has assumed a vast array
of regulatory and redistributive powers that were never its to
assume--not, that is, if we take the Constitution seriously.


122

its reach has expanded enormously into every area of public and private life, leaving none
untouched and displacing social institutions and representative government with pernicious
effects.

Government Unrestrained

Surveying the American landscape, an observer would be struck by the number and range
of social, economic, and other problems which, after decades of ambitious government programs
and trillions of public dollars, only seem to be growing worse. The list is a long and familiar one:
pervasive crime, low educational standards, high taxes, enormous budget deficits, reduced
‘economic growth, decaying cities, a decline in the social order and quality of life, and so forth
‘New programs are regularly announced in Washington to address these problems but, despite
perennially optimistic predictions, they continue to worsen.

For many, it has become clear that, far from being the source of solutions, the federal
government's activism is the root cause for much of the intractability of these problems. Not only
for creating or exacerbating these
ills, it has also reduced or even blocked the ability of individuals and communities from attempting
to deal with these problems. It is this marginalization of civil society which is perhaps the most
damaging effect.

Although the federal government has neither solved nor substantially ameliorated any of
these problems, its expansive activism has brought about a profound transformation of the
American system of government and its relationship to the individual and society. Whereas once
the federal government was restricted only to those powers necessary for the maintenance of a
general environment in which society was free to act and to order itself, now all decisions
regarding virtually every aspect of society are either made by Washington or are subject to its
review and approval, with the individual citizen and society as a whole made increasingly passive
recipients of these decisions.

This combination of widespread social and economic ills with the feeling of helplessness
on the part of the citizenry in dealing with them, has led to increasing frustration, even rage, at
Washington in all sectors of American society. Aspiring office-holders have learned to identify
themselves as being in the “anti-Washington” category, but a succession of such elections has yet
to fundamentally alter the existing system.

In seeking to address this problem, many would-be reformers are led to advocate
appealing, but ultimately ineffective, solutions. By themselves, none of the many piecemeal
efforts at reform, from term limits to opposition to unfunded federal mandates to proposals for a
balanced budget amendment, are likely to produce decisive results, even if enacted. For example,
term limits may have some beneficial effects, but the larger problem of a distant and unrestrained
government they seek to correct does not lie in insufficiently active or unethical individuals in
‘Washington, but in the system itself. Replacing officeholders while leaving the larger system
intact is likely only to reproduce the same pattems of behavior.

These and other proposals seck to treat symptoms, and not the source of the malady
which lies in the system itself, especially the consequences of its radical transformation over recent



127

‘the federal courts. There is no law, regulation, social organization, or private activity at any level
which cannot be struck down or altered at will by any five members of the Supreme Court. It is
for this reason that the once routinely approved appointments to the court have become brutal
political battlegrounds, for the replacement of even a single individual can alter the definitions,
‘operations, and obligations of every aspect of government and society. There are no limits to this:
‘even sections of the Constitution itself have been cast off and delegitimated, not through
amendment, but through “reinterpretation.”

The Effects of Revision

The negative consequences of this vast expansion of power by the federal government
extend far beyond the abstractions of political theory, many of the ills facing the United States,
including the range of social and economic problems, are directly related to the federal
‘government's expanded role. Certainly, the intractability of these problems in large part is due to
this change.

One effect has been to make the political system more rigid and thus less adaptive to
changing conditions and the electorate’s preferences and therefore more likely to do harm. In
discussing the merits of federalism, reference is often made to the benefits of experimentation by
the different states, the so-called "laboratories" of public policy. The existence of different
approaches to similar problems can provide policymakers with valuable evidence regarding the
comparative advantages of one course over another, as well as identify the ever-present
unintended consequences. Mistakes, to the extent that they occur, are confined to single states;
benefits can be extended to the entire country.

By contrast, the centralization of decision-making in Washington has had the effect of
imposing a pervasive and heavy-handed uniformity throughout public policy. The negative
‘consequences entail more than merely a loss of flexibility and of experimentation; by removing
decision-making further away from the people it affects, increased bureaucratization usually
results. As a result, mistakes are much more difficult to correct, or even notice. Edicts from
Washington usually do not allow for appeal, and in any case, with a monopoly on policy, there is
rarely the opportunity to amass evidence of the superiority of alternative approaches. To be
noticed by distant, bureaucratic Washington, mistakes must produce enormously bad effects and
ona national scale, usually over considerable periods of time.

The quality of decision-making has been significantly reduced as well. As the number of
bills introduced in Congress has risen dramatically, the time available to examine any of them has
correspondingly shrunk. Complex legislation affecting broad ranges of society is often written by
very small groups of staff members and consultants, with little or no oversight; bills commonly are
voted on by members who have only an outline knowledge of their content. Even assuming
honesty and competency, the long-term consequences for the public from such legislation are
almost never addressed in a comprehensive manner. Decision-making in the regulatory
bureaucracy is even less responsive and informed,

‘A more insidious effect of the federal government's expanded role is the greatly enhanced
opportunity provided to special interest groups to influence decision-making behind closed doors
in favor of their particular agendas, with the costs passed on to the larger society. With decision-

7



151

on programs for children, and yet we are trying to balance the
budget mainly by cutting programs that are serving needy chil-
dren. I can’t see how this is good public policy.

By the way, this is not a criticism of the Republicans because the
Clinton administration is proposing essentially the same thing.

Mr. SHays. Mr. Peterson, I serve on the Budget Committee. I
just want you to know that I just think you are not accurate. I
thought we were going to adjourn this meeting, but we may have
a longer dialog.

Seriously, we just need to get used to the concept that we are
going to spend more dollars. It is true, we are cutting discretionary
spending. Those are real cuts. We are slowing the growth, and yet
the WIC Program is going up, and nutrition programs will go up.
They just won’t go up quite as much as they have in the past.

Mr. SoupER. Mr. Chairman, may I make a comment on that?

Earlier Mr. Nathan referred to current services projections. In
some programs that is a variable; in other programs we have
changed eligibility standards. There have been no limits to what
type of things people had access to. So the spending is going up,
and we may—we may, if you had all the variables—the changing
eligibility, everybody being able to get any kind of health care they
wanted—conceivably we have had some reductions against that.
But it also wasn’t a reduction from current services projections. It
is still an increase in dollars. It is just a slowed increase in most
of the programs.

Mr. SHays. Right. The critical thing, candidly, that is off the
table is Social Security, but Medicare, we are slowing the growth
from basically 10 percent to 6.9 percent. And I think the elderly
will come to you and say that what you said is just way off base.
So if you just want to isolate discretionary spending, then I might
be more inclined to agree with you.

Mr. PETERSON. Maybe what I should do is supplement my testi-
mony with written information that would go into this more ex-
actly.

Mr. SHays. OK.

Mr. CHRYSLER. I think the Medicare is obviously one of the big-
gest areas that is affected. I mean that is obviously the over-65
group. That is probably the single biggest—single biggest dollar
amount.

Mr. PETERSON. I think you will find that my numbers are not far
off, but it needs to be laid out.

Mr. SHAYS. I would welcome that. Thank you.

Mr. Greenstein.

Mr. GREENSTEIN. Thank you for making that.

On the part of what happens depends on where those savings in
Medicaid comes from, if what ends up happening is that in most
States the elderly and disabled who were two-thirds of Medicaid
costs get shielded and most of the Medicaid savings come out of the
other third, then——

Mr. SHAYs,. That is true. Well, since it will be a block grant, we
don’t know. That is a very valid point.

Mr. GREENSTEIN. Could I just, too—again, on this front, I hope
as your deliberations go forward, particularly in the Medicaid area,


155

they are going to accomplish what their adherents believe th:
will.

The major problem I have with the block grants that are beir
discussed now is the lack of accountability. It is, in essence, fr
money as far as the States are concerned, and even given the ve
best people in power, there is no incentive for them to really «
anything risky with the new power they have been given. They a
going to spend that money, every penny that they get, and Ia
not sure that their desire to innovate is going to be as great as
should be.

Congressman Chrysler’s approach of coupling a devolution
power from Washington to the States with giving the citizens ba
their money then letting the States raise the taxes is, I think—e
actly the way to go, because then there will be a healthy deba
and the arguments will have to be laid out: Do we want this pr
gram? Do you want to pay for this program? Is this program ne
essary? If the citizens say no, I don’t understand how there can |}
a viable argument against their choice.

If the argument is that we can’t allow the citizens to make thi
choice because the electorate is going to make the wrong decisio
then | that argument, at least in an American democracy, is illegi
imate.

My last point is this—goes back to what I think the—what is tt
unique characterization of the American republic, certainly what
was established to do, and that was the view of Americans as sel
governing.

That characteristic has been something that has been cor
mented on by observers, throughout our history, the most famot
being DeTocqueville. Yet that description is rapidly becoming «
anachronism, because government has often with the best of inte:
tions—so intruded itself into rulemaking in every area, every a
pect of life, that the idea of us being self governing, of our comm
nities being self governing, is simply a fiction. And it is an attem|
to restore tax money to the citizens and allowing them to decic
how they want their own money to be spent as a way of correctir
some of this problem.

Mr. Suays. Each one of you has made a comment that trigge
me to respond, which means that you have been wonderful wi
nesses, and I really appreciate your participation in this hearin
which will be the first of many. Again, I thank each and every o1
of you, and I now adjourn this hearing.

‘Whereupon, at 1 p.m., the subcommittee was adjourned.]

oO


Hearing held on July 20, 1995...

CONTENTS

Page
1

Statement of:

Martin, James, National Governors’ Association; and Julie Belaga, former

regional administrator . 5
Nathan, Richard P., director, Nelson A, Rockefelier Institute of Govern-
ment; Roger Pilon, director, Center for Constitutional Studies, CATO
Institute; and Douglas Seay, director, the Governors’ Forum, the Herit-
age Foundation 88
Peterson, Paul E. i
ment; Robert Greenstein, executive director, Center on Budget and
Policy Priorities; Bd Kilgore, senior fellow, the Progressive Policy Insti- 56
nt
Letters, statements, etc., submit!
Belaga, Julie, former regional administrator, prepared statement of . 7
Greenstein, Robert, executive director, Center on Budget and Policy Pri-
gatrities, Ee oni statement of ... vi}
Kilgore, Ed, senior fellow, the Progressive Policy Institute, prepared
statement of 82
Martin, James, National Governors’ Association, Brepared statement of 15
Martini, Hon. William J., a Representative in’ Congress from the State
of New Jersey, prepared statement of 50
Morelia, Hon. Constance A., a Representative in Congress from the State
of Maryland, prepared statement of 46
Nathan, Richard P,, director, Nelson A. Rockefeller Institute of Govern-
ment, prepared statement of .. 91
Peterson, Paul E., Professor, Harvard University, Department of Govern-
ment, prepared statement of ... 58

Pilon, Roger, director, Center for Constitutional Studies, CATO Institute,
prepared statement of ..

Seay, Douglas, director, the Governors’ Forum, the Heritage Foundation,
prepared statement of

(mD,


145

Constitution in a complex society, a complex world that we live in
today.

Mr. SouDER. Not to completely wave a red flag in front of you,
I did amend the Constitution.

Mr. Suays. You waved it in front of Mr. Pilon.

Mr. Souper. I did support an amendment for flag burning, and
I know you support that amendment.

Mr. PETERSON. [ am a real flag waver. I don’t think anybody
should insult the flag.

Mr. Souper. I think that there is a standard process for amend-
ment. But this could be a long argument. I wanted to see, and that
is a crucial difference between how conservatives approach it. I
wouldn’t necessarily refer to it as a dusty document. I refer to it
as a living document.

I understand the arguments in Holmes and Story, and these
guys have argued this for years, and we are continuing to have
that debate here. But I do think it is a legitimate question because
it is a different approach to government.

You also said in your testimony—and I was intrigued by this,
and let me see if I understand it correctly—I understand the race
to the bottom which also Mr. Nathan used in trying to compete to
not get a heavy caseload in welfare, for example.

What I also thought I heard you say is that in the suburban
areas, the closer you get to the people, where they feel there is a
direct tax impact, they don’t like to vote for the taxes for the pro-
grams.

Mr. PETERSON. Let me just give you an example. In a town
neighboring mine, they have a very generous set of social services
for low-income people. It is really much better than in the town I
live, which really doesn’t have much of anything. And in this neigh-
boring town, they are getting a huge influx of people who are very
much in need of social services, and even though a lot of this is
being covered by State and Federal money, there is still a lot of
pressure on local public officials to cut these programs back, to re-
duce them in size, because they are saying we are getting too many
poor people coming into our town.

And to me this is sort of a dramatic illustration of, when you
turn things over to lower levels of government, it becomes more
and more difficult to deal with the problems of the needy.

Now, maybe you can say government shouldn’t care about that,
you know; let people starve in the streets. That is a position that
some people might want to take; I just don’t take it.

Mr. SoupeEr. I wanted to clarify your comment a little further.
You live in Massachusetts?

Mr. PETERSON. Yes.

Mr. Souper. And I~all I am——

Mr. SHAYS. He will pass those.

Mr. Souper. I am from Indiana. My question was going to be—
is that there may be—in fact, I was going to be complimentary.
There may be altruistic suburbs in Massachusetts that would like
to keep their benefits higher but feel that pressure.

Don’t you think, in fact, most suburbs around the United States
keep their taxes low because they don’t want to spend money on


106

Parcipation is the development of the
workforce development plan

‘Agency is responsible for monitoring
performance and providing training and
best practices info to one-stop and voc
rehab personnel

Planning requirements si
Consumer choice strengthened, and voc
rehab closely integrated with adult taining,
delivering core services and specialiced
services through I-stop centers.

resier coordination. Planning, timelines,
‘and accountability are consistent with
Workforce Act. Voc Rehab
‘part of the larger employment and
training system in the State but retains
separate authority and funding stream.

ALLOTMENTS / ALLOCATIONS

‘STATE AND
LOCAL FUNDING

For Tile I, of the amount authorized, 20%
or $250 (whichever is less) may be retained
by Secy. the balance is 10 the States

Formula Jor allotments (o States based on
general population, unemployment rates,
of low i ‘ond

indi

based on the percentage of Perkins 101 and
JTPA 282 and 262 funds received in
previous year. In subsequent years,
‘percentages stay the same.
Substate allocation - 90% of funds
allocated to local areas, (40%), eligible
institutions for in-school, (40%) for out of
school. Governor sets within State formula
fer distribution based on poverty rates,
roportion of youth, and other appropriate
Sectors. Minimum rants secon
State may grant incentive awards from
Sfunds reserved for State.
For Title U1, 85% of authorived funds
‘allotted 10 states based on
‘amount received in last year under Title
A and Il of ITPA. Governor may
reserve 20% of allotment for TA,
innovative and experimental programs, !-
stop support, mis. No more than 1/4
reserved may be used for admin. Governor
‘sets allocation formula based on poverty,
unemployment, proportion of population or
‘other factors.
Title 1¥° allotment for adut ed and family
literacy based on proportionate number of
eligibles in State

welfare recipients. 7% of appropriation
may by retained at the federal level, with
93% alloted to the States

For Workforce employment activities, 75%
shall be distributed to local entities,
‘allocetion formula using such factors as
poverty, ‘and the number of |
AFDC recipients in the State. For
workforce education activities, 80% must be
‘allocated in accordance with the formulas
Set out in the sections for sgcondary,
‘postsecondary, and adult education.

Flex funds (50%) - through a collaborative
process, the State will decide how to use and
‘llocate these funds, setting prior
according 10 “the State's
educational, and employment factors. The
approach to be taken is based on the model
established in the STW Act.

WORKFORCE
DEVELOPMENT
LOANS,

‘Secretary may provide grants to sates for
Toans to employers. or employee
representatives for skills upgrading

‘No provision.

ACCOUNT-
ABILITY

Consumer information and certification of
service providers combined with consumer
‘choice through vouchers. States establish
core indicators under definitions
Secretary. States establish levels of
Performance for local areas, taking into
account world class levels. States report
levels to Secretaries. State failure to meet

‘Consumer information and certification of
service providers required if vouchers used.
States set appropriate benchmarks related to

of | appropriate eduction and meaningful

‘employment to meet broad workforce
development goals and report annually on
success in meeting benchmarks. Governing
Board negotiates benchmarks with State.



66

wu Federalism

‘The greater territorial reach of states also makes them better at redistribution
than most local governments. The costs of moving across state lines is more substantial
than changing residence within a metropolitan area. As against the 17 percent of the
population who change residence every year, only 3 percent move across a slate line.
Even so, labor and capital can and do move, and states must take that possibility into
account in their policymaking. Since 1970, for example, states have been in something of
a race to lower welfare benefits for fear that high benefits could attract poor people to

the state--thus raising social spending and perhaps triggering an exodus of taxpayers.

The bulk of the responsibility for income redistribution falls to the national
government. It levies higher taxes on the well-to-do than on the poor, then carries out
redistribution through pensions, welfare, health care, and other programs aimed at the
needy, the old, the sick, the disabled, and the disadvantaged. The largest and most
successful redistributive programs in the United States--Social Security and Medicare--
are designed and administered in Washington, And again the explanation is capital and
labor mobility—or rather comparative immobility. Washington is best suited to engage in
redistribution because it can prevent the in-migration of labor from foreign countries and
need not worry as much about the outward tiow of capital. If any state or local
government had attempted to mount programs like social security by itself, it would have
gone bankrupt long before becoming a haven for the aged.

‘The increasing integration of the world economy has begun to erode some of the

national government's redistributive capacities. Information and products can move


52

Mr. SHAYS. Without objection.

Mr. Martini. Unfortunately, I didn’t have the benefit of the testi-
mony.

Just one or two things come to mind that I think of a practical
nature are of concern in this process of attempting to have a better
balance between the Federal Government’s role and the State’s role
and the local government’s role. And as we go through this adjust-
ment period and making that shift, the one thing that is of great
concern to the people at the local level and the State level is the
impact of that shift on local property taxes. And so this entire dis-
cussion of shifting responsibilities and defining better what are the
roles of the different governments, Federal, State, local, county, et
cetera, by necessity I think has to be done in the context of the tax
structures and the impacts on that.

Having served just for a short time on the county level of govern-
ment and still being in communication with those there, while they
are in favor of the efforts we are attempting to make here in Wash-
ington to reform government and define the roles and duties of the
Federal Government and they are behind that, they have this anxi-
ety about what is going to happen to the State, what is going to
happen to the county government, who is going to pick up some of
these—what they view as voids and may not be voids.

It just may mean, as I try to explain to them, an effort on their
part to define their roles even more efficiently and more effectively,
and that that is a necessary part of this process. Their dependency
on the Federal Government, et cetera, may have to be reviewed
and reflected upon and they have to start to make some priority
choices in their governing roles. But again that is a general concern
that I hear sometimes and I am not so sure we have the best of
answers to the people at the local level of government who are
faced with the fear of an increased property tax to make up for
some of the shifting of responsibilities.

And I think it is a perception problem, too, and I will close with
that. There is this perception by the governing officials at the local
level that the Federal Government is now—and I say this with
some caution, dumping responsibilities on the States. I don’t be-
lieve that is what we are doing.

I happen to believe that what we are trying to do is make the
process more effective and more efficient and have better defini-
tions, because the one thing I did observe at the local level of gov-
ernment a very short while was how much duplication there ex-
isted as you went up. I mean, there were so many departments at
every level doing the same thing or overviewing the same thing,
and I think what we are trying to do is streamline that process.

I don’t know if you have any response to that. The concern at the
local level of government is—by the governing officials is what will
this do to property taxes in this shifting and it is a legitimate con-
cern?

Mr. Martin. In Oregon they pushed it up to the State level and
last year they pushed the property tax up to the State level in
Michigan. The movement is under way in about nine States. They
can’t stand the property tax anymore. The people are fed up with
it. They don’t have any idea in the world what federalism is or
what is being done or what is being changed.


101

So, Reagan was on the fence intellectually on this federalism issue. He
would centralize one income transfer rogram ‘Medicaid) and devolve another
(AFDC). As it turned out, Reagan's “swap and turnback” plan never went
anywhere; it was not even introduced in the Congress.

In the 1981 Omnibus Budget Reconciliation Act (OBRA), Ronald Re:
won enactment of nine new programs called "block grants” by his administration.
They were for operating and capital functions - not for entitlement-type programs.
Three were in the health field - for the prevention and treatment of substance abuse
and mental health, preventive public health services, and maternal and child health
care. Four of the "blocks" contained only one pre-existing grant. So, at least in my
view, Reagan as a grant blocker was overrated.

Reagan's block grants and Nixon's, have one point in common that is very
important when considering the ideas advanced by the new majority in the House of
Representatives. ime, these grants have lost value, both in nominal dollars
and in real terms, adjusted for inflation. A recent report by Steven D. Gold
from the Center for the Study of the States of the Rockefeller Institute of
Government on nine block grants (some of Nixon's and some of Reagan's) showed
that four declined in actual dollars over the ten year period 1983-93, one remained
about the same, and all nine lost ground in real terms.

The "New(t) Federalism"

’

Enter the new House Republican majority in 1995: They are decidedly not
‘on the fence intellectually when it comes to block grants for welfare-type (that is,
entitlement) programs. Early on in the "100 Days," Speaker Gingrich and his
House Republican colleagues set about creating block grants for entitlement grant-
inaid programs with a vengeance, "The New. Majority at one point advocated
capping and blocking existins nts to create five new block grants - for AFDC,
school lunches, foster care, Medicaid, and food stamps.

This isa distinction with a diference. Grants for payments to individuals now
account for 63.3 percent of total federal aid outlays. Under the new Republican
majority in the House they are, in effect, repealing the national safety net, which
President Nixon built up and which Reagan said should be preserved.

‘The Essential Question

James Madison is much maligned when conservatives attribute to him and to
the Federalist Papers the idea of devolving such welfare functions. Madison's
Constitutional purpose was nation building, to centralize. Classical public finance
theory in a similar way in the modern period assigns redistributional functions to the
broadest population group in order to achieve equal (or close to equal) treatment
for the needy and to share this fiscal burden widely. As a nation, we have done this
= or at least moved in this direction strongly - since the nineteen thirties. The
United States is by no means first among the industrial democracies in carrying out
this safety-net function centrally, but in our own distinctive incremental bargaining
process we have come a long ways. To block income-transfer programs to the poor
i$ not just a management change. It represents a basic change in direction for
‘American social policy.



26

RESTRUCTURING MEDICAID: Concepts, Issues, and Alternatives

LIMITING MEDICAID GROWTH

THE 1996 BUDGET RESOLUTION

In late June 1995, Congress adopted the federal fiscal year 1996 budget resolution. It calls for
limiting the growth of spending in the Medicaid program. The provisions of the resolution that
pertain to Medicaid:

© permit $773.1 billion in federal Medicaid spending over seven years,

© propose to save $181.6 billion in federal funds from current baseline estimates through
programmatic changes,

«limit annual Medicaid growth to 7.2% in federal fiscal year 1996, 6.8 % in 1997, and 4%
for each year thereafter, and

+ reaffirm the current state/federal matching arrangements (so states will be required to
spend state dollars in order to draw down federal funds).

The agreement makes no reference, however, to block grants as a strategy to restructure the
program and leaves it to the authorizing committees to determine the best strategy to meet the
targets outlined in the resolution, This resolution, while not binding, provides the framework in
which appropriations and authorizing committees will conduct their work.

STRATEGIES TO LIMIT GROWTH IN MEDICAID EXPENDITURES

‘The Congressional authorizing committees are expected to consider an assortment of restructuring
options in order to limit federal spending in the program and meet the budget targets. A number of
different alternatives are available for their consideration.

Preserving the Policy Objectives of the Current Medi

Program

While the Congressional leadership has expressed interest in eliminating the individual entitlement
in the Medicaid program, strategies exist that will allow for program savings while preserving the
entitlement nature and policy-making of the current program.

1. Current Medicaid—Streamlined and Downsized. In this approach, Medicaid would

be kept as an individual entitlement. To bring program costs under control, Congress

* could make statutory changes that make program operations more cost efficient and, if

necessary, they could legislate reductions in eligible populations and services. In

addition, they would establish in statute streamlined service delivery systems. The

Congressional Budget Office would have to estimate that the financial impact of the
programmatic changes are consistent with budget targets.

2. Current Medicaid With Changes In Federal Matching Percentages. . In this
approach, Congress could streamline the program but would maintain the individual
entitlement. To achieve the federal savings, the federal share of the program would be
lowered for each state (e.g. from a national average of 57 percent to 38 percent). As
such, states would be required to increase their spending to accommodate the reduction
in federal funds. Like the first option, the Congressional Budget Office would have to
estimate that the financial impact of the programmatic changes are consistent with
budget targets.

NGA Staff Paper . . 5
July 24, 1995


22

RESTRUCTURING MEDICAID
Concepts, Issues, and Alternatives
Annotated Outline

This outline is a companion document to a paper that discusses some of the concepts and issues
in the current Medicaid debate before the U.S. Congress. .

INTRODUCTION

As part of a broader strategy to balance the federal budget, the U.S. Congress has adopted a
budget resolution that includes expenditure targets to reduce the rate of growth in costs of the
Medigare and Medicaid programs. The paper examines some of the major issues in restructuring
Medicaid

PROGRAM FLEXIBILITY

For the last five years, Governors have been unified in their call for more flexibility in the
Medicaid program. Historically. NGA flexibility proposals have been developed within the
context of a program that has an individual entitlement to eligibility and benefits. The current
debate could eliminate all or part of the Medicaid individual entitlement making the scope of
flexibility virtually boundless. Flexibility in design is discussed in the following program areas:
eligibility, services, service delivery systems. and reimbursement systems and rate setting.
(page |.)

ACCOUNTING FOR EXPENDITURE DIFFERENCES AMONG STATES

Since its inception, the national Medicaid program has functioned as a state and federal
partnership. The federal government defines broad parameters to meet national policy
objectives. and the states design and implement their programs. with some fatitude, within those
parameters. States and the federal government share in the financing of the program. and
significant differences exist among states in those federal expenditures. These differences can be
explained by the federally determined financing structure of the program, state options and state
economic and demographic characteristics. Each of these areas is discussed in some detail
(page 4.)

LIMITING MEDICAID GROWTH

In June 1995, the Congress adopted a budget resolution for federal fiscal year 1996 that calls for
Himuts in the growth of federal Medicaid spending. From a policy perspective. Congress may
choose from two main strategies to limit the program’s growth.
* Congress may choose to preserve the policy objectives of the current Medicaid
program and limit growth (page 5.). or
* they may choose to restructure the program's objectives through either aggregate or
per-capita caps in the program (page 6.)
Using aggregate and per-capita cap. different program objectives may be achieved. Aggregate
caps are relatively ‘simple to administer, allows for great flexibility in defining eligible
populations and services, and gives the federal government certainty in federal expenditures.
Since the individual entitlement to eligibility is retained under a per-capita cap, flexibility would



105

hel cece aia ‘which must include a

reps, with:
reps of ed. & chos.

rH
i
i
i
i

a
uy
i

cbo's
Agreement must include how funds
‘allocated to area will be spent to meet State
and benchmarks, and how
collaboration took place. If agreement
‘cannot be reached, Governor, with 30 days
iotice advises how funds to be spent
Separate jo rkfnce
education funds submitted by secondary,
, and adult ed eligible entities
to State Ed Agency.

PROGRAM DESIGN

TN GENERAL

Creates four block grants to States: Adult
Training, Adult Education and Literacy,
Voc Rehab, and Youth Workforce
Preparation.

‘One block grant divided at State level into
‘wo separate streams with minimum funding
levels: workforce employment (25%) and
workforce education (25%). State flexibility
on 50%, but must use a portion
of funds for schoolto-work activities

SERVICES

T-stop centers required. Core services and
information available to general public
through I-stops. Intensive services
available to general public if sufficient
funds aveilable.

‘Feneral public through I-stop.

INCOME
SUPPORT

Income ‘similar to needs-based
payments under JTPA Title Il explicitly
authorized.

‘Support services, including financial
assistance, authorized

‘CERTIFICATION
OF EDUCATION
‘AND TRAINING
PROVIDERS

Whar te chowses tse romans Sie

itera for provider hibit and
© providing information about provider

‘SKILL GRANTS/
VOUCHERS

Vouchers are to be used fer education and
training in Adult Grant except for OJT, or
where there insufficient certified

cor services for special populations.

formance
“Authorized but not required.

NAT. PROGRAMS | Authorization for ‘But | Provides for ive grants Based
Sanding set at 60% of FY9S level. on performance but silent on other national
activities.

SCHOOL-T0- Consol Requires STW Ce liminated but ‘Siates
WORK framework ba Rat no funds Yor nation! | wi sTw must continue to
‘incentive grants, imple using 50% flex funds. No

‘STW framework but requires State

fending for STW ont of State et ren
TABOR MARKET | National Labor Market information system | National LMI system established
INFORMATION | established. Prescribet how Secretary to | Governing Board given discretion on how to
a level sinister at level.
‘VOC REHAB ‘Funds go to the Governor who designates | Continue as a separate authorization.

an agency _to__administer, including

Amends Title 1 of Rehab Act to achieve



34

7. It resolves several major problems now before Congress about welfare and bealth reform in
compassioaste, clean, reasonable ways that will ultimately be demanded by the new realities of fiscal
federalism. As Leon Panetta said last year about mandate reform: “We are now in an ema of severe
fiscal constraint at all levels of government.” Much more than “reform” is needed in this new era!

‘Proposal:
Five-Year Welfare/Medicaid Swap

Current Medicaid costs by recipients shows that one-fourth of the Medicaid population or 26 percent
receives 69 percent of the payments, while 74 percent of the Medicaid population of children, their
mothers, and non-aged adults receives only 31 percent of the funds. In fiscal 1996, state costs will be
$77 billion and federal costs will be $96 billion for a total of $173 billion. $55 billion of the state costs
are for A-B-D recipients.

|. Divide Medicaid programs by eligibility.
© Permanently Eligible (Aged, Blind, Disabled = A-B-D)
‘State SSI, Medicaid, Long-Term Care, and Acute Care for A-B-D

In fiscal 1996, state Medicaid costs for A-B-D will be approximately $55 billion plus ($23 billion
state Medicaid costs for children and non-aged adults)

© Recumting Eli

Medicaid services for children and acute care for non-aged adults and children. In fiscal 1996, state
Medicaid costs for this poputation will be approximately $23 billion.

2. Swap an equivalent amount of non-A-B-D federal safety net programs for the state Medicaid
population of A-B-D . Some programs include:

$28 billion Food Stamps
173 billion AFDC and JOBS ~
7.7 billion Child Nutrition
28 billion Social Services
1. billion Child Support
36 Foster Care
35 wic
‘$64 billion Fiscal 1995 federal costs

3. The $9 billion difference to the federal government could be addressed in several ways:

© Use these funds for transition purposes, phaso-in costs, or hold harmless payments for formula
adjustments.

© Cost equalizations due to different A-B-D populations in the states.

‘© Inflation adjustments due to higher costs for the A-B-D program than the non-A-B-D Medicaid
population,


115

Plainly, power resides in the first instance in the people,
who then grant or delegate their power, reserve it, or prohibit its
exercise, not immediately through periodic elections but rather
institutionally--through the Constitution. The importance of that
starting point cannot be overstated, for it is the foundation of
whatever legitimacy our system of government can claim. What the
Tenth Amendment says, in a nutshell, is this: if a power has not
been delegated to the federal government, that government simply
does not have it. In that case it becomes a question of state law
whether the power is held by a state or, failing that, by the
people, having never been granted to either government.’

At bottom, then, the Tenth Amendment is not about federal vs.
state, much less about federal-state "partnerships," block grants,
“swapping,” "“turnbacks," or any of the other modern concepts of
intergovernmental governance. It is about legitimacy. As the
final member of the Bill of Rights, and the culmination of the
founding period, the Tenth Amendment recapitulates the philosophy
of government first set forth in the Declaration of Independence,
that governments are instituted to secure our rights, “deriving
their just powers from the consent of the governed."? Without that
consent, as manifest in the Constitution, power is simply not
there.

It is the doctrine of enumerated powers, then, that gives
content to the Tenth Amendment, informs its theory of legitimacy,
and limits the federal government. Power is granted or delegated
by the people, enumerated in the Constitution, and thus limited by
virtue of that delegation and enumeration. The Framers could
hardly have enumerated all of our rights--a problem the Ninth
Amendment was meant to address.‘ They could enumerate the federal
governments powers, which they did to restrain that government.
The doctrine of enumerated powers was meant to be the principal
line of defense against overweening government. The Bill of
Rights, added two years after the Constitution was ratified, was
meant as a secondary defense.

Yet today the federal government exercises powers not remotely
found in the Constitution, leading lawyers and laymen alike to say,

2? ghis is a point that Justice Thomas got exactly right in his
trenchant dissent in U.S. Term Limits v. Thornton, 63 U.S.L.W.
4432, 4433 (U.S. May 22, 1995).

3 Declaration of Independence, para. 2 (emphasis added).
‘ The enumeration in the Constitution of certain rights shall

not be construed to deny or disparage others retained by the
people."


136

That presumes, in other words, that the Constitution arose like
the Phoenix in 1937, and the first 150 years was just back there.
Well, James Madison rose on the floor of the Congress when this
bill was introduced, this welfare bill, and said, I cannot undertake
to lay my finger on that passage of the Constitution that authorizes
us to expend the money of the taxpayers on this welfare measure.
Two years later, his colleague from Virginia, William Giles, when
faced with a similar bill, rose from the House floor to say, our duty
is to uphold the Constitution and the oath we took to do so, not
to engage in these humanitarian activities.

Contrast that with Franklin Roosevelt, writing to the chairman
of the House Ways and Means Committee in 1935: I hope you will
not allow any reservations about the constitutionality of this bill.
however well founded, to stand in the way of its passage. Contrast
that with Rexford Tugwell, one of the principal architects of the
New Deal, writing in Center Magazine in 1968: In order to get our
programs through we had to engage in, “tortured interpretations of
a document intended to prevent them.”

Well, it is just those kinds of programs that my colleagues over
here on the right are talking about preserving, the kinds of pro-
grams that have no place whatever in the Constitution. To put it
in a nutshell, most of what you are doing today is illegitimate. It
enjoys no constitutional foundation. This is a Congress without con-
stitutional clothing, and it is increasingly recognized as such.

I have a quote, for example, from Prof. Gary Lawson, now at the
Northwestern University Law School, from the Harvard Law Re-
view. “The post New Deal administrative State is unconstitutional
and its validation by the legal system amounts to nothing less than
a bloodless constitutional revolution.” And Congressman J.D.
Hayworth——

Mr. SuHays. In interrupting you you'll think that I’m trying to
shut you off because you’re saying we're illegal. That’s not my pur-
pose,

Mr. Kilgore.

Mr. PiLon. I made my point, I think.

Mr. Towns. If you will continue to yield 1 second. I think it’s im-
portant, he says what we’re doing is naked, and I think that’s an
interesting point.

Mr. SHAYs. He got to you, huh?

Mr. Towns. Yeah. I think it’s a—

Mr. SHays. He was going to leave, and now you kept him.

Mr. PILON. This is more interesting than Waco.

Mr. Towns. Fine, I’m hearing what you're saying. But still, spe-
cifically, how do you propose giving the States what you say is
their rightful power? I don’t hear that.

Mr. PILON. How do I propose giving it to them?

Mr. Towns. Yeah.

Mr. PILon. I don’t propose you give it to them. I propose you stop
doing what you’re doing and let them assume it. Because these are
powers that are, as the 10th amendment makes clear, retained by
the States or the people.

Mr. Towns. I mean I really don’t understand how we do that.
Could you just—Mr. Chairman, could you just yield just another
minute to me? Because he’s saying a lot of things here, and I want


58

Who Should Do What?

‘The Division of Responsibility in the Federal System

Paul E. Peterson

The newly elected congressional majority arrived in Washington in January
determined to wm a great deal of national policymaking over to the states. Goals
include cutting federal spending on state and local programs and allowing states to
design public programs to fit their particular needs.

Many of these proposals-giving states more responsibility for transportation, job
training, education, crime control, and other policies that affect economic development--
are promising. A number are rightfully winning the support of the Clinton
administration. Indeed, President Clinton proposes to finance a tax cut by means of
substantial reductions in federal spending on roads, housing, education, and flood
control. For example, money is to be saved by combining thirty separate grants for
construction and repair of mass transit systems, highways, airports, and railroads into a
modest, if unified, transportation grant to states and localities.

The convergence of interest between the congressional majority and President
Clinton results partly, of course, from the enormous pressure exerted on federal spending
by demands for tax cuts, the rising cost of senior-citizen entitlements, and the budget
deficits piled up during the 1980s. But it also reflects an important trend in American

federalism as it has been developing over the past two decades--a shift in economic


112

running roughshod over the privileges and immunities of their citi-
zens. Article 1 gives the courts the power to secure the privileges
and immunities of citizens, the very power the Supreme Court ab-
dicated in the Slaughter House cases.

Article 5 gives Congress the power to regulate, to secure the
rights of citizens. In short, what the 14th amendment’s privileges
and immunities clause was meant to do was to ensure that the
Federal Government had a power to negate State actions in viola-
tion of the privileges and immunities of citizens of the United
States. This issue, properly understood, has nothing to do with fed-
eralism, it has nothing to do with the devolution issues and the
10th amendment we're talking about today. It has everything to do
with the case of judicial abdication.

Thank you.

Mr. Souper. Thank you.

(The prepared statement of Mr. Pilon follows:]


16

Federalism and Low-Income Programs

Some low-income programs probably should be consolidated into block grant-
type structures. There is broad consensus, for example, that there are too many
overlapping job training programs and that consolidation — and more state authority
and flexibility — makes sense here.

The issues become more complicated, however, when one looks at means-tested
entitlement programs like food stamps, Medicaid, school lunches, and AFDC. It’s
sometimes said that block grants are needed in these areas to give states more flexibility
and to reduce federal costs. But states can be can be accorded greatly enhanced
flexibility in these areas — and federal dollars saved — without a block grant.

Take food stamps as an example. Legislation introduced in June by Senator
Richard Lugar and approved by the Senate Agriculture Committee on June 14 (and to a
lesser extent, the food stamp provisions of H.R. 4, the House welfare bill) show that
large savings can be extracted and substantial flexibility accorded to states without
turning the program into a block grant.

The Lugar bill allows states to set their own rules in determining food stamp
benefits for families that receive welfare. It includes a sweeping array of state options
affecting virtually all parts of the program. It repeals scores of prescriptive federal
rules. It also establishes waiver authority covering virtually every aspect of the
program in which explicit state options are not established. States would have vast
flexibility so long as the changes they made in the program’s benefit structure did not
increase federal costs.

The bill also contains provisions reducing federal food stamp costs by more than
$16 billion over five years. And it achieves these things without turning the food stamp
program into a block grant or ending its entitlement status.

Why is this important? Because converting the financing structure of means
tested entitlements like food stamps into a block grant structure results in some highly
undesirable effects:

+ Under the current financing structure, federal funding rises when poverty
and need increase in a state — such as during a recession — and fall when
need recedes such as during a recovery.

+ Similarly, federal funding rises when the number of poor people rises in a
state due to rapid state population growth and falls when a state's overall
population — and its poverty population — decline.


28

RESTRUCTURING MEDICAID: Concepts, Issues, and Alternatives

Medicare Hospital Wage Index. This measure is a proxy for the cost of doing health care
business in a state. It is calculated by the U.S. Department of Health and Human Services
and is used in the Medicare program. The data are not currently available on a state-by-state
basis however, the calculation can be done from the existing data set.

Outcome-Based Incentives. In recent years, business and government has moved toward
performance or outcome based measures of program success. Unlike most of the preceding
factors, those listed below are general categories that would need more exploration and refinement
before being considered in an allocation formula.

Efficiency-Related Factors. These are factors that would increase allocations of funds 10
states based on program administration such that those states that administer programs more
efficiently would be rewarded. Two examples of factors that might be considered in this
category are proportion of beneficiaries in managed care and proportion of spending
allocated to administration as compared to services.

Effectiveness-Related Factors. These factors would provide allocations to states based cn
how successful a state has been in meeting certain health related goals. For example,
allocations could be made based upon the number of children under age two who are
immunized. Some examples of these measures are described in the U. S. Public Health
Service's Healthy People 2000 document or in states’ version of this document.
Weighting
Once the factors have been chosen, decisions must still be made concerning the weighting of each
of the factors in the final equation. For example, since the elderly and disabled represent about 70
percent of spending in the current program, should measures of the elderly receive a higher
weight? What weight should state financial capacity factors have in the formula? This set uf
decisions is as difficult and complex as the decisions that guide the selection of factors
themselves.

Allocation Strategies

In the following sections, three broad options to allocate or re-allocate funds among states are
presented. The first most closely represents existing expenditures. The second makes adjustments
to growth, and the third makes adjustments to base year and growth. While a basic approach is
taken in the latter two options, a number of additional modifications can be made to fine tune the
formula.

These options are not allocation formulas. Rather, they are conceptual approaches to the
allocation of funds.

1, Use Existing Base Year Expenditures and Allocate Growth Proportionally Among
States. Under this approach, the new federal dollars would be distributed among states
proportionally using the same percentage. The growth would be calculated against actual
base year expenditures in the state. Proponents of this approach would argue that the
current program represents the state's financial commitment to those served by Medicaid
and the state's commitment should be preserved. They also argue that changes in the
base would cause serious disruptions in services.

NGA Staff Paper 9
July 24, 1995


94

percent in FY 1996 and 8 percent over the remainder of the eight-year glide-path
period. Add to this formulation that the unfunded mandates law is now on the books
and that the ACIR (which I hope will stay in business) is hard at work on a study of
existing mandates that present serious problems. And frost this cake with the possibility
that the U.S. Supreme Court may move down the path to overturning Garcia and in
selected specific areas (environmental and civil rights) loosening federal controls.
Anything close to this would in my mind justify the designation of a "Devolution
Revolution” if this is what comes out of the 104th Congress.

From my vantage point as far as block grants are concerned, I also see the
possibility of a SuperBlock with functional-area earmarks that could provide the
framework for a “grand compromise” on the contentious issue of interstate formula
allocations.

A recent GAO report (GAO/HEHS-95-139) highlights opportunities for exciting
Management and structural reforms as part of an overhaul of American
intergovernmental relations. Under such a new regime, states are likely to push hard to
extend their Medicaid managed care system for medical and hospital care for the AFDC
Population and other poor people and also for institutional care for the elderly and
disabled. Many states, I hope, will take advantage of such opportunities to link social
services and create “One-stop” shops for coordinating case management across health
(managed care) and welfare ("Jobs First,” "Jobs Now,” “Jobs Above All," or whatever),
and the Employment Service, to which they could assign an enlarged mission with new
powers for state economic development if a workforce development block grant is
enacted this year or next. See Attachmeat-3.

Let me also sketch in another element to this picture that involves technology. 1
have been around for awhile, and I have seen more failures of program coordination
than you can shake a stick at. I am now convinced that we have gone about this nice-


paternalistic. This wasn't all EPA's fault. Congress established a hefty requirement for reporting,
and so...in attempting to communicate its work product and the work product of those states that
enjoyed “delegated” authority...the agency built a convoluted and often wasteful program of
oversight.

EPA does have a long history of delegating authority but often, within that delegated

authority, it merely duplicates what the state agency is doing in the name of “oversight" This is a

‘waste of limited resources and undercuts the credibility and value of the delegated authority.
Oversight is important. Duplication is not.

I use the example of oversight to focus the dialogue on two important factors. First, in
assessing programs, it is critical to take an historic look and then answer some really hard
questions about the future of the agency in question. Drawing the lines of responsibility takes
care, research and understanding of the intent of the law and the capacity of the players.

Second, there is not going to be a cookie cutter that will press out just the right way for
each and every agency and program to be designed. For example, there will be situations where
states won't want the responsibility and will prefer that the federal government take the lead.
Pesticide registration comes to mind here.

Let's take a look at some basic principles that need to be kept in mind. After determining
whether the agency brings value to the system, there should be some basic criteria for the delivery
of the service offered. It is clear to me that, in the case of EPA, there is enormous value added.
The public clearly demands environmental protection and even when there is controversy over
implementation of the federal laws, there is very broad based support for such protection.

‘The question then should be how best to fashion that service?

1) Major responsibility should be given to the federal government to set the standards. In


7

. In addition, an entitlement financing structure automatically shifts funds
among states as relative need changes among states due to economic,
demographic, or other reasons. By contrast, a block grant must use a
funding formula that is out-of-date in apportioning funds among states.
At any point in time, the latest state-by-state poverty and income data are
three-to-five years old.

Furthermore, some of the proposals before Congress to block-grant
means-tested entitlements would give each state the same share of block
grant funds in future years as the state’s share of FY 1994 funds under the
program being block-granted. Such an approach creates serious equity
problems. At least four groups of states are inequitably treated: 1) states
that experience a serious economic downturn in the future; 2) states with
rapid population growth; 3) states that had an unusually robust economy
in 1994 and hence uncommonly low poverty that year; and 4) states in
which conditions change markedly for other reasons. (As an example of
how a state can fall into the fourth category, decisions recently made to
reduce AFDC benefits in Connecticut would place that state at a
disadvantage if the food stamp program were block-granted based on FY
1994 state food stamp data.)

Block-granting means-tested programs also can have adverse macroeconomic
effects because it weakens the “automatic stabilizer” effect of means-tested
entitlements. These programs expand during recessions — thereby infusing more
purchasing power into a weak economy — and contract during economic recoveries.
Herbert Stein, chairman of the Council of Economic Advisers under President Nixon,
recently called attention to this point.

Finally, as Paul Peterson has described so well, block granting such programs
can engender a “race to the bottom.” This is a serious issue. [ will not cover it here
since Peterson has elsewhere written so ably about it.

Approaches like the Lugar food stamp bill avoid these adverse side-effects of
block grants while according states sweeping flexibility and saving federal money.
They illustrate my basic point — that policymakers need to distinguish between
flexibility in designing and operating means-tested entitlements and whether the
financing structures of these means-tested entitlements are converted to block grant
form.

The school lunch program provides another example of these issues. Savings
can be achieved here in a reasonable manner. But a block grant — including one that
makes no cuts — is not a desirable way to proceed. In the recession of the early 1990s,
the number of children receiving free school lunches rose 1.2 million. A block grant

3


83

willing to throw out the baby with the bathwater, if that’s the only choice they are
given. We want to throw out the bathwater in order to save the baby.

That is why we view federalism in a very broad context—not as an end in
itself, but as one of several frameworks for developing a new model of domestic
governance suited to the Information Age, and capable of solving real problems.

Unfortunately, Mr. Chairman, I cannot agree that this year’s debate in
Congress on block grants for welfare, nutrition, health care, crime, or education, truly
represents a debate on federalism, much less on reform of democratic institutions or a
real devolution of power. In a PPI paper entitled "Blocking Devolution” that Kathleen
Sylvester and I published in February, we argued that block grants as proposed in
the 104th Congress were in fact a step back from genuine devolution, and an obstacle
to real discussion on the subject. I would like to devote the balance of my testimony
to a justification of that critical assessment, because you cannot have a debate without
some agreement on terms.

Lest you conclude that our antipathy to block grants is motivated by partisan
considerations, allow me to illustrate the limited nature of this year’s federalism
debate in Congress by contrasting it with the debate initiated in 1981 and 1982 by
President Ronald Reagan.

The Reagan Administration proposed a number of block grants in its initial
budget, and a broader array in the President’s 1982 State of the Union Address. Block
grants were never advertised as the centerpiece of Ronald Reagan’s New Federalism
concept, much less as its sum total. Generally speaking, the Reagan Administration


5

on this issue. But I know the other witness Julie Belaga. She is in-

vited here as someone who has worked on the State level as a

State representative and someone who served the Federal Govern-

ment both as a Regional Director of EPA and now working down

in Washington. I consider her one of the most talented public serv-

ants that I have ever met. It is wonderful to have both of you here.
Ms. Belaga, welcome. We are going to have you start.

STATEMENTS OF JAMES MARTIN, NATIONAL GOVERNORS’ AS-
SOCIATION; AND JULIE BELAGA, FORMER REGIONAL AD-
MINISTRATOR

Ms. BELAGA. OK.

Congressman Shays and members of the committee, I am really
delighted to be here today because I think you have a subject that
is fascinating and challenging, and I appreciate the opportunity to
be part of the discussion.

You pose the question of why doesn’t Washington trust the
States? I would like you to expand your question to the other side
of that coin: Why don’t the States trust Washington? Because I
think there is a very clear issue here.

On the one hand, you have the Federal Government invoking its
authority in a very paternalistic manner, which clearly signals that
the Federal Government doesn’t trust the States. On the other
hand, you have State legislators and Governors crying foul. They
want more of the power there. I think the tension is now palpable
and it forces us to take a look at this role and I think it is terrific.

I am taking a look at the questions you pose after having served
for 24 years in both elective and appointive office. My focus has al-
ways been on land use and the environment, so I am going to take
a look at the subject from that vantage point, but I really think the
issues that I discuss with you today are applicable to any agency
across the government.

Mr. SHAys. How many years were you in local government? I for-
got to mention that.

Ms. BELAGA. I was in local government for 6 years, 10 years in
the legislative role and then—you see the gray hair, Congressman.
I have been around for quite some time. So I have a very interest-
ing vantage point.

I want to set the record straight, first of all. I believe in govern-
ment. I really believe that there is a—an important role for govern-
ment to play with the private sector—where there is a need and
where the private sector cannot meet those needs.

So with that in mind, if you would go with me back to some envi-
ronmental history in the late 1960’s when the Cayuhoga River
burst into flames and it was spontaneous combustion. The pictures
that were all over the newspaper focused attention on industrial
pollution and that was followed by Love Canal and that was fol-
lowed by urban smog and people getting ill. All of this fed the

ublic’s passion for intervention and that outrage led to a series of
laws, which I will be candid with you, have been absolutely won-
derful. They have been successful and they have been powerful
tools. Clearly, the Federal Government had a role to play. But I
think the time has changed and I think this is an interesting anal-
ogy for you.


111

And it’s crucial to understand that you cannot understand the 10th
amendment until you understand that it is informed by the doc-
trine of enumerated powers.

It is that doctrine that gives the 10th amendment substance. Be-
cause the Federalist Papers made it clear right from article 1—
made it clear and the Constitution itself makes it clear in article
1, that all legislative powers herein granted, just as the 10th
amendment makes reference to powers not delegated, prohibited
and reserved, it makes clear that power begins with the people.
The people in the original position delegate power. That power is
enumerated in the Constitution, and it is limited by virtue of that
delegation and enumeration.

In a nutshell, if the power is not delegated, the Federal Govern-
ment does not have it. It’s just that simple, as a matter of constitu-
tional law. At bottom, then, the 10th amendment is not about Fed-
eral/State partnerships or turn-backs or swapping. It’s about legit-
imacy, the legitimacy that is derived from dela legation and enumera-
tion. Yet today the Federal Government exercises powers, vast
powers, of the regulatory and redistributive sort that the Founders
would have simply been appalled to see.

How did we get to this state of affairs? We got to it through the
demise of enumerated powers. Very briefly, in the New Deal era,
the court simply looked the other way under pressure from the
Roosevelt Court-packing scheme and opened the floodgates through
a reinterpretation of the commerce clause and the general welfare
clause. Through those two clauses we have gotten the leviathan we
live with today, the leviathan we know and love so well. Those two
clauses are the principal vehicles for government today.

It is absolutely striking to think that the Founders meant for
Government to arise just through those clauses. If they had meant
that, why would they have bothered to enumerate Congress’ other
powers, if Congress could do whatever it wanted through those two
simple clauses?

The issue today, therefore, is that we have government all over
the place. What can we do about rolling it back?

We have got to turn to some of the practical things that have
been talked about here today as way stations. But the fundamental
point must be kept in view: that government to be legitimate, gov-
ernment power to be legitimate, must be located in the Constitu-
tion.

Let me say finally a word about the States’ rights issue, because
I know the subcommittee is concerned about that. And here, too,
we have an issue that has arisen because of a fundamental mistake
in constitutional interpretation. It happened in the Slaughter
House cases in 1872. Had that decision, that 5-to-4 decision, gone
the other way, we would be in a very different situation today. We
in all likelihood would not have had Jim Crow.

The privileges and immunities clause, which was eviscerated
from the 14th amendment in that opinion, was meant to carry the
principal substantive burden, was meant to provide the rights to
the freed slaves that Jim Crow thereafter denied them.

We then had a sordid history of Jim Crow for almost 100 years.
Properly understood, federalism does not strip the Federal Govern-
ment of the power to regulate the States when those States are


81

Unfortunately, the block grant debate this year has brought out
the worst in all of its participants. With some honorable exceptions,
block grant proponents in Washington appear motivated by narrow
interest in Federal budget savings and by the usefulness of block
grants as a way to avoid difficult Federal policy questions that just
happen to divide Republicans.

Meanwhile, State officials supporting block grants appear moti-
vated by narrow interests in controlling Federal funds. In part be-
cause they believe that the money is going to be cut in any event.
In other words, the block grant fashion really is blocking devolution
at both the intellectual and political levels. This country does need
a broad debate on devolution that goes far beyond the inside-the-
boxes reorganization schemes of federalism scholars, and addresses
the challenge faced by Government officials at all levels adjusting
to the economic and social forces that are producing a radical de-
centralization of private institutions. Instead we’re arguing about
funding formulas for block grants.

Members of the subcommittee, I really do hope that a genuine
debate on devolution in federalism can begin with this hearing.
Thank you.

[The prepared statement of Mr. Kilgore follows:]


107

performance levels for ? consecutive years
results in up to 25% reduction in grant
Feds grant incentive monies based on
performance. For 2 year transition,
certification of service provider can be

‘States failing to achieve benchmarks may
have allocation reduced by up to 10% for 3
years and States may receive incentive
‘grants for meeting or achieving
benchmarks. States required to evaluate

based on JTPA performance. progress of all individuals through I-stop
system.
MAJOR DIFFERENCES.

CONSOLIDATION

> Employment Service remains separate
¢ JOBS remains

+ Job Corps remains a federal program
+ Food Stamps E & T remains

(© ES resources are a part of grant
© JOBS is repealed

© Job Corps turned over to Govs.
2 Food Stamps E & Tis repealed.

FUNDING (See Allocation Section) (Sze Allocation Section)

‘APPROACH Organizes the system based on target | Organizes the system based on core
groups ctivities

PLANNING United approach a rade a one plan | Bierce epproah that eerily at

lans

FEPERAL ‘Reduces but maintains federal notional role | Cuts federal role significantly and
‘and maintains existin is new administrative system
Loistem

STW ‘No provision “Makes core provisions

LOCAL BOARDS | Required Optional

‘VOUCHERS Required Optional

PERFORMANCE | Creates a more defined national framework | Provides more flexibiliy to the States in the
Jor a consolidated and uniform | development of specific performance
‘performance measurement system Jor | benchmarks A
program activities

‘AT-RISK VOUTH | Clear definition that extends beyond | Defined as economically disadvantaged

DEFINITION

‘economic situation to include barriers to
employment and school drop-out factors



92

Personally, 1 have always felt that income transfers for the poor should be
centralized. This was Nixon's position with "FAP" and "FHIP,” which are described in
Attachment-2 to this testimony presenting a brief history of block grants. But policy
analysts have to be honest. Welfare today is not a pure transfer-type program. We also
want to change personal behavior. We want to stop teenagers from having babies out

of wedlock, get them to stay in school, and orient them to self-respecting lives of work

and self-support. This involves a lot more than sending out a check. The process of
achieving these behavior-modification goals cannot be micro-managed from
Washington. Similarly, health care for the poor and the disabled under Medicaid is not
a pure transfer function. Food stamps are more of a pure transfer, and personally I am
reluctant about devolving this program to the states.

So I am on the fence. I worry about closing the end on entitlement programs
and causing the proverbial "Race to the Bottom.” But at the same time I see advantages
to the "Devolution Revolution” of 1995 stimulating states to develop new and truly
integrated systems to reform health, welfare, and social service programs. Where does
that put me? Maybe I should be the referee in the debate you are having.

Although I only get my five minutes to say what I think could and should happen
in the intergovernmental arena this year with the “Sword of Domiciles" of budget cuts
pushing towards devolution, I want to add two subjects in my written testimony about
what happens AFTER the revolution. The first subject concerns what the states could
and should do to implement radical changes in American intergovernmental relations.
This subject - implementation - never gets enough attention when we are preoccupied in
Washington with legislative deal making as is now the case. Second, I want to comment
‘on another subject that often doesn't get enough attention in times like the present. I
refer to the need for feedback, that is, accountability mechanisms for the new
devolutionary policy changes that may very well be enacted this year.


60

s Federalism

education, mass transit systems, public parks, police and fire services, and sanitation
systems--necessary for the country's economic growth. I shall call these kinds of policies
developmental because without them economic progress would be retarded. ‘The
national government, by contrast, has taken responsibility for transferring economic
resources from those who have gained the most from economic development to those
who have gained the least--the elderly, the disabled, the unemployed, the sick, the poor,
families headed by single parents, and others lacking in material resources. 1 shall refer
to these policies as redistributive because they shift resources from the “haves" to the
“have-nots.”

Since 1962, developmental spending at the state and local level has been more
than double that at the national evel. In 1962, state and local spending was 9.4 percent
of gross national product as compared with 4.2 percent for national spending. Despite
growth in the size of the domestic responsibilities of the national government in
subsequent decades, Washington still spends less than half as much on development as
the lower tiers. In 1990, the states and localities were spending 10.8 percent of GNP on
the country’s developmental infrastructure, while the national government was spending
only 5.2 percent of GNP.

With regard to redistributive expenditure, the story is entirely different. Since
1962, the state and local share of the country’s spending on the elderly, the poor and the
needy has steadily declined. While national government redistributive spending more

than doubled, from 4.9 percent of GNP in 1962 to 10.3 percent in 1990, state and local


56

STATEMENTS OF PROF. PAUL E, PETERSON, HARVARD UNI-
VERSITY, DEPARTMENT OF GOVERNMENT; ROBERT GREEN-
STEIN, EXECUTIVE DIRECTOR, CENTER ON BUDGET AND
POLICY PRIORITIES; ED KILGORE, SENIOR FELLOW, THE
PROGRESSIVE POLICY INSTITUTE

Mr. PETERSON. Representative Souder, thank you very much for
inviting me. I simply want to start off by seconding what Mr. Mar-
tin from the Governors’ Association said, that the budget problem
that we are facing today is driven by costs of programs serving peo-
ple over the age of 65. I did notice yesterday that if you look at
life expectancy among the G—7 countries, the seven most strongest
economies in the world, we rank No. 7 in terms of life expectancy
at birth; once you get to age 65, we rank No. 1 in terms of life ex-
pectancy. So what we are doing in terms of health care over the
whole life cycle is very different from what we are doing for health
care at the age of 65. And if you start looking at where the dollars
are going, as was just testified to, it shows those dollars are really
affecting people’s lives in very important ways.

Now, how does that relate to our discussion today? I think it does
in a very direct and important way because it raises the question
exactly what is it that we should be turning over to State and local
governments? What is the appropriate division of responsibilities
between the National and the State Governments?

And it has been increasingly the case that the two levels of gov-
ernment have begun to specialize in different kinds of activities.
State and local governments have assumed the responsibility for
managing the country’s physical and social infrastructure, the
roads, education, mass transit systems, public parks, police and fire
services, and sanitation systems that are necessary for the coun-
try’s economic growth. And I call these programs developmental
programs because were it not for them, economic progress in the
United States would be retarded.

The National Government by contrast, has taken responsibility
for transferring economic resources from those who have gained the
most from economic development to those who have gained the
least: The elderly, the disabled, unemployed, the sick, the poor, and
those lacking the material resources. I call these programs redis-
tributive because they shift resources from the haves to the have-
nots.

Developmental spending by State and local governments
amounts to 10.8 percent of the gross national product. The amount
of developmental spending by the National Government on domes-
tic policy amounts to only 5.2 percent of GNP.

Now, when you look at redistributive spending, it turns around.
The National Government spends 10.3 percent of GNP as compared
to 3.5 percent by State and local governments. So basically we have
a division, a responsibility here.

The Federal Government takes the responsibility for redistribu-
tion, the State and local governments for economic development,
and this, I submit, is appropriate. It is the right thing to do. Local
and State governments are efficient mechanisms for supplying
most of the physical and social infrastructure necessary for eco-
nomic development. In providing roads and sanitation systems and
public safety for residents, local governments, and State govern-


18

19% PRESIDENT'S BUDGET ~ FFIS PRELIMINARY ESTIMATES
GRANTS INAID. MAJOR DISCRETIONARY AND MANDATORY PROGRAMS 0240
eter fl ye ta mao
Fie | neo i nr a
wos | rv ies [ressinenrs S ciARGE sit
MAJOR DISCRETIONARY enacteo lesnimare |"-suveer [7 CCC
APARTMENT OF AGRICULTURE cr ws] suo) nae
lberaxIMENT oF COMME rt =
SCONE OFS OTMENT ASOFTANCE 3 mf Sot =
losraRraNr oF EDUCATION vans] om
‘aurteton soso rn ere
cana te = TM
a a . om oo ne
Eseonowee rnoresSORe BEC a a ware
S os ed es

Ser aus

FieALTH AND HUMAN SERVICES me

haeiseiiemeora somes |
cowvrn Oe emake + a0

lberaRTMEST oF rae INTERIOR

lnraxrusr or scence
vista atc
Seren orer a pungutee Paes 2
loeraatasevr or vance rr v8
‘muonwenr sect SATE AOMN on,
or exReER Com ° |
Lustirconanr cour 547e sD ay ale

‘Copyright () 1995 FFIS Federal Funds Information for States AI! Rights Reserved


al

CAN BE EXPANDED EFFECTIVELY FOR THE BENEFIT OF
OUR CITIZENS.

WE MUST ALSO KEEP IN MIND THAT, JUST AS STATES
ARE BETTER SUITED THAN THE FEDERAL GOVERNMENT
TO UNDERTAKE CERTAIN RESPONSIBILITIES, THERE ARE
AREAS OF PUBLIC POLICY WHERE UNIFORM, FEDERAL
POLICY HAS ABLY SERVED OUR NATION. THE DOMAIN
OF CIVIL RIGHTS ENFORCEMENT IS ONE SUCH AREA,
FOR EXAMPLE. I HAVE ALWAYS BELIEVED THAT STATES
SHOULD HAVE MORE LEEWAY TO EXPERIMENT AND
INNOVATE IN PUBLIC POLICY, BUT THAT THE FEDERAL
GOVERNMENT MUST MAINTAIN CERTAIN NATIONAL
STANDARDS. DEVOLVING RESPONSIBILITY SHOULD NOT,
AND NEED TO, INVOLVE LOWERING OUR EXPECTATIONS
OF GOVERNMENT. ON THE CONTRARY, IF PROPERLY
ENACTED, IT CAN MEAN SURPASSING THOSE
EXPECTATIONS.


51

HERE IN WASHINGTON WE LIKE TO USE THE ONE
SIZE FITS ALL APPROACH! IT TOOK US FORTY
YEARS, BUT ! THINK WE FINALLY FIGURED OUT
THAT THIS DOES NOT WORK.

WHAT WORKS IN PHOENIX, ARIZONA MAY NOT
WORK IN PATERSON, NEW JERSEY.

THIS COMMITTEE HAS PLAYED A KEY ROLE IN RE-
THINKING THE WAY WASHINGTON WORKS.

EARLIER THIS YEAR WE PASSED AN UNFUNDED
MANDATES REFORM BILL THAT WILL BEGIN TO
STEM THE TIDE OF BURDENSOME UNNEEDED
FEDERAL REGULATIONS.

| BELIEVE THAT MY STATE COULD ADMINISTER
MANY OF THE PROGRAMS MORE EFFECTIVELY

AND AT A CHEEPER COST THAN THE FEDERAL

GOVERNMENT.

WE HAVE STARTED ON THE PATH TOWARD
RETURNING RESPONSIBILITY BACK TO THE
STATES. WHILE WE HAVE MADE PROGRESS, |
BELIEVE WE STILL HAVE A LONG WAY TO GO.


80

idea of block grants, which is simply an administrative reform to
promote more flexible management of Federal/State grants.

Second, the block grant legislation we have seen so far does not
liberate State administrators of Federal grants to focus on achieve-
ment of broad national objectives, that I believe every witness so
far has suggested ought to be the object of block grants. Instead,
those broad national objectives are ikemselves eliminated, and
with them any coherent rationale for providing Federal funds in
the first place.

In the Reagan budgets and in the 1982 State of the Union Ad-
dress, block grants were clearly and honestly described as interim
weigh stations toward full State assumption of selected Federal re-
sponsibilities. I have no doubt that there are Members of Congress
who privately viewed these block grant proposals as a weigh sta-
tion for eventual abandonment of Federal responsibilities to States,
but those predictions have remained private. So we really haven't
had a debate over how States would finance any new responsibil-
ities that are ultimately given to them.

The Reagan administration’s federalism proposals exhibited some
internal consistency. Entire functional areas of domestic govern-
ment were identified as appropriate for full assumption of the
States, by the States. This year’s block grants are full of inconsist-
encies. For example, the crime block grant legislation passed by the
House earlier this year completely replaces categorical crime pre-
vention and community policing grants supported by Democrats in
last year’s crime bill, while leaving in place a host of conservative
prescriptions on sentencing and prison construction.

The House welfare block grant package totally eliminates Fed-
eral eligibility rules for cash assistance in the name of State flexi-
bility, but then prohibits eligibility for specific categories such as
unwed teen mothers and illegal immigrants.

Finally and most importantly, in contrast, the Reagan era new
federalism agenda reflected thoughtful analysis of those areas of
domestic responsibility which Federal and State governments were
best equipped to handle, the sort of sorting out agenda that Profes-
sor Peterson talked about. You didn’t have to agree with the con-
clusions they reached to respect the seriousness of their effort.

President Reagan’s swap concept included a proposal to entirely
federalize the Medicaid program, because it was understood that
sorting out these responsibilities is a two-way street, not a one-way
shift. This year, many Republicans in Congress rightly argue that
there’s no one-size-fits-all Federal solution to every problem, but
they tend to embrace a one-size-fits-all solution in block grants.

The casual and almost frivolous application of the block grant
concept, I think, reached its apex last week, when Senators Gramm
and Faircloth proposed to turn Medicaid into a block grant for the
sole apparent purpose of overcoming a formula fight over distribu-
tion of funds for the welfare block grant.

The question that Chairman Shays raised in convening this
hearing, why didn’t Washington trust the States, is really the
wrong question to ask about the debate that’s occurred so far this
year. Trust requires an honest and serious dialog on commonly de-
fined problems.


142

doing block grants because people like me and others are outraged
that a city like Bridgeport, which declared bankruptcy, and then
applied for a lot of different grants, closed down its parks, and one
of the grants it got was a beautification grant to improve a park.
That’s an outrage. They go through a whole lot of work and hurdles
to get categorical grants. We have people who evaluate the grants.
They come down and we pay them. Then we decide in some arbi-
trary ways, as best we can, who gets the grants. Then we figure
that maybe 60 cents gets down to the person on the street. So
that’s another reason why we're looking at that issue. Mr. Green—
is it Greenstein or Greenstein?

Mr. GREENSTEIN. Stein.

Mr. Suays. | got that right at least. Mr. Greenstein, why don’t
you make your comment, then I’ll go to Mr. Souder.

Mr. GREENSTEIN. Mr. Chairman, you make the excellent point
about the problem of the one size fits all. And I think my concern
is that your statement was the key reason we’re interested in block
grants, is we’ve got to get more flexibility to State and local govern-
ment, let them make more of these decisions.

The Federal Government hasn’t done a lot of these things well.
My one caution would be, a block grant is one of, but not the only
way, to achieve that goal. So let’s not have also I would say a one-
size-fits-all in terms. In some areas, as | think all six panelists are
in agreement on at least in principle, in some areas, the Federal
Government should just devolve a function, no grant, no block
grant. You're going to have to reduce the size of the Federal Gov-
ernment as we move toward budget balance, and rather than mak-
ing everything a block grant at less money, some things shouldn’t
have less money. Some things shouldn’t have any money, and let
the States decide out of their own taxing capacity what to do in
areas like economic development.

And local parks and things like that probably, in my view, fall
into that category. Then you get a second set of programs, includ-
ing, and I think Dick misunderstands my view on this, including
some low income programs, that should be block granted. We have
a hundred and X job training programs now. Each local labor mar-
ket is different.

Let the local areas decide what to do. But it shouldn’t be de-
volved. It should be Federal funding through a block grant. Dif-
ferent areas have different rates of poverty, unemployment. They
can’t all raise the amounts they need for job training or else we'll
have people constantly moving to areas where the training pro-
grams are better. But the third area and the one that particularly
concerns me where I think a block grant structure is a problem,
but flexibility is appropriate, are some of the means-tested entitle-
ments.

I think you will have a hell of a time trying to come up with an
equitable formula to distribute the Medicaid funds. I don’t think
it’s workable. Should States have a lot more flexibility in Medicaid?
Absolutely. Should we save money in Medicaid? Absolutely. There
are a variety of ways to do it.

We would probably all agree that we should repeal some of the
mandates. We should give States flexibility to go to managed care
without having to go through all kinds of waiver procedures. They


135

their own rules in the behavioral areas and the service delivery
areas and the training areas for welfare recipients in the way that
Dick Nathan proposes, and do it without a block grant funding
structure which has the quite different problem of not responding
to recessions, not responding to population growth, and getting the
wrong amount of money in the wrong State at the wrong time.

And since you’re here, I'll give one quick example. To your State,
Connecticut, your State has just reduced payments in the AFDC
program. If one were to do a food stamp block grant, and one were
to, as Governor Engler calls for, base it on each State's share of the
total in 1994, Connecticut would be very heavily disadvantaged, be-
cause it had higher payment levels in 1994. But why should in the
year 1998 Connecticut get fewer food stamp funds than another
State that has the same AFDC benefit level, just because it low-
ered its level after 1994 rather than before 1994?

So I’m trying to distinguish the financing question, where the
Federal Government would recognize that different States’ econo-
mies, different States’ wealth, different States’ taxing capacities
change over time, from giving States the flexibility, as the Lugar
food stamp bill does, as Chafee’s Medicaid bill he’s developing I
think will do, give States the flexibility to make those rules without
having them hit a wall in recessions or when population raises.

Mr. SuHays. Let me ask Mr. Pilon, am I saying your name cor-
rectly?

Mr. PILON. Yes, you did. I had corrected it earlier, but you
weren't here. You got it right.

Mr. Suays. I asked someone who was here.

Mr. Piton. OK, you cheated a little, all right.

Mr. Suays. But I didn’t trust him enough.

Mr. PiLon. Let me just say that my colleague here, Mr. Nathan,
remarked that what he agreed with was my statement that my re-
marks would be something entirely different. And over the laugh-
ter, you did not hear him say, and yet his points are exactly on
point. And that’s what I want to return to. Because it strikes me
again that the discussion throughout is assuming a kind of busi-
ness-as-usual approach. That is to say, we’re now simply talking
about how we transfer these Federal programs to the States to
carry out, as though there were no question, but that these pro-
grams will continue.

And my point throughout my testimony is this: What are we
doing running these programs to begin with? I mean, is it the idea
that we take the subsidies for the National Endowments for the
Arts and CPB and so forth and then give them to States to sub-
sidize? Is it that we take all these programs and just give them to
the States, let them fund them?

I mean the fundamental question that I’m trying to bring us
back to is, that this is not a policy issue. This is an issue of prin-
ciple. May I remind you, ladies and gentlemen of the panel, that
James Madison, your predecessor, rose on the floor of Congress in
1794, when a welfare bill was introduced of the kind that Professor
Peterson is talking about when he says redistributive spending
should stay with the Federal Government, developmental spending
should be at the States, never even asking the question, well, is
there authority in the Constitution for this redistributive spending.


13

tained national economic growth and its impact on State and local
government. When we look at Federal aid, which is 18 percent of
that, $240 billion. In 1995, we have to take that in the context of
national economic growth.

Second, nothing compares to Medicaid. Nobody knows how many
Federal aid programs there are. There are over 600, that’s all we
know. There are over 600. Nobody has a definitive count.

Medicaid alone, of all those 600 programs, Medicaid alone ac-
counts for 40 percent of all Federal aid to all governments for all
purposes, that one program. The Federal Government this year will
pay—the Federal Government will pay $89 billion, the States will

ay about $70 billion for fiscal 1996. That gives yon that $163 bil-
ion program. Medicaid has been going up in the last year, 10.5
percent, the 2 years before that, over 20 percent per year. This is
a huge program of $163 billion is going up for the foreseeable fu-
ture at 10.5 percent, and the economy only growing at 3 percent,
you can see where the squeeze is coming.

Governor Romer of Colorado repeatedly says today that he will
not have any money left for education, basic education in Colorado
unless something is done about the explosion of health care costs
in the country. I think—I don’t have it attached here, but President
Clinton’s Medicaid in his new budget, his changes for Medicaid and
Medicare are only about $50 billion off from what the Republican
proposals are when you take his from a 10- to a 7-year proposal.

it is amazing, and something has to be done about Medicaid.

If nothing is done about Medicaid and Medicare and health care
costs containment, nothing else that you and the Governors or the
legislators are doing, are going to make much of a difference be-
cause the health care costs are going to eat us alive. The higher
education people have said repeatedly last year that the worst
thing that ever happened to higher education in America is Medic-
aid. Medicaid is now eating into everything else that we have at
the State and local level.

And we have some proposals for Medicaid, and I can give the
committee those, detailed proposals that the Governors have.

The same with welfare reform. The issue there is flexibility. Re-
peatedly you have heard we don’t want to change Democratic
micromanagers for Republican micromanagers. And Republican
Governors are just as insistent as Democratic Governors that in
the welfare reform that there be flexibility.

The Governors are tired of begging for waivers. It takes about—
an average of 30 to 40 separate waivers to get one health care
thing or welfare reform proposal going.

Secretary Shalala has been outstanding. She has given 34 waiv-
ers, 34 States are now operating under waivers of current law. The
law is so confusing and so inoperative that 34 States are operating
under waivers from Secretary Shalala, and she has been good to
offer those.

Let me close by saying that block grants, they are the rage for
fixing everything. I will make a little quote from a GAO report that
just came out. This is an outstanding report on the history of block
grants, up to date, published in January. And they say here in an
employment training area you have 163 programs for job training
by 15 separate departments. I mean, so much money must be spent


137

to follow him, because, you know, he’s very articulate. 1 mean he
sounds good, you know. But I am having difficulty following you.

Mr. PILON. Well, I know you are. Because you're at this point in
the 20th century. What you are asking is very much like what is
being asked today in Moscow.

Mr. Towns. I am having trouble following that, too.

Mr. PILon. It’s very much what is being asked today in Moscow.
I was at a conference that Cato put on there in 1990, and again
in 1991. And there they were. The regime was collapsing about
them, the regime which had power in Moscow, planning every facet
of their lives. And now the question is, how do we get out of this
mess? It was easy to get into it. We socialized property and people’s
activities. Now, what do we do?

Mr. Towns. How do we get out of it?

Mr. PILON. That’s exactly the question you’re putting to us.

Mr. Towns. That’s correct.

Mr. PiLon. And there is no easy answer to that. I’m sorry, that
is something——

Mr. Towns. OK. I yield back, Mr. Chairman.

Mr. PILON. That is something I don’t have an answer to. My sim-
ple solution, and your solution, and you're going to have to do this
over time, you do what Chile did, fer example. You privatize the
Social Security System, and today it’s a remarkable success. You
move toward a tax system that allows for medical TRA’s. It would
solve a host of problems with respect to Medicaid that you’re never
going to solve by trying to micromanage them at this level.

Mr. Suays. I'd like two others to just respond, Mr. Kilgore and
Mr. Seay. And I’m going to ask you to try to be a little shorter, be-
cause you'll get other chances to comment. We are not going to
leave for a while. We’re going to stay for a while. We're going to
have a good dialog here.

Mr. KiLcore. I have very mixed feelings particularly about the
point of view being expressed by my colleagues from Cato and Her-
itage. On the one hand, I think it’s very important to recognize——

Mr. SHAvs. Excuse me, Connie, did you have anything you want
to say?

Mrs. More La. No, I find this fascinating. I want to thank all
the panelists.

Mr. Suays. Thank you for being here.

Mr. KiLcore. Federalism, much less block grants, really is a sub-
ject which needs to be seen in a much larger context, in essentially
of how we make—how we achieve public goals through the least
bureaucratic and least coercive method possible, of which privatiza-
tion is one method.

Devolution of power through vouchers or empowerment strate-
gies is another. And most importantly, as my friend from Heritage
indicated, through figuring out how to reinvigorate the civil society.
But I do have to say this. If we—if federalism advocates wait for
an institutional or a constitutional solution to the current system,
and refuse to engage the inside-the-beltway policy debate over—
that goes in the name of federalism or devolution, you'll be waiting
a very, very long time.

The problem is there is no political constituency for the 10th
amendment. Let’s be blunt about that. The reason we are—have


55

care and with Medicaid and other issues that are just going to be
extra in their impact in years to come.

Mr. Martin, you are free to stay.

I know, Ms. Belaga, you have to leave.

You are free, both of you are free to stay and listen to the other
panelists and then participate afterwards, if you want.

I do want to correct one thing, Mr. Martin, you said in the begin-
ning. And that is, you said no one is talking about Medicaid. We
are talking about it every day. I have a meeting with the Speaker
right now on Medicaid, and I am going to have to leave for a half
hour.

I had a meeting last night that ended at 12 on this issue. The
committees are conducting hearings on it. It is the press that
chooses to report on things like Waco and other issues so you are
not hearing a dialog about it. And you don’t see many press at this
meeting now.

Mr. MarTIN. I appreciate your correction, Mr. Chairman, and I
meant the press.

Mr. Suays. I am not dumping on the press, but that is just not
their priority right now.

I would like to call on our other witnesses again, either you are
free to stay or you can come back if you want to.

Thank you both very much.

Mr. MartTIN. Thank you Mr. Chairman.

Mr. Suays. And if I could call these witnesses, if they would re-
main standing so I can then swear them in.

Prof. Paul E. Peterson, Harvard University Department of Gov-
ernment; Robert Greenstein, executive director, Center on Budget
and Policy Priorities; Ed Kilgore, senior fellow, the Progressive Pol-
icy Institute. That is panel two.

Panel three is Richard Nathan, commissioner, Advisory Commis-
sion for Intergovernmental Relations; Roger Pilon, director, Center
for Constitutional Studies, Cato Institute; and Douglas Seay, direc-
tor, the Governors Forum, the Heritage Foundation.

I am going to swear the witnesses in and then apologize for
yielding the chairmanship to my colleague. I will be back shortly.
But let me swear you in.

If you would raise your right hand.

[Witnesses sworn.]

Mr. Suays. I would note for our record that all have answered
in the affirmative.

You are welcome to sit down.

We will go in the order in which I called you, if we can. I am
going to yield the chair to Mr. Souder for about a half an hour, and
I will be back.

Mr. SoupER [presiding]. Having just come over from the hearings
on Waco, let me say that I could barely get out without tripping
over the TV cords and the newspaper people, around the things,
and there is a dramatic difference when something is more detailed
and more technical, the media runs from that.

Mr. Peterson, would you like to go ahead?


2

Yet it is hardly debatable that the modern federalism is seriously
out of balance. Federal powers and programs occupy and, in man‘
cases, preempt virtually every area of public concern. The social,
political, and fiscal implications of that imbalance have added ur-
gency to the debate over the appropriate balance of power between
the National Government and councils closer to home.

Any proposal for a renewed federalism must overcome a powerful
barrier. It is the perception, a stereotype actually that States lack
the fiscal capacity, the political will, or the management sophistica-
tion to address pressing problems. The legacy of the conflict be-
tween States rights and civil rights and the need for Federal inter-
vention in the face of hard economic times have forged the impres-
sion that States are either unwilling or incapable of sharing a
greater role in governance.

But that view is no longer tenable. Today’s lopsided federalism
distorts the political balance struck in the Constitution, alienates
citizens from a too-distant government, and has saddled our na-
tional fiscal capacity with a multitrillion-dollar debt. The Supreme
Court recently breathed new life into the 10th amendment as a
limitation on the scope and reach of Federal powers.

States must play a central, sometimes exclusive, role in the
public’s business. Any new federalism must address these new re-
alities and reject the convenient assumption that States cannot
participate fully in a sovereign partnership.

Where should the line be drawn between State and Federal juris-
diction? Are there mutually exclusive spheres of governmental au-
thority or do Federal and State powers overlap entirely? What cri-
teria should guide the allocation of Federal and State authority
over the matters of health, welfare, education, labor laws, or infra-
structure spending? These are the questions we have asked our
witnesses to address today. The answers bear directly on proposals
before Congress to devolve Federal programs through block grants,
swaps, or privatization.

The budget deficit may have made us all “new Federalists,” in
one sense. But, budget-scoring rules alone will not and should not
determine the proper relationship between the National and State
governments. Twenty-first century federalism will have to address
the transformation of our postindustrial economy, the changing
shape of the American city and the impact of shifting demographics
on the need for public services.

Principles higher than the bottom line will be needed to guide us.
Those principles can be found in the 10th amendment and the
14th. They can be gleaned from the shared experiences of success
and failure at all levels of government and they can emerge from
the type of civil disobedience embodied in the Federalist Papers,
which we hope to continue here today.

I would like to welcome our witnesses. I especially would like to
welcome the ranking member who was the chairman of this com-
mittee in the previous 2 years. And since my ranking member just
came in, I don’t know if Mr. Davis wants to make a comment and
then we will give you a chance to catch your breath.

Mr. Davis. I will be very, very brief.

I was in local government for 15 years out in Fairfax County
where I was head of the local government for 3 years, served as


72

Mr. Souper. Dr. Greenstein.

Mr. GREENSTEIN. Thank you, Congressman, and I commend the
subcommittee for holding the hearing on this important question

jay.

Let me start by saying I am in broad agreement with the frame-
work that Professor Peterson laid out that States should be ac-
corded more authority in an array of areas, that there are some
areas of Federal Government that should be shifted or devolved to

tates.

Block grants are desirable in some areas, they are unwise in
other areas. And in particular, I think a concern I have about the
current debate is that it is often formulated that either you are for
trusting States and for giving them flexibility and for block grants
in a whole array of areas or you are against a block grant because

ou don’t trust the States and think they should not be given flexi-
ility.

I think that formulation oversimplifies and in some cases misses
the point. In particular, in a number of areas we need to distin-
guish the question of whether to convert the financing structure of
a program to a block grant from the separate question of whether
to give States flexibility and authority in designing and operating
the program. There are some program areas where the best policy
mix is probably to give the State Sroad authority in designing and
operating the program, a lot of trust, without changing the pro-
gram’s fiscal structure to that of a block grant.

I would like to focus particularly this morning on federalism
questions and low-income programs. Some low-income programs
probably should be consolidated into block grants. There is a broad
consensus, for example, that we have too many overlapping job
training programs, more State authority and flexibility makes a lot
of sense there, a block-grant structure.

The issues become a lot more complicated, though, when one
looks at means-tested entitlements like food stamps, Medicaid,
school lunches, and the like. It is sometimes said that block grants
are needed in those areas to give States more flexibility and reduce
Federal cost, but States can be given greatly enhanced flexibilit;
and a lot of Federal costs reduced in those programs without bloc!
grants.

Take food stamps as an example. Legislation introduced by Sen-
ator Lugar in June and passed by his committee last month, and
to a lesser degree the food stamp provisions in H.R. 4, your welfare
bill, show that large savings can be extracted and substantial flexi-
bility accorded the States without going to block grants. The Lugar
bill allows States to set virtually all of their own rules in determin-
ing food stamp benefits for families that receive welfare.

ir. GREENSTEIN. It includes a sweeping array of State options,
repeals scores of prescriptive Federal rules, and establishes waiver
authority covering every aspect of the program in which an explicit
State option is not granted. States would have vast flexibility here
so long as the changes they made in the program’s benefit struc-
ture didn’t increase Federal costs.

The bill also cuts food stamp costs $16 billion over 5 years and
it does this without turning food stamps into a block grant or end-
ing its fiscal entitlement status. Why is that important? Because


27

RESTRUCTURING MEDICAID: Concepts, Issues, and Alternatives

Strengths and Weaknesses of Aggregate and Per-Capita Caps. Significant differences exist
between aggregate and per-capita caps in both their implementation and policy objectives. An
aggregate cap is relatively simple to administer—formula allocation issues aside. Because the
growth is calculated in the aggregate, states could be given significant flexibility to define who is
eligible for the program and what services can be offered. To make it politically acceptable, the
aggregate cap may-require some reallocation of funds. Aggregate caps also offer the federal
government complete predictability in federal expenditures. On the downside, some but not all of
the factors that have resulted in differences among states in the current Medicaid program remain
(e.g. changes in population, economic downturn, differences in cost of care). Some of these might
be addressed in a formula allocation. However, depending on the level of federal funding, there
could be winners and losers.

With regard to per-capita caps, the individual entitlement to eligibility would be retained, and
states would be assured of per-capita payments for each eligible beneficiary irrespective of
changes in population demographics or economic downtum. The federal government would still
have to establish a growth rate to be applied to the per-capita cap. However, this growth rate
would only have to reflect differences in utilization pattems and medical inflation. This approach
retains an individual entitlement to services, if a state was interested in redefining eligible
populations, other strategies (i.e. waivers) would be required. While giving protections for
populations, this approach does not offer the financial certainty to the federal government on
expenditures since the financial impact of changes in population demographics and the economy
can be modeled but not determined with certainty.

ALLOCATION OF FEDERAL FUNDS UNDER CAPS

Congress may decide to use existing annual federal expenditures to define the base year and use a
uniform annual growth percentage for all states. Or they may opt to define some other allocation
strategy. In the following sections, factors and issues associated with the allocation of funds are
presented. This issue is complex and highly political. The reader should not assume that the
detailed discussions of alternative allocation strategies is an endorsement for ariy allocation
strategy or that an alternative allocation strategy is needed at all. Rather the detail represents an
attempt to assure that the reader understands the range of issues that could be considered in an

. allocation debate.

Allocation Factors

The following is a list of some factors that might be considered in any allocation discussions.
They fall into three broad policy categories—beneficiary-related, state financial capacity, and
‘outcome-based incentive factors. Neither within nor across categories is this list exhaustive. In
some cases, different proxy measures are presented for the same underlying policy objective. This
was done because proxies are always imperfect measures of underlying phenomena. Any changes
in allocation might incorporate two or more of these factors.

Beneficiary-Related Factors. These attempt to allocate funds based on the distribution among
states of those potentially served by the program:

Poverty Poputation—General. The federal government has established a national definition
of paverty, that is calculated annually. Through census data, the number of people in poverty
in each state may be calculated.

NGA Staff Paper 7
July 24, 1995


70

15 Federalism

Intensified state and local opposition to redistribution is understandable in an
‘economy that has become increasingly integrated and a society that has become ever
more mobile. States and localities can no longer make policy choices as if they were
living in isolation from other parts of the country. The decisions they take are noticed by
people elsewhere, and the impact on their economic and fiscal situation will be felt
sooner rather than later. One may regret that states and localities no longer seem
capable of caring for their sick and needy, but it is a price a federal system must pay in
an ever more integrated society.

Because states and localities are unequipped to finance social welfare programs,
their role in any welfare reform should be carefully circumscribed. The legislation
approved in March by the House to abolish AFDC gives states too much latitude to set
policy and is almost certain to worsen the “welfare magnet® problem. As some states
tighten eligibility standards and reduce benefit levels, states with more generous benefits
will become more powerful welfare magnets than ever before and yet will receive no
commensurate increase in federal funding, as now happens, if poor people move to take
advantage of the more generous benefits. And states are already making strenuous
efforts to avoid losing the "race to the bottom."

The state of Wisconsin reported last summer that about 20 percent of new AFDC
applicants in Milwaukee county came from new residents, many of whom were arriving
from Illinois, a state with lower welfare benefits. To respond to these pressures,

Wisconsin asked the national government for permission to try an experiment in which


146

anything? The closer you get to the people, you have school bond
referendums; no matter what the issue, they are being voted down.

Mr. PETERSON. No. I find at the local level a lot of people con-
cerned about their property values, and they say if we don’t have
good schools, if we don’t have good parks, if we don’t have good
roads, if we don’t have a good sanitation system, this town’s not
going to be keeping up its property values. They care—people in
my town care a lot about basic social services, and they will vote
to support them.

Mr. Souper. Your principle that the closer you got the people
and the more they feel the tax impact, the less likely they are to
do these things is solely based on the race to the bottom theory.

Or do you think that, at the Federal Government level, part of
the argument to keep some of these funds at the Federal level is
that you don’t get this competition at the local level to cut the
spending?

I would argue that part of that is that the closer you got the peo-
ple, the more they feel they have direct control of the government,
the more they see the impact. Therefore, the more they vote
against it, because they don’t like the government, whether it is so-
cial services, almost any type of things right now.

I understand, because I grew up in a community and currently
live in a suburban area that has a higher property tax because
they wanted it for their schools. So I would argue there are excep-
tions, but that is not the general rule, the voting pattern around
the country.

Mr. PETERSON. No, I think your town is not the exception. I
think your town and my town are like many towns. Everybody
really wants to have a good community. People don’t want to live
in a lousy town that doesn’t have good public services so long as
they are for the good, solid, productive citizens of that community.
What they are concerned about is a highly dependent population
moving into their community, and that’s where you have to have
a higher level of government take responsibility.

Mr. SHays. You have more time.

Mr. Kilgore, you were going to weigh in a second. Did you want
to weigh in on this issue or something close to it?

Mr. KILGorE. Well, I can make a brief comment.

Obviously both of the gentlemen to my right know a lot more
about this than I do. But the—the welfare block grant as enacted
by the House, which has led to most of the discussion of the race
to the bottom, I think it is important to recognize that it is not just
the basic block grant structure that tends to produce this.

There are actually incentives in the bill itself which tend to en-
courage States to reduce benefits or eliminate eligibility. It has sort
of perverse negative performance standards in it, which is part of
the strange design of that particular block grant.

So you can believe that that bill will produce a race to the bottom
without making that a general characterization of any devolution
proposal.

Mr. Souper. I want to make just kind of a general statement
that I do not necessarily agree with this concept of race to the bot-
tom. It may be a race to move people off welfare and into the work


63

e Federalism

The national government, on the whole, is the least efficient provider of economic
development. Unlike states and localities, it operates under few market-like constraints.
It need not fear that a series of poor economic investments will cause citizens to move to
another country. But without market signals to help guide policy choices, development
easily degenerates into political "pork" that does little to spur national economic growth.

Proposals to create a national industrial policy have generally gone nowhere:

good
part because proponents cannot convince policy makers that national bureaucracies, can

allocate scarce economic resources wisely.

Washington did enlarge its developmental responsibilities during the 1970s, largely
through grants to state and local governments. Federal dollars were given to cities and
towns to help build roads, fight crime, improve schools and redevelop deteriorating
central business districts. Members of Congress delighted in taking credit for securing
federal dollars that helped build bridges, dams, tunnels, and colliders.

This kind of developmental pork prospered during the sixties and seventies partly
because Congress was organized into subcommittees that focused member attention on
narrow issues and interests. But it was also facilitated by the fact that the revenues of
the national government increased automatically by means of inflation-induced bracket
creep within a steeply progressive income tax system. Members of Congress could enjoy
increasing tax revenues without ever passing a tax increase. Indeed, it was possible to

claim that taxes were being cut even when inflation was causing them to increase. (The


PressDewT’s
154 ‘THE BUDGET FOR FISCAL YEAR 1996
Table 12-3. “PERFORMANCE PARTNERSHIPS”"—Continued
7
Dyer | pyc’ | Srmceey | oparmee x
epee | Blase et | 5 athe | Bers | oopremee | termes
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Govuece | Skeeter | eu pece| me Gani | Sancstecinby | mal
‘parereand ta | saosuseger | reload | apes ilps | Sout: | ne
itateu be | Sic umghe | teals ewes | Strmcate tr | fedora
emetinc | genay maton | an PAS nas | Icninaelpe | Scan, tr
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oe Sewn ei | fester | Seer 3 or raimpe bs
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= Eteetinr | parses Pir
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saree [See SSeS | Sve" | So
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meanaree and arees wi be a with State Sn taal eer prantene
‘Pivorsane aetsure wil nowte oat ste" and oissae Mette forthe env inone sted “


87

FIGURE II-17.
Share of Total Medicaid Beneficiaries
by Eligibility Status of Beneficiaries, FY 1991

Total Beneficiaries = 28.0 Million

~S - Aged
Blind &
Disabled
“as
Children
“x

Source: Figur prepare by Congreniona Research Sac
based on data


57

ments must be sensitive to the needs of the businesses and resi-
dents. If they were not, if they didn’t attend to business, people
would vote with their feet and move to some other place.

Seventeen percent of the population changes its residence each
year, 3 percent moves across State lines. You can turn a lot of
things over to State and local governments and expect them to do
a very good job. You can let 50 flowers bloom, and the competition
among the States will make sure that they do a good job.

However, the very fact that State and local governments are ef-
fective instruments for achieving economic developrient makes
them much less effective at providing those redistributive services
that we today expect of our government. The smaller the reach of
a government, the less its capacity for redistribution.

The most extreme case is the small suburb. The small suburb in
our metropolitan area has almost no capacity to meet the special
needs of low-income citizens because the effects of such actions
would be immediately felt in the suburban tax rate, property val-
ues and attractiveness to business.

States, too, have to worry about the in-migration of people if they
have more generous welfare policies or Medicaid policies than their
neighbors have. They can easily become a welfare magnet or a
Medicaid magnet if their program of services is more generous than
those of surrounding States. And, therefore, it is not surprising
that the bulk of the responsibility for these kinds of programs, so-
cial Programs has been carried out by the National Government
rather than by the State and local governments.

Mr. SoupER. You have a minute left.

Mr. PETERSON. Yes.

Current congressional plans to transfer economic development
functions to the States are desirable because they place economic
development in the hands of those policymakers best able to do it.
And both the Clinton administration’s proposals and the proposals
coming out of the Republican majority fers in the House are doing
an effective job of turning over a lot of responsibilities in this area
to State and local governments.

However, it is not a good idea to turn over the responsibility for
Medicaid and welfare through block grants so that all the addi-
tional costs of these programs are going to be carried by your State
and local officials. Instead of having 50 flowers bloom, we are going
to have 50 flowers wilting as each are competing with each other
in a race to the bottom to try to shift the responsibility for taking
care of the needy in our society to some other place.

This is not because political leaders at the State and local levels
are not concerned about the poor and about the needy. It’s because
to the extent that they focus their activities on this kind of service,
they become a welfare magnet, they become a Medicaid magnet,
they become an attractive place for a dependent population. te re.
tards their economic development. They have all the incentives to
wilt their programs, not bloom their programs.

Let’s not turn over to the State and local governments respon-
sibility for things that just don’t belong at that level of our govern-
mental system.

Mr. SoupEr. Thank you very much.

[The prepared statement of Mr. Peterson follows:]


23

focus on benefits and service delivery systems. With a per-capita cap, states would be assured of
federal funds if economic and demographics result in more individuals needing health care
services, but the federal government would have less certainty in their expenditures (page 7.).

If federal Medicaid funds are limited, the allocation of those limited federal funds will become
extremely important to states. Congress will have to decide whether to reallocate existing
program expenditures among states or only new growth dollars; what factors might be
considered in any reallocation formula; and how much weight each factor should get. Congress
is probably faced with three options (page 9.). They can
© use the current allocation of existing funds and allocate new growth dollars
proportionally among states; .
‘* use the current allocation of existing funds and allocate new growth dollars according
to some other formula; or
‘© they can reallocate both existing federal funds and new growth dollars.

PROGRAMMATIC ISSUES UNDER A CAPPED ENTITLEMENT

If the Medicaid program is changed from an uncapped to a capped entitlement, a number of
issues emerge in that restructuring, Congress must give careful consideration to the transition
from an uncapped to capped program; funding of administrative costs; section 1115(a) waiver
states, expanding eligibility under a capped entitlement, Medicaid/Medicare dual eligibles. and
quality and performance standards (page 10.).



144

Mr. Says. I should have yielded to you a lot sooner.

Mr. SoupDER. The first question, and I realize as the chairman
said, this could be a whole hearing, but the question raised by Mr.
Pilon hasn’t really been directly addressed. I wanted to ask Mr. Pe-
terson, do you see that the thing that the Federal Government does
best is redistribution functions? What is the constitutional jurisdic-
tion?

Mr. PETERSON. Well, the taxing and spending clause of the Con-
stitution has been interpreted by the courts to say—we don’t know
what’s in the general welfare. The Supreme Court said, you know,
everything is in the general welfare and everything is for the spe-
cific welfare of a particular group or individual. And to try to draw
the line between what’s in the general welfare and what’s in some-
body’s specific welfare is so complicated that we think this is some-
thing Congress should decide, not the courts. I think that’s one of
the wisest decisions the Supreme Court has ever made. It sort of
said this is something we’re not going to subject to judicial review.

Mr. SouDER. Well, the -——

Mr. PETERSON. They took the lawyers out of this question. I
think it was a great decision. And that means that you can do a
lot of things.

nit Souper. A core difference that—it means you can do any-
thing.

Mr. PETERSON. I think that’s right.

Mr. Souper. That one of the differences between this Congress
and past Congresses, is that—I worked here for 8 years as a staff
person. About the only reference I heard to the Constitution was
the avenue. And all of a sudden, when you go to the 49 States,
there are a number of Members who pull constitutions out of their

ocket.

p Tl say something on their floor, and they'll hold it up to me. 1
had 31 town meetings in April and there were very few where
somebody didn’t either wave the Constitution or talk to me about
the Constitution. And the immediate perception is, oh, it’s the gun
people. No, it’s not just the gun people. It’s the education people,
then it’s somebody on welfare, then it’s somebody on another issue.
And that it’s not really a satisfactory answer to say that, oh, we
could do anything because the court enabled us to do anything.

The question is, Do you see anything in there that suggests that
Congress should decide that they have jurisdiction over these is-
sues beyond that the court has given them a general term, welfare,
and said that they can do whatever they want?

Mr. PETERSON. Well, it is the Constitution we are interpreting.
That is what Justice Holmes said, and he says that the Constitu-
tion has to be interpreted in terms of the experiences of the Amer-
ican people. It is not something that was written in 1789 and never
changed. It is a document that has had life and breath moving
within it because of the people who struggled and died on the bat-
tlefields during the Civil War and in the many other wars that we
fought. It has the richness of the great diversity of our society con-
tained within its framework and its understanding, and to try to
treat this document as a dusty piece of parchment dried up from
the past to give instant solutions to any public problem we have
to face is a complete misconstruction of how to think about the


90

and maybe in the exchange that’s going to come on what should be
block granted and what shouldn’t be.

Thank you for inviting me to testify.

Mr. SoupDer. Thank you very much.

{The prepared statement of Mr. Nathan follows:)


44

thing I think the accountability ought to be with who is making the
rules, for the most part.

Thank you.

Ms. BELAGA. And I will share with you that if we say to a State
you have to go ahead and do this, we really have to give them the
choices of how they are going to meet those standards.

iM. Davis. Don’t tell me how to live with it. One size doesn’t fit
all.

Mr. Martin.

Mr. Martin. Mr. Davis, in my testimony is a real short state-
ment on Medicaid and the health care issue, there is a subissue
that is the crux of the matter. Of all Medicaid recipients, 12 per-
cent are aged, and 14 percent are blind and disabled. So 26 percent
of all Medicaid recipients are aged, blind, and disabled. They are
getting of the $173 billion being spent, 26 percent are getting 69
percent of that money. It is mainly for nursing homes. It is not
poor pregnant women——

Mr. Davis. Long-term care.

Mr. Martin. It is not only Medicaid children that are bankrupt-
ing us. It is the aged, and the aged are the Medicaid problem, and
the Medicare problem, the SSI problem, the pension problems, and
we have decided to take that off the table, and both parties have
and nationwide for the time being. Until the issue of controlling the
cost of programs for the aged, blind, and disabled, at the rate at
which they are expending, we will not solve the deficit issue. This
is going to reduce the growth rate from 10 to 7 percent.

The plans are to reduce the growth rate for our State old folks
on Medicaid from 10 to 4. Our old folks cost more than your old
folks, and it is just not fair to have our old folks get down to four
and yours stays at seven. It, at least, ought to be seven—the same.

And federalism is not going to be resolved until the health care
issue has been resolved, and that is not going to be resolved until
the Nation is ready to deal, and the people, and, I think, you are
representing the people, with how are we going to control those
long-term costs for the aged, Social Security, Medicare, and Medic-
aid.

Mr. Davis. We are spending money just shrinking this small
piece?

Mr. Martin. It is shrinking everything else.

Mr. Davis. Everything, including discretionary, domestic spend-
ing, squeezing it and trying to get more and it is not—-I agree with
you, it is not the way you are going to get the answer.

Mr. Martin. Last year when Mr. Panetta came up and testified
by the full committee on the mandate relief bill—and you may re-
member this, Mr. Towns, all of you may have been there at the full
committee—and he said we are now in a long—in an era of long-
term fiscal constraints at every level of government. That’s what is
new in America.

What is new in America is the taxpayers have said enough is
‘enough, at the Federal level, State level if and local level. Before you
could push up Fed and we could cover this, that. Now it is the en-
tre is the public budget we are dealing with, not the Federal

udget.


85

responsibilities to the states. But those predictions have remained private, which
means block grant proponents have been relieved of the responsibility of explaining
how states would find the revenue sources to unburden Washington of these fiscal
obligations in the future.

The Reagan Administration's federalism proposals exhibited some internal
consistency. Entire functional areas of domestic government were identified as
appropriate for full assumption by the states, even if they included specific programs
that were popular or which enjoyed support from powerful constituencies in the
President's own party.

This year’s block grants are full of inconsistencies. For example, the crime
block grant legislation passed by the House earlier this year completely replaces
categorical crime prevention and community policing grants supported by Democrats
in last year’s crime bill, while leaving in place a host of conservative prescriptions on
states related to sentencing and prison construction. The House welfare block grant
package totally eliminates federal eligibility rules for cash assistance in the name of
state flexibility, but then prohibits eligibility for specific categories such as unwed
teen mothers and legal immigrants.

Finally and most importantly, the Reagan-era New Federalism agenda reflected
a thoughtful analysis of those areas of domestic responsibility which federal and state
governments were best equipped to handle. You did not have to agree with the
conclusions they reached to respect the seriousness of their effort. President Reagan’s
swap concept included a proposal to entirely federalize the Medicaid program,


62

7 Federaliem

Economie Development Engine
Local governments are efficient mechanisms for supplying most of the physical and social
infrastructure needed for economic development. In providing roads, schools, sanitation
systems, and public safety to their residents, local governments must be sensitive to local
businesses and residents. If they ignore them, people will vote with their feet and move
to another town. Since 17 percent of the population changes its residence each year, the
effects of locational choices on property values can be quickly felt. Moreover, if a locality
makes a poor policy choice, its failure will soon become apparent and will be ignored by
other communities. If it chooses wisely, its policy will be copied-and thus be
disseminated throughout the federal system.

Not all local policies will be identical, of course. People vary in their tastes and
preferences. Some towns will provide sex education in their schools; c:hers wiil not.
Some towns will ban smoking in stores and restaurants; others will be more permissive.
Some towns will emphasize country lanes for walkers and joggers; others will provide
playgrounds and baseball diamonds. Part of what makes local government efficient is
the variety it provides for people choosing a place to live.

Development policy cannot be an exclusively local prerogative, however. For
example, major systems of transportation, air and water pollution control, and some
forms of higher education must be coordinated across a substantial geographical area.

‘Thus state governments, too, are significant participants in economic development.


86

because it was understood that sorting out federal and state responsibilities was a
two-way street, not a one-way shift.

This year, many Republicans in Congress rightly argue that there is no one-
size-fits-all federal solution to every national problem—yet they embrace a one-size-
fits-all solution in block grants, for widely varying areas of domestic government. The
casual and almost frivolous application of the block grant concept reached its apex
last week, when Sens. Gramm and Faircloth proposed to turn Medicaid into a block
grant, for the sole purpose of overcoming a formula fight over distribution of funds
for the welfare block grant.

Ironically, the one step taken by the House in the 104th Congress that will
have a major impact on the future of intergovernmental relations had nothing to do
with federalism or devolution: the decision to reduce the number of committees and
subcommittees and their staffs, and to limit the seniority system. Those reforms
represent a real attack on one element of the "iron triangle" that typically defends
narrow, prescriptive federal programs, and House Republicans deserve some real
public credit for making it happen.

Mr. Chairman, the question you asked in convening this hearing, "Why doesn’t
Washington trust the states?", is the wrong question to ask about the debate over
federal-state relations we've seen so far this year. Trust requires an honest and
serious dialogue on commonly defined problems. Unfortunately, the block grant
debate in Congress has brought out the worst in all its participants. With some

honorable exceptions, Washington's block grant proponents appear motivated by a


121

Douglas Seay
Director, The Governor’s Forum

The Heritage Foundation
FEDERALISM AND THE REPUBLIC

Introduction

‘American national life awards no higher place in its hierarchy of values than the
Constitution. Liberals and conservatives alike ground their political philosophies on the
document; its creation has been the subject of endless praise and study; the system of checks and
balance it brought into being is used as an exemplar for wide areas of endeavor. The oldest
written constitution in the world, it is regarded as the supreme creation of the American political
mind, and remains the final arbiter of legitimacy for all political activity.

Yet, for all of this universal adulation, the reality is that the praise is anachronistic. The
applied Constitution in force today, the one actually governing the American commonwealth, is
far different from the written document. This divergence of the written and applied Constitutions
is the product of @ radical transformation over a century in the making. Some of this occurred by
‘consensus, some by extra-constitutional means. Taken together, these innovations have brought
about a fundamental transformation of the American political, economic, and social systems, one
never sought or approved by the Congress, the states, or the electorate.

The Constitution is justly famed for the many compromises it contains. Of those, the
central compromise arose from the effort to establish and empower a national government, while
at the same preventing tyranny, defined as the unrestrained exercise of power. The result was a
carefully chosen list of powers to be granted to the federal government, which were restricted to
the most necessary and narrowly defined purposes. Not trusting the new government to follow
either the letter or spirit of these provisions, nor believing in the efficacy of self-restraint, the
Framers selected as guardians the jealous sovereignties of the states and provided these with the
most formidable institutional and legal armory they could devise.

The inevitable tension produced by these and other deliberately contrived opposing
mechanisms often made for seemingly awkward processes of government; but that awkwardness
conceals their most important purpose: the restraint of government.

Tn contrast with the central importance of government in all aspects of modern American
life, the Framers of the Constitution had a far different understanding of the respective roles of
government and society. For them, the purpose of government was to maintain a secure
environment within which individuals, communities, and society as a whole would order
themselves through the operation of voluntary social organizations, collectively known as civil
society. By this means, the Framers sought to ensure liberty to individuals and allow them to
exercise control over their communities.

This is the system which worked so well for most of the Republic's history. Yet, at the
end of the 20th-century, it is incontestible that this conception no longer describes the actual
relationships between government on the one hand and society and the individual on the other, for
the latter half of the original constitutional compromise is gone. In fact, it has been wholly
inverted.

Far from limiting the power of the federal government in any meaningful way, the
Constitution is now used to justify the growth of govemment and its continuing centralization in
‘Washington, At century's end, there are no effective checks on the federal government's reach;

1



124

FEDERALISM IN AMERICA

In its original conception, and throughout most of the history of the United States, the
federal government was never intended to be as the national decision-maker on the range of
public issues. For most of our history, the individual states had far greater powers to represent
and legislate for their citizens than did Washington, and the totality of those powers was quite
limited: society was recognized as being largely self-regulating through its many institutions.

In their debates over the Constitution, the Founders were concerned with two competing,
objectives: establishing a central government with sufficient powers to carry out a carefully
‘enumerated set of responsibilities while also creating safeguards against the abuse and expansion
ofthat power. This concem grew out of their own experience: The Founders had rebelled
against what they regarded as tyranny: the unchecked operation of government, regardless of its
motives, however positive. And they were determined to avoid recreating it themselves. As a
result, the limited responsibilities accorded the federal government were confined almost
exclusively to those directly concerned with maintaining a secure environment in which the states
and society could operate without undue hindrance.

Far from authorizing the creation of a national decision-maker, the framers devoted
considerable effort to making its emergence impossible. To ensure restraint, they purposely
hobbled its decision-making processes with several undemocratic elements. Not only were the
processes of election to national office made elaborate, but the reaching of consensus among the
branches of government were deliberately made quite difficult, with a wide range of individuals
and groups being armed with an effective veto power. Getting something done was supposed to
be hard; stopping something from getting done was made easy.

Of the many checks and balances written into the Constitution as a safeguard against
tyranny, the best known is the division of the federal government into three competing branches.
‘However, this provision is effective only in balancing the powers of the three branches relative to
‘one another; it does not address the problem of restraining the absolute power of the federal
‘government as a whole, nor its power relative to the states and society. In fact, the separation of
powers actually works to encourage an expansion of the federal government's overall reach by
allowing each branch to operate largely independently and to compete in expanding its authority
into all areas of society.

Restraint of the absolute and relative power of the central government was to be secured
through two principal means: the absolute power was limited by a careful delineation of the areas
of authority granted to the federal government, along with several specific prohibitions against its
assumption of any additional powers, a safeguard reinforced by the sweeping and definitive
language of the 9th and 10th Amendments. The relative power was to be restrained by what has
‘come to be known as federalism, i.e, the states as sovereign powers collectively and individually
would comprise a natural adversary to the expansion of the power of the central government.
‘The protection of the interests and autonomies of the states from encroachment by the federal
government was regarded of such importance to the stability of the whole that a second chamber -
= the Senate -- was established for the exclusive purpose of representing the political interests of

4



31

DRAFT
. March 20, 1995

‘The states’ role in federalism a few years out could be much different than expected. Unless the
cost of government programs for the aged, blind, and disabled are assumed by the federal
government, states may not have enough funds to care for the poor regardless of all good
intentions, reforms, and commitments.

‘The current debate on welfare programs and cuts in Medicare and Medicaid obscure a long-term
problem for the states. The problem is that 70 percent of current state Medicaid funds are for the
aged, blind, and disabled. These costs are rising 8 to 10 percent a year—much higher than the
cost for welfare programs and the non-aged Medicaid recipients.

‘There is a possibility that the federal government would control their growth costs for Medicare
and Medicaid, shift their growth costs for welfare programs to the states at capped levels, and
leave the states with the most expensive of all programs—long-term and community based care
for the aged, blind, and disabled—$58 billion state costs in fiscal 1996.

Eventually, something must be done to deal with this dilemma, One way is to swap or sort out
the aged population of Medicaid for other welfare-type programs. It would not be easy to do but

it would make sense.
A sonting out would do several things:

1. Protect state funding for the poor;

2. Focus federal funding on all programs for the permanently eligible aged, blind, and disabled,
along with furure funding of Social Security and Medicare; and

3. Create the conditions for significant health and welfare reforms for the long-term for both
the federal government and state governments.

‘Today's expectations for significant state assumption of most federal welfare programs cannot
be separated from tomorrow's realities about the costs of health programs for the permanently
eligible population.


‘Testimony of
JULIE D. BELAGA

‘The subject of your discussion today is a powerful one You pose the question "Why
doesn't Washington trust the states?" I appreciate the opportunity to share my perspective on
that question and to bring my experience to bear as you address the challenge of identifying a

model intergovernmental arrangement.

{am here testifying today not in my capacity as a member of the Board of Ex-Im Bank,
but I speak based on my previous background in federal, state and local government, I consider
my experience in all of these venues to be helpful in formulating my answers to your question.

I thought that, perhaps your question could be expanded to include the question “Why
don't the states trust Washington?" On the one hand, the federal government invokes its authority
in a truly paternalistic manner. This clearly signals that the federal government does NOT trust
the states. On the other hand, cries of “foul” are coming more and more often from Governors
and legislators. They are signaling that the states do not trust the federal government, and that
they want power tumed over to them.

This tension is very real and it forces us to take a look at the role of government and the
possible lines of responsibility between all of the players.

‘You have asked me to discuss the benefits and detriments of intergovernmental relations
in the context of my experience in federal, state and local government and to discuss what |
suggest as the appropriate role for each. I've been in both elective and appointed government
service for 24 years. My focus has been on land use and environment, so let me use the
environment as the model. Obviously lessons learned from years of experience with ANY
federal/state relationship are applicable to other agencies.

Let me add that, in no uncertain terms, I believe in government. I feel passionately that
government has an important role to play where needs exist and where the private sector cannot
meet those needs.


139

I think of environmental law and I think we've solved our wet-
land problem in the Northeast, but candidly, most of Louisiana is
a wetland so we basically tell Louisiana you can’t do much. And
they have a problem with that. And I understand it. I have seen
the creativity that I long for in government happen at the State
level, not the Federal level.

Now, having said that, just to preface my remarks and then
throw it open, I look at national service. National service is a
Democratic program with a Republican delivery system. In some
ways it’s a Republican program. But it’s clearly Republican in its
delivery system. We say two-thirds have to be State and local.

Now, what’s the danger with that? Some States are going to do
it well and some States are going to really screw it up. You're going
to have, instead of that lowest common denominator view of the
Federal Government. Some States that are going to be worse off
and some that will be better off. The critics on my side of the aisle
go after and pick out the programs they don’t like and say, see, na-
tional service stinks, instead of saying, my God, look at the great
things it’s doing here and here and here.

So what is my bottom line? My bottom line is that I understand
the Federal Government getting involved in spillover effects.

We are not going to get into the debate yet of whether it’s con-
stitutional or not, because we can have that debate. But, I’m going
to make an assumption right now that it is. And I’m going to make
an assumption that it exists; that, you can’t disagree with me on.
I don’t have a problem with the spillover effects and understand
why it has to happen.

I can’t have New Jersey polluting Connecticut. New Jersey is not
going to deal with its pollution because the air doesn’t stay there.
It comes right over Connecticut. Connecticut has the third worst
air quality in the country because of New Jersey and New York,
candidly, I’m not throwing stones, but that’s the fact. So I have no
problem saying we should step in there.

Where I debate the issues are on other issues about the whole
concept of why we're doing a block grant. I’m doing block grants
because | think States can do it better and local governments can
do it better. I’m absolutely convinced of it. Some of them will do
it worse. And, yes, we are using federalism as the vehicle to discuss
that issue. I throw my comments out. Yes, sir.

Mr. PETERSON. Well, I think your comments, Mr. Chairman, are
really on target and very helpful. The Federal Government tries to
make one-shoe-fit-all kinds of different circumstances and it makes
lots of mistakes. And it always will. And just a lot of things should
be turned over to State and Tocal governments. And I think there’s
a lot that is being done in the legislation that’s going through Con-
gress today that’s moving in that direction and doing a good job.

And I would even go further. I'd say if you’re moving toward a
block grant in transportation, just why do you need a block grant
in transportation? You can pretty much expect the States and the
local governments to raise the money themselves if they need to do
it.

Mr. Suays. But I can answer that question. The answer to that
question is I want a three-lane highway to match a three-lane
highway in New York that matches a three-lane highway in Penn-


147

force, and what seemed to be perverse incentives may be intended
to be incentives to get people to work.

Now we can argue whether that is an effective way to do it, but
there is some motivational implication here that we are trying—
and, as the chairman said, I don’t think this is just a budget ques-
tion. Many of us were philosophical conservatives coming in and
have—I will grant that we have used the budget argument to help
advance a philosophical point.

What’s the most effective way to deliver services? We believe
philosophically that the welfare state may not have—may have
caused people, to their own harm, to the breakdown of families, to
the collapse of communities, to become involved in the welfare sys-
tem, and we are trying to encourage people to get out of that wel-
fare system.

But I do understand that if you go too far, people who, for a
number of reasons, may not be able to take care of themselves, and
local communities may not be sensitive enough to that, and I am
not one who believes there is no role for the Federal Government,
but we could—we could go on as we have.

And so I wanted to ask one question of the conservatives from
a completely different angle, and that is, how do you address the
more liberal question? And one of the reasons the Federal Govern-
ment is increasingly taking over these things, and as we get into
it, even in joint and several liability in lawsuits, a number of
things that are forcing some of us who were States’ rights advo-
cates to look at certain things at the Federal level.

Because of the tremendous mobility of the population, the inter-
activity of the population, in northwest Indiana, which is not in my
district, but when I worked for Senator Coats we dealt with in
Lake County 27 different communities. Literally, people had child
care in one, worked in another, visited relatives in another, grocery
shopped in another. Some of them didn’t even know which State
they lived in, in Chicago, IL, or in Indiana.

How do we deal with government at the local level with that tre-
mendous mobility of the population? And is that not some of the
pressure rather than an insensitivity to the Constitution or an op-
position to States’ rights that is driving some of the problems that
we are seeing in the move toward the Federal Government?

Mr. PILON. Mr. Souder, I think you got it exactly right when you
said that maybe these perverse incentives that Mr. Peterson is
talking about are not so perverse after all, and indeed it seems to
me that he’s got it exactly wrong when he is concerned about wel-
fare migration.

As we have seen, the point that is brought out by his examples
is that you get what you pay for. When you provide liberal welfare
benefits, you will get a lot of welfare people coming in.

The cities of California, some of them, found out that when you
provide ample benefits for the homeless you are soon inundated
with the homeless. I think that the lesson from that, that you get
what you pay for, should be the lesson that drives us here, and
your point that maybe what we want to do is have programs that
get people off welfare. What we have learned from human behavior
is that one of the best ways to do that is to reduce the benefits,
and pretty soon they do find that they can work after all—at least


153

Mr. Suays. Yes.

Mr. KILGORE. You made a comment that you tended to support
block grants because of a residual conviction that States could do
it better. The key question with block grants is, what “it” is.

In transportation you—or in welfare, you decide what is the most
important single or very small number of fundamental national
purposes to justify spending Federal money to begin with and then
get rid of a lot of the narrow categorical measurements reflected in
narrow categorical programs. So you sharpen the national purpose
and provide enormous flexibility to the States as a means to
achieve it.

Unfortunately, what seems to be happening in this year’s block
grants, we think, is that the national purpose itself is being obliter-
ated and there are alternative ways, as Mr. Greenstein and Mr.
Martin earlier suggested, a performance-based grant, the perform-
ance partnerships the Clinton administration is proposing, or even
the kinds of block grants the Reagan administration were propos-
ing in the 1980's.

But this question of ends and means also applies to the bigger
question of federalism and devolution. I think if there is any deep
philosophical split between panelists here today, it may be between
some of us who view devolution as a way to take a completely fresh
look at how we pursue public purposes in a nonbureaucratic em-
powering way and those who believe the purpose of devolution is
to eliminate the pursuit of those public purposes to begin with, and
it’s the most concise way I can think of to say it.

It is the difference between suggesting that we ought to find
ways to enliven the civil sector, charities, religious organizations,
to pursue public purposes and the point of view that you simply de-
volve what purposes we want to pursue for those organizations
themselves to define. That is a big difference.

But my basic comment is, we have got to keep ends and means
completely separate.

Mr. Suays. OK. Thank you.

Mr. NATHAN. To paraphrase Tip O’Neill when he said all politics
is local, all federalism debates are political.

Mr. Suays. All what?

Mr. NATHAN. Federalism debates are political. All federalism de-
bates are political, as intellectual as we may want to sound, and
I like to sound that way all the time.

But here is what I would like to say as a final point, Mr. Chair-
man, and I disagree with Mr. Kilgore now. We should have traded
places. I think that if you are going to do block grants, do block
grants. Mr. Goodling’s career block grant has got too many strings
in it.

If you really believe—once you start making block grants, you—
everybody throws in a string. It gets to be a great big ball of string,
and it’s got more ways that Federal agencies can make local and
State and—organizational officials jump through hoops.

I am greatly opposed to the idea in the Clinton administration
budget that Alice Rivlin is always pushing and Mr. Kilgore just
mentioned performance-based block grants. I don’t think there is
such a thing as a performance-based block grant. I think if you let


46

Sop psn rete

Statement of the Honorable Constance A. Morella
Subcommittee on Human Resources and Intergovernmental Relations
July 20, 1995

MR. CHAIRMAN, THANK YOU FOR CONDUCTING THIS
IMPORTANT HEARING ON ONE OF THE MAJOR
GOVERNMENTAL ISSUES OF OUR DAY -- THE DIVISION OF
RIGHTS AND RESPONSIBILITIES OF THE STATES AND THE
FEDERAL GOVERNMENT.

AS FORMER STATE LEGISLATORS, MR. CHAIRMAN,
YOU AND I SHARE BOTH A STRONG KNOWLEDGE OF AND
COMMITMENT TO THE RIGHTS OF STATES. WE BOTH
KNOW THAT THEY CAN BE INNOVATORS IN A WIDE
ARRAY OF AREAS -- EDUCATION, HOUSING, SOCIAL
SERVICES -- AND THAT THEY CAN SERVE AS
LABORATORIES OF EXPERIMENTATION IN WAYS THAT
THE FEDERAL GOVERNMENT OFTEN CANNOT. THAT IS
WHY IT IS IMPORTANT TO EXAMINE THE ROLE OF
STATES IN OUR CURRENT FEDERAL SYSTEM AND TO
DETERMINE IF THERE ARE WAYS IN WHICH THAT ROLE


6

The system that brought us those exceptional successes of the
1970’s and 1980's are no longer systems that satisfy. And that tra-
ditional command and control approach, those delivery systems are
outmoded and they need to be replaced by new models.

The issue, I think, for you is that $64,000 question: How do you
fashion a government that responds to the changes that are clearly
needed, and do so without throwing out the baby with the
bathwater?

In early EPA days, it was established and then the States got the
message that they really had a role to play and they came after the
fact, and they looked to the Federal Government for guidance and
for money and for leadership, and that relationship was very real.
Then I would suggest to you that the relationship took a turn for
very heavy paternalism and I think that is where we are now, and
I think EPA is aware of that.

Let me, within my short 5 minutes, tell you two things that I
think really need to be addressed: No. 1, I think the major respon-
sibility for the Federal Government has got to be to set the stand-
ards, particularly in the case of environmental law. This is a very
powerful requirement because pollution knows no boundary.

There are no geographic or political boundaries there, so in order
to level the playing field, the economic playing field for business,
for industry, for governmental entities, you really need national
standards to be set. And then I think, too, that the States should
implement those standards and I think that if we help the States
develop a credible capacity to do the job, and it should be the Fed-
eral Government’s job to help them become able to handle this
challenge, then the States should have additional autonomy and
flexibility to move forward to serve these needs.

I don’t think your task is terribly easy, Congressmen. I think you
are not going to find a cookie cutter that is going to answer all the
questions here. In some instances, you are going to find the States
don’t want the responsibility, they prefer the Federal Government
to take the role. I think pesticide registration comes to mind here.

But I would hope that you wouldn’t get into a debate of either/
or, that we don’t have all heavy Federal laws or all heavy State
power, because I really do believe that what we need here and
what the stage is set for is a very good partnership. To my way of
thinking, that would reap a real harvest of goodwill and would gen-
erate better services that are delivered closer to home, that allow
more insightful decisionmaking and would aid all levels of govern-
ment to attain those goals.

From my vantage point what is so interesting is that we are
called, in fact, the United States of America and I think that word
“United” really needs to be cherished. I don’t think we can solve
the current crisis that we have by pitting one State against the
other or by pitting the State governments against the Federal Gov-
ernment. [ think we need a better model, and in all candor, my
vote is for a true cooperative, collaborative partnership between the
States and Federal Government. I think that would be a win-win
for everyone.

Mr. Suays. Thank you for a wonderful statement.

{The prepared statement of Ms. Belaga follows:]


40

PRES DENTS BUDGET
218 - ‘THE BUDGET POR FISCAL YEAR 1806

Table S-19. OUTLAYS BY FUNCTION
(in billions of deliare)

oe a
— “soles

mas ams a) 2 206 TD
we 03 eo
wroy mas eT es
2 > RD
me ee 28
40 35 3B
mz m0 oe 8
7106) 062
oy ee ee ee
an aD ee
CY Yee ee)
Pr ee ee
m1 84 868
a STS 8 TS,
wi 21 2 was
wee 2120 mae
pore ar tee iy
yar me as a3:
aD an aD an
O69) OMS) 06 UKM
mr me wo aL
m3 m5 m3 MI
M3 M2 30
qmae m9 ml a0
a0 a GeH QsTe
(28) 47D) (ED
2s 08 st
me 377 mo =n
ee ee ee
5 ae ete
200 35
4931 es as
3 er oats
OD 96ND
UD th an an
eset Lees lames Lees

—~ AAS hae OTD AMD L4H OETED
(20) (308.0)



120

stead, they sought to harness self-interest to the public good by set-
ting up opposing political forces.

Now, we know this as checks as balances. The phrase doesn’t
occur in the Constitution, and we’re most familiar with it in the di-
vision into three branches of the Federal Government and their
competition with one another. This is often referred to as gridlock,
but I think it’s a misunderstanding of the purpose of the Constitu-
tion.

The Constitution exists, at least in part, to make government de-
cisions difficult to make, if not impossible in certain cases. But
there’s a more important component of the checks and balances
than simply the division of powers within the Federal Government.
And that is the checks and balances between the Federal Govern-
ment and the States.

The Framers, knowing that the Federal Government itself would
have a tendency to aggrandize its power, deliberately set up the
States as an equal counterforce, hoping that both the Federal Gov-
ernment and the States would balance and check one another.
However, the system that they have set up is almost entirely gone.

Certainly, the States are not capable of playing the political role
that they had been intended to. The question is, is this a bad
thing? Is it really something that should trouble us, that Washing-
ton now does things that perhaps Kansas used to do?

The problem is that there are now no limits on the Federal Gov-
ernment. It’s hemmed in only by its own self-restraint, which the
Framers, as I indicated, said was no restraint at all. There are no
larger fiscal limits, as we have seen with having run up a $6 tril-
lion public debt. But there are far more negative consequences than
simply this.

The expansion of government has had very negative effects upon
the network of social institutions known as civil society. Civil soci-
ety allows communities to control the world they consist of and
allow individuals to be connected to those communities.

Mr. Suays. Could I give you a 1-minute warning? Please wrap
it up.

Mr. Seay. OK. In the minds of the Framers, government was to
establish a general environment within which society would govern
itself through its voluntary social institutions. As government ad-
vances, society must retreat, it simply cannot compete.

The results are the range of social and even economic problems
that we are faced with today that seem to be resistant to virtually
all types of government efforts to ameliorate them. The only solu-
tion that I see is the restoration of civil society, which can only
begin by the reimposition of effective restraints on the Federal Gov-
ernment, and that has to include a revival of the State power to
do that. Thank you.

[The prepared statement of Mr. Seay follows:]


19

iL BLT
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use| som] mm| ous] eas] sar] ae
| naa] 2. ms pel eer ered
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ae wef aan] att] att] soe] ete
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oman GRAN & rc 20) oe} amo] mm ma] zm) we
(On DCRETIDNARY GRANTS i) ths es ee) bo er ey
FAL, DISCRERONARY aoe] sree wae] arm] wre] soe] sree]

Fie
Manoavorvierrrunaent | ENACTED
‘aca nero ‘107
ms

Scat eRMCeS BL oy 2a

ocATIA REMAN STATE GRANTS |

Hori sanostonventment| suse] worn] na

were] sos] sei] ee

font SEcRDGEsivam [oven] eae] aaa] eee | oe

ry

(RETTEREST Ov THE FEDERAL DeaT |_ snes] ene] cine] mee amme |—Sa8] eva] ee] ore



4

on the service providers that there is none left for the intended re-
cipients.

And then you have $20 billion in fiscal 1995 for all these job pro-
grams. Youth development area, 46 programs and agencies with
appropriations of $5 billion. This is insanity to have 600 programs,
hundreds for the same client, the money is not reaching the client.

Finally, I have listed block grants that are in the budget right
now. Block grants are no big new idea. We have had block grants
for a long time. The GAO report says that $32 billion in Federal
aid is now spent in block grants.

I don’t know if my list comes up to that under the 4-year current
block grants. States are running block grants. They are working.
Some are working better than others. The worst one is the alcohol
and drug abuse because it has about 15 categories in it. It is not
a block grant.

The best one is probably the ISTEA that is a block grant. It is
not listed as a block grant. It is the biggest one. It is the largest
discretionary program in the Interstate Surface Transportation Act.
It is a block grant that Governors, mayors, and locals like and don’t
want to change it. They like it. They want to keep it going.

The social services block grant is $2.8 billion of general revenue
sharing for State government to use for poor people.

Finally, on this chart, of all the Federal aid programs, there are
11 of them, two-thirds of all Federal aid to all governments, for all
purposes, are in 11 programs, 40 percent of it is in Medicaid alone.

The final thing is President Clinton’s proposals for performance
partnerships. A lot of people complain the Republicans are doing
too much. If they just read what President Clinton is proposing, he
has 28 block grants here covering across the whole Federal Govern-
ment, he calls them performance partnerships.

There are some goals to achieve and we can achieve that. So the
idea of block grants is in. It is not out. And my summary is that
the Governors are running a lot, a lot of these States are running
these now, they can run the new ones that you give to them very
well.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Martin follows:|


3

a member of the board for 12 previous years. We were a State that
was limited in the activities we could take without State authority.
I think the federalism debate is one of the most important debates
before the Congress in these next 2 years as we try to decide which
level of government can deliver services most efficiently and most
effectively.

One of the frustrations with the growing role of the Federal Gov-
ernment has been its inability to reform and change itself once a
program gets set in motion, whereas the States seem to have the
ability to make changes in a much quicker basis and do experi-
ments and that kind of thing that we really haven’t seen at the
Federal level.

I have always had a belief few programs can be administered,
controlled, reformed, or delivered better than they can at the local
government. And yet States rights still carries a very bad connota-
tion going back to the civil rights debates in the 1960's. So I think
there is a lot of room for discussion.

T look forward to the debate today and following it and the de-
bate following today’s before the Congress in the next couple of
years.

Thank you.

Mr. Suays. I thank the gentleman.

And I note that he has tremendous responsibilities dealing with
the District of Columbia and it is interesting how you will relate
those concerns to this issue.

Mr. Towns, I welcome you here today and welcome your state-
ment.

Mr. Towns. Thank you very much.

And let me say, Mr. Chairman, that I plan to join the District
of Columbia Committee so I can give him some help.

Mr. Davis. Well, I appreciate that.

Mr. Towns. This issue that we are considering today dates back
to the birth of this Nation and focuses on one fundamental ques-
tion: What powers, privileges, duties, and responsibility does the
Constitution grant to the National Government and what powers
shall be reserved to the States and to the people?

As a former county legislator, I can anticipate and appreciate the
arguments that we will hear from both sides today. While I think
it is important to allow for greater State and local autonomy to im-
prove the administration of programs, to encourage innovation and
creativity and to better individualize services to local populations,
we should not lose sight of the circumstances that led to the cur-
rent concentration of certain powers in the Federal Government.

There is the long and shameful history of discrimination in many
States that precipitated Federal involvement in areas that were
previously the exclusive domain of States. It was not until Federal
intervention that many citizens were able to enjoy full protection
of their rights guaranteed under the Constitution of the United
States. For example, the existence of poll taxes, illiteracy tests, and
many States that deprived many citizens of the right to vote led
the Federal Government to enact the Voting Rights Act. Any trans-
fer of power to the States should be mindful of this history and
must ensure that States will protect the rights of all of its citizens.


132

the elements inimical to American liberties at bay. For they knew that only if the citizenry is
determined to control its government can the Republic endure.

Douglas Seay
July 19, 1995

12



110

Mr. Souper. Mr. Pilon, is that how you——

Mr. PILOon. It’s pronounced Pilon.

Mr. Souper. Pilon, thank you for coming.

Mr. PiLon. Thank you for the invitation to be here. I’m Roger
Pilon, Director of the Center for Constitutional Studies at the Cato
Institute.

I should open my remarks by invoking the line from John Cleese
in the Monty Python series: “And now for something completely dif-
ferent.”

In listening to the discussion this morning, I am struck by how
we are here to discuss federalism, and yet the discussion treats fed-
eralism, when it even uses the word, almost entirely as if it were
a policy discussion, as if federalism were about policy questions.

Indeed, this is a quintessential, inside-the-beltway, policy wonk,
green-eyeshades discussion, with the exception of a few of the open-
ing remarks by the chairman. And I'd like to move it off that posi-
tion, if I may, and raise the fundamental point that federalism at
bottom is not about policy. It is about legitimacy. Indeed, it is a
constitutional issue. And this is what I want to use as my driving
theme throughout my brief remarks this morning.

I, too, was struck, as was Julie Belaga, by the question that is
put before us: Why doesn’t Washington trust the States?

Because it strikes me, especially after the November elections,
that the proper question is: Why don’t individuals and the States
trust Washington?

And the reason, I submit, is not simply because Washington has
failed in so much that it has tried to do, but, more deeply, because
there is a more fundamental issue, namely, that Washington has
assumed a vast array of regulatory and redistributive powers that
were never its to assume in the first place. Not, that is, if we take
the Constitution seriously.

Thus, the question that the people in the States are increasingly
putting to Washington is simply this: By what authority do you
rule us as you do?

That question, of course, takes us to first Principles of the kind
that the Supreme Court invoked just recently in the Lopez case,
which was raised earlier this morning. That case sent shock waves
through this town, which had not thought about the question for
60 years. Indeed, in the statute at issue, the Gun Free School
Zones Act, Congress had not even bothered to cite the source of its
authority under the Constitution for that act.

One can hardly fault the average American for finding in that a
certain indifference, if not contempt for constitutional limits. And
yet that’s what federalism is all about at bottom. It is about con-
stitutional limits. It is not about block grants and many of the
other things that we are talking about here today. And nowhere is
that more clear than in the 10th amendment, properly understood.

Now, 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. It
is, as the court said in Darby, a truism, but it is no less important
for that.

Indeed, the crucial words in that truism are not Federal and
State; they are delegated, the verb, and retained, the other verb.


69

14 Federalism

Policies (Wisconsin had an unemployment compensation system before the national
government did). But in recent years state proposals to reform welfare have generally
taken the form of reductions in welfare assistance. In 1988 the Family Support Act
explicitly gave states the opportunity to experiment with Aid to Families with Dependent
Children. The first three proposals submitted to the Department of Health and Human
Services all proposed new restrictions on welfare. Wisconsin and New Jersey petitioned,
among other things, to withhold the increase in benefits that typically comes with the
birth of an additional child. California proposed an immediate 25 percent reduction in
benefits, a second further reduction for all families remaining on welfare after six
months, and a restriction that limited benefit levels to new arrivals to California to the
level they were receiving in their previous state of residence. What began in a few states
is now spreading nationwide.

Although AFDC has been the major target of state welfare cuts, other
redistributive programs have proven to be politically unpalatable as well. State general
assistance programs have all but disappeared. State supplementary benefits to the long-
term unemployed and to disabled persons have also been dramatically reduced, even
while national benefits have kept pace with increases in the cost of living. State
contributions to unemployment insurance programs have fallen far short of what is

Necessary to maintain their viability,

Looking to the Future


24

RESTRUCTURING MEDICAID: Concepts, Issues, and Alternatives

INTRODUCTION

As part of a broader strategy to balance the federal budget, the U.S. Congress has adopted a budget
resolution that includes expenditure targets to reduce the rate of growth in costs of the Medicare

-and Medicaid programs. As individual entitlements, these programs are designed to adjust

automatically to increases in the number of eligibles and to increases in program costs and
utilization. As a result, there is no upper limit on annual program spending growth. In the case of
Medicaid, the program is projected to grow at more than ten percent each year for the next five to
seven years—a rate in excess of twice the consumer price index.

This paper will examine some of the major issues in restructuring Medicaid. It begins with a
presentation of program flexibility issues associated with the current Medicaid program. This is
followed by a brief discussion of why differences exist among states in current Medicaid
expenditures. The third section examines the financing and policy issues that surface when
limiting the growth of Medicaid. Finally, the last section identifies some specific programmatic
issues that arise under a capped entitlement. An appendix is included that highlights the basic
elements of the Medicaid program.

This paper is designed solely to stimulate discussion. In some cases, alternatives and options will
be presented. In other cases, not. The alternatives and options are intended to help define the
breadth of the issues, not to limit the debate, In short, this paper is not an endpoint, but rather it is
a beginning.

PROGRAM FLEXIBILITY

For the last tive years, Governors have been unified in their call for more flexibility in the
Medicaid program. NGA flexibility proposals were developed within the context of a program
that has an individual entitlement to eligibility and services. Governors’ calls for flexibility
focused on service delivery systems with less emphasis on eligibility and benefits. With
proposals under consideration that could eliminate all or pant of the Medicaid individual
entitlement, the scope of flexibility is virtually boundless. Flexibility discussions take on an air of
a federalism debate. Specifically, what level of direction, oversight, and accountability should be
retained at the federal level when the federal government is making a significant financial
contribution to the program, but the state has responsibility for its design and implementation. For
the most flexible proposal for Medicaid is one where there are no federal parameters on
benefits, service delivery systems, and quality assurance; nor are there any
maintenance-of-effort requirements for state spending. The following is a listing of major
program areas and alternatives for flexibility.

ELIGIBILITY

The current Medicaid program specifically defines who is eligible for Medicaid services. The
federal statute defines nine mandatory eligibility groups and allows states to choose from an
additional seven. In broad terms, the program covers certain poor adults, poor pregnant women
and children, certain persons with disabilities and certain elders in need of long term care.

There are several broad options that might be considered in making eli more flexible for
states. The following is a list of some of those options. This list is not exhaustive.

NGA Staff Paper 1
July 24, 1995


143

should be freer on setting their payment rates. We could have a
whole array of things. You could do it within a structure that’s a
block grant, but you then have a problem of some States have al-
ready done cost containment.

Well, some haven’t done much. Some have a lot of dish money;
some don’t. It’s very complicated. And the risk, I think, is that if
one block grants a program like Medicaid or food stamps and the
economy changes and you get the wrong amount in the wrong
States, doesn’t adjust automatically as it does at present, then
some States have to really cut the benefit levels. And since once
you get to the block’s total everything above that is 100 percent
State money, that’s where you get the risk of the race to the bot-
tom; that a State like yours that wants to do well thinks, my God,
everybody who moves to the State, we’re now paying a 100 percent
of the AFDC, Medicaid, food stamp costs, isn’t so.

Last point I’d make on this is there are areas where a State can’t
do as well in setting a standard, not because it doesn’t want to, but
because of certain fundamental political forces. In the WIC Pro-
gram would be my example. Here is a program that does work
well. Little dispute. Reduces infant mortality—

Mr. Suays. It may be duplicative, but it is a good program.

Mr. GREENSTEIN. Excuse me?

Mr. Suays. It may be duplicative. In other words, there may be
other programs that do the same thing.

Mr. GREENSTEIN. We don’t have any evidence of that. The Gen-
eral Accounting Office was asked about 3 years ago——

Mr. Suays. If I could, let me get to Mr. Souder on this.

Mr. GREENSTEIN. Just to make the punch line on this. WIC Pro-
gram has lots of State flexibility. There’s not a single State in the
country I know that’s asked to have it blocked. But it has a Federal
general framework for the foods that are in the package that are
based on the scientific evidence of the foods pregnant women and
infants most need in their diets. That doesn’t vary from State to
State. That’s scientific evidence.

Mr. SHays. But it doesn’t say that certain people—that doesn’t
vary from State to State, but people have different appetites and
like different kinds of foods.

Mr. GREENSTEIN. And States have flexibility to tailor that. My
only concern is if you blocked it——

Mr. SuHays. It’s my fault you keep going on. I keep asking you
questions. I’m going to have Mr. Souder. Make your last point.

Mr. GREENSTEIN. This is my last sentence. If you blocked it in
States where individual agricultural interests or food processors
were very strong, they would inevitably, I think, get their foods
added to the package in lieu of others, and we wouldn’t have as
much effect. So there’s lots of other areas we could give them broad
flexibility, but maintain a Federal standard here. So I wouldn’t
block that program.

Mr. Suays. I understand. Thank you. Mr. Souder.

Mr. SoupbER. Yes, I’ve got a couple of different types of questions.

Mr. SHays. You chose us over Waco?

Mr. Souper. And I had to run over to do six votes in education,
missing the first one because they were looking for me in the Waco
hearings.


10

the case of EPA this is a particularly powerful requirement because pollution knows no
boundaries or political/geographic borders. So, in order to level the economic playing field for
industries and for governmental entities, national standards must be set. The federal agency must
be given Congressional support to allow it to do that research and analysis. Furthermore, in the
development of these standards, states and local officials must have an opportunity for meaningful
input.

2) States should be required to implement those standards. They will need a credible
capacity to do the job and it should be the federal government's role to help the states build that,
capacity to perform. States should be given additional autonomy and flexibility once they have
programs up and running,

T hope that today's discussion will not be an “either/or debate. We cannot afford to
pursue an agenda of total federal power or total state power. What we need to do is take stock of
what works and what doesn't work and offer suggestions for corrective action. The old ways
must give way to new systems. But this does not mean that all of the old ways are wrong. To
my way of thinking the stage is set for a truer partnership that will reap a harvest of good will;
generate better services that are delivered closer to home; allow for more insightful decision-
making and aid all levels of government to attain their goals.

Have no illusions that the path is easy. It isn't. But the pendulum has swung away from
prescriptive and proscriptive federal government. Let's not let it swing all the way in the other
direction to prescriptive and proscriptive STATE government. We are, after all, the UNITED
States of America. That name embodies the historic notion that we are a united group of states.
‘We need to cherish and protect that unifying quality and standard. We cannot look to solve the
current crisis in confidence by pitting one state against another or by pitting the states against the
US government. We need a better model. I think that a new model, one that is fashioned on the
outcome of today's discussion, will be a true win-win for everyone.


141

ment, like it or not. And if we were going to start over again,
maybe we wouldn't like it at all.

T also think that we're on to something here about whether just
because a program is a low income program to help the poor, I
mean really your rationale comes down to saying that’s why it
should be open-ended. And that’s a debate we'll have, I’m sure,
after the hearing. So I'll just point out that I’ve—I’m sure I got Mr.
Greenstein thinking about that.

Mr. Suays. I’m going to stay for a little bit longer. This fas-
cinates me. I appreciate my staff getting such fine speakers here.
That’s very interesting.

Mr. Pilon. *

Mr. PILON. Yes, the question you asked, Mr. Chairman, about
the proper relationship between Federal and State governments,
was answered 200 years ago as an institutional matter, not as a
policy matter. It was answered as a jurisdictional matter, informed
as a substantive matter by the theory of enumerated powers. What
you have done, though, is recast it in its modern version, where
federalism is not a jurisdictional matter, but rather becomes a pol-
icy matter. It’s what one might call——

Mr. Suays. We have an hour more of debate and we could spend
a whole day on your issue. We may come back to the legitimacy
of what we’re doing.

Mr. PILON. But there’s a deeper point I want to point to. When
you do that, you’re up against a well-known problem, and that’s
why this debate is going on today, just as it went on in the Reagan
administration, just as it went on in the Nixon administration, in
the Eisenhower administration, and 10 years from now, you will be
sitting here, if you’re still here, having this same debate. Because
economists, for example, of the public choice school, James Bu-
chanan, the noble laureate, have explained this over and over
again.

‘You've got the issues of human behavior under different systems
of restraint, concentrated benefits, dispersed costs, all of which ex-
plains why this debate is constantly, when kept at the policy level,
a race to the bottom. And as I said, 10 years from now we'll be hav-
ing this same debate, so long as it remains as a mere policy debate.

Mr. Suays. But we’re always going to have debates, but at least
we don’t have a debate of whether the States should free the
slaves. And I don’t mean that in a sarcastic way. But I listen to
what you say, and then I think, well, what problems wouldn’t have
been revolved if we had basically said we didn’t have the power to
deal with the problem?

Mr. PILON. If we treated slavery as a policy matter whereby,
look, let’s see if we can get the optimal amount of slavery, we’d still
be here debating that one today. And that’s, in a way, what you’re
talking about when you're talking about, well, these should be Fed-
eral, these should be State. The issue is, if it’s going to be Federal,
where’s the authority for it? That handles it as an institutional
matter, as opposed to a policy matter. That’s a well-recognized dis-
tinction in philosophy.

Mr. Suays. Mr. Nathan. I’m calling you Mr. Nathan. You’re prob-
ably all doctors. When you say we're doing block grants for this
reason, we’re doing block grants for another reason, too. We're


29

RESTRUCTURING MEDICAID: Concepts, Issues, and Alternatives

incurred when the program was operating as an uncapped entitlement. States may have
insufficient time to streamline the program to operate within the federally set expenditure limits.

Administration. Under the current Medicaid program, administrative costs, like service costs, are
not capped. The Congress must decide how states should be reimbursed for administrative costs.

Section 1115(a) Waivers. More than ten states have had section 1115(a) waivers approved by the
federal government. In many, but not all cases, these states have negotiated for expanded
populations and expect to incur additional program costs in the future. Since most have not been
‘operating in federal fiscal year 1995, they will not have incurred expenditures in the year that may
become the base year for the program. Therefore, they may not have a sufficiently large base to
implement waiver population expansions. In addition, a number of states have negotiated annual
growth rates that are greater than those in the budget resolution.

Expanding Eligibility Under A Per-Capita Cap. As has been mentioned previously, per-capita
caps would require federally defined eligibility categories. Such a requirement could preclude
states from using federal dollars for other populations as they currently do under the existing
1115(a) waiver process. If Congress wants to continue giving states authority to change or expand
eligibility under a per-capita cap, some mechanism, probably a waiver process, would be needed
to assure that the state is spending no more than might have been expended if the federal eligibility
requirements had remained in place. It should be noted that Governors have objected to the
burdens associated with a waiver process in the past.

Medicaid/Medicare Dusl-Eligibles. Some 40 percent of the SSI-related beneficiaries are
enrolled in both the Medicaid and Medicare programs. These people are referred to as “dually
eligible”. States pay Medicare Part B premiums, and, in some cases, Part A premiums,
copayments and deductibles for dual eligibles. If Medicaid funds are limited, the relationship
between Medicare and Medicaid must be streamlined as well so that states can more efficiently
and effectively coordinate the benefits between the two programs. In addition, Congress must be
aware that increases in premiums, copayments, and deductibles in the Medicare program will
result in increased Medicaid costs.

Quality and Performance Standards. The current Medicaid program contains a variety of
statutory and regulatory requirements that govern quality and access to care. Under a capped
entitlement, the federal government will still have an interest in assuring that the states are
accountable for the use of the funds, States and the federal government must decide what types of
requirements might be necessary to assure accountability.

‘NGA Staff Paper WT
July 24, 1995.


rN ,

eter Gratin Ad Raaion to Stat and Lal Su, Teal Fear Outre an Gross Domes Produc

(billions)

st ee pp we
' For 1955-1976, Gacal years ending June 30; 1977 and later, fiscal years ending September 30.
? See Special Analysis H of the 1990 Budgut of the United States for explanation of differeaces between grazt-in-sid figures published by the National
isioueainesrenarttte ”
Been i the Nation Icom ead Produc Accounts
heen ces Seger Pe re it en eres a it
‘Rieraranmau meat et rt

“significant Features of Fiscal Federalism, Volume 2, Revenues, and Expenditures”
December 1994 (¥-190-II) Comenion


140

sylvania. And so I have no trouble understanding why the Federal
Government would step in and say here are some dollars if you do
it our way, a Federal mandate with money, then you can use our
dollars. I have no trouble with that whatsoever.

Mr. PETERSON. Yes, I would agree. Now that we have the inter-
state transportation system pretty much put together, there’s less
of a need for that than there was in the 1950’s when that was
being proposed. But there’s just a lot that could be done in that
area.

I think that the problem is that this whole question of what
should the Federal Government do and what should the State and
local governments do has become so political, so partisan politics,
that you can’t sort of say, well, yes, some things we can turn over
to State and local governments and other things are just going to
be very difficult.

I mean it’s really hard to imagine the Social Security Program
being run by 50 different States. It just is unimaginable that you
could do that. One State would say, OK, we'll have a retirement
program, and everybody would move to that State to get the bene-
fits. I mean it just wouldn't work. And that’s true with a whole
range of social programs. And now you can say, OK, well, we'll
block grant those and we'll give a block grant to the States, but
that means that any time that you have a change due to economic
circumstances or population growth or unforeseen circumstances,
then you’ve got an imbalance developing.

Mr. SHays. Let me just throw a point over here, then I’m going
to ask Mr. Souder if he has any comments he wants to make.

Mr. PiLON. May I respond, Mr. Chairman?

Mr. Suays. I'll be happy, Mr. Nathan, and then——

Mr. NATHAN. Let me say I really agree with Mr. Kilgore, as a
way to think about, Mr. Shays, what you’re saying. He says that
whether we like it or not, we got to talk about what is—are the
instruments. And block grant is an instrument for loosening up on
Federal control, which a lot of Republicans want to do now. And
I would add to what Mr. Kilgore said.

He said the reason that we’re here today is because you're inter-
ested in block grants. But the real reason we're here is you're inter-
ested in reducing the Federal deficit. The real reason you're putting
block grants on the table with such assertiveness is you want to
take $180 billion over 7 years out of Medicaid and $100 billion over
7 years out of AFDC. And the only way to do that is by putting—-

Mr. Suays. I’m just going to correct you, just because you're in
the Washington mind-set. No, we want to spend a hell of a lot more
money in each program. We just don’t want to spend it——

Mr. NATHAN. I misspoke. Against current services, I completely
understand your correction, sir. But the point is that once you want
to say you can only spend—a particular State can only spend this
much on those two programs, Medicaid or AFDC, you’ve got to give
them freedom to figure out how to stay within that amount of
money, that amount of increase, reduced from what the current
service projection is. So I think that Mr. Kilgore’s right; that if we
want to talk about giving the States more influence and more
power in relation to our budget goals, block grants are the instru-


91

BLOCK GRANTS - SHOULD WE OR SHOULDN'T WE?
‘Testimony for the U.S. House Committee on Government Reform and Oversight
Richard P. Nathan

July 20, 1995

In my experience as a student of federalism and U.S. domestic policy, I have
never seen a period as turbulent as the present one. I will be fascinated to see what
eventually comes out of all of this and I am amazed by the strong likelihood of non-
incremental - really radical - changes in federal grants-in-aid being made by the
104th Congress. And I am also surprised by some of the things that are happening
like this "debate." Chairman Shays’ letter inviting me to participate today gave me
‘an assignment, and I quote: "You will be participating in the panel advocating the
devolution of current federal programs and responsibilities to the states." Thanks
but... I favor some block grants, but not others. I am not sure how far we should
go in the "Devolution Revolution” of 1995.

Having served as an official of OMB in the first term of the Nixon
administration, helping to design President Nixon's "New Federalism,” I have always
thought that some government functions should be centralized - others
igcentralized. The remarkable thing about what I call the “New(t) Federalism” is
that it is so broad, It takes a giant leap into the unknown by proposing to devolve
to the states entitlement-type "safety net" functions (AFDC, Medicaid, and maybe
food stamps) which we have never done before. Roughly two-thirds of all federal
the grant-in-aid money today is for this type of open-ended income transfer-
program. (See the ACIR table on the history of federal aid from 1955 to 1994,
which is Attachment-1 to this testimony.) What happens when you cut, cap, and
close the end on these programs? I'll be damned if I know.


OE

Mr. Suays. Mr. Martin, would you like to share your comments?

Mr. Martin. Thank you, Mr. Chairman.

Mr. SHays. Mr. Martin, if you could use that mike. We unfortu-
nately only have three today.

Mr. Marv1n. Thank you, Mr. Chairman, members of the commit-
tee, Mr. Towns, and Mr. Davis for inviting the National Governors’
Association to be at this hearing this morning. I especially thank
Mr. Towns. He was our leader last year on unfunded mandates re-
lief and will still be our leader for State government interests.

And as a resident of the District of Columbia, Mr. Davis, I appre-
ciate your concern for the District and your positive concern. I feel
that and I feel your leadership.

And we welcome you, Mr. Towns, to the District of Columbia
Government Committee, if you want to make that switch.

Rarely, does NGA staff testify. It is the Governors that are the
lobbyists and the testifiers. We don’t have all the Governors. We
have 48 signed up to be at our annual meeting in Vermont in a
week and a half, and hardly any of them are leaving their States
right now because they are going to be gone for a week. But I will
just summarize the things that I have heard.

I have been with NGA for 29 years as their legislative counsel
and director of State-Federal Relations. And my job is to lobby Gov-
ernors to come here and testify and do what they say they care
about, and I am, this morning, failing because I couldn’t catch a
couple.

Mr. Suays. When the Governors come, are they just saying what
you give them to say?

Mr. MARTIN. They say what they believe in and then I remind
them what they believe in. Now, it is time for you to remind your
peers in Congress. Federalism, as you know, covers the very broad
subjects of the article 5 out of the Constitutional Convention. And
there are always groups around that want to always resurrect that
procedure, and they say that what we have doesn’t work so they
want to find a new way.

This constantly includes the 10th amendment and what powers
are reserved to the Federal Government that the States have. The
Conference on the States is essentially a movement by the leaders
of the National Governors’ Association, National Conference of
State Legislatures, the Council of State Governments to call atten-
tion to the 10th amendment and what does it mean.

Over the years, the Supreme Court, in 1976, in Usery v. The
United States said that the 10th amendment was active and that
they couldn’t regulate the wages of the employees of the San Diego
Transit Authority. And 10 years later, it came around with the
Garcia decision and overturned the Usery decision, and Garcia said
that the 10th amendment was inactive. And I can quote you some
statements from the Garcia decision which essentially said, the Su-
preme Court essentially said if the States and locals have any prob-
lems, you have representatives in Congress, go see them and get.
in line, get your votes. We are not refereeing the 10th amendment
is my summary, and I think many other legal scholars’ summary
of the Garcia decision. It came along in 1988 in South Carolina and
said that our bonds were in the interest of the Federal Government
and Congress said we should register our bonds and do whatever


97

My view is that big and bold new federal block grants should require and pay
states to have their own goal setting, data gathering, and reporting systems. The proper
federal role is to help them design and support such systems, encourage the sharing of
ideas about how to do this hard job, and publicize the results from different states.

Credit should be given for good results and good reports, and the Feds should i

licate.
in discrete ways which states do not have a handle on providing feedback on what they
are doing under block grants, I also think the national government should sponsor and

support demonstration-type studies of best practices, using rigorous research methods to

say how they worked - well, badly, medium. And finally, I myself have participated in
studies of the overall systems for implementing new domestic programs that look
broadly at what was decided as to the goals of a new program, and why, how, by whom,
and for whom. In other words this involves taking a broader political science approach
to understanding what happens when you snap your fingers in Washington and states
and localities are operating under new rules, Attachment-4 is a listing of previous
studies of this type.

Mr. Chairman, I thank you for this chance to meet with your Committee.

Richard P. Nathan is director of the Nelson A. Rockefeller Institute of
Government, the public policy research arm of the State University of
New York, located in Albany. He chairs the board of the Manpower
Demonstration Research Corporation and is a member of the U.S.
‘Advisory Commission on Intergovemmental Reiations. The ideas and
‘opinions expressed here are the author's.



102

SIDE-BY-SIDE ANALYSIS

WORKFORCE DEVELOPMENT BLOCK GRANTS

Source

‘The Sar A. Levitan Center
Institute for Policy Studies
Johns Hopkins University

Sune 1995


118

not give weight to the question, "Why doesn’t Washington trust the
states?" Indeed it does, but here too there has been substantial
misunderstanding over the years, with a seminal Supreme Court case
at its core.

The tragic compromise that led the Framers to accept slavery
in their midst is well known. It took a civil war to abolish that
institution, and the Civil War Amendments to secure the legal
rights of the freed slaves. Unfortunately, no sooner had those
amendments been ratified than the principal vehicle for insuring
substantive rights against state action, the Privileges and
Immunities Clause of the Fourteenth Amendment, was eviscerated by
a deeply divided Court in the Slaughter-House cases." The clause
has never been successfully revived.

On Blackstone’s view, the clause referred to our “natural
liberties." The Civil Rights Act of 1866, which Congress reenacted
in 1870, just after the Fourteenth Amendment was ratified, made it
clear that the clause was meant to protect the very rights Jim Crow
went on to deny.

The demise, then, of the Privileges and Immunities Clause had
nothing to do really with the Tenth Amendment or the doctrine of
enumerated powers. It was a blatant case of judicial abdication
that eviscerated the clause, thereby leaving the freed slaves in
the South to the mercies of state legislatures.

Nor is there anything in current efforts to revive the Tenth
Amendment and the doctrine of enumerated powers that should give
pause--provided only that we are clear, and the judiciary is clear,
that the Fourteenth Amendment gives the courts, through section 1,
and the Congress, through section 5, the power to negate state
actions that deny their citizens the privileges and immunities of
citizens of the United States. Were the Congress to move to do
that, the promise of the Civil War Amendments would at last be
realized, not in opposition to federalism, but in harmony with it
as perfected through those amendments.

@ 83 U.S. (16 Wall.) 36 (1872).

6


65

10 Federalism

‘Nevertheless, the national role in economic development has dwindled in recent

years under the pressure of fiscal deficits, anti-tax pressures, and senior-

entitlements, and it will probably continue to do so.

Redist:

uuting the Wealth

For the same reason that local governments are best suited to providing economic
development-the mobility of labor and capital--they are not effective at redistributing
wealth, Local governments, for example, avoid progressive income taxes. No more than
3 percent of local revenues comes from this source. Any locality making a serious
attempt to tax the rich and give to the poor will attract more poor citizens and drive
away the rich, No amount of determination on the part of local political leaders can
make redistributive efforts succeed. If no other force is able to stop their efforts,
bankruptcy will.

The smaller the territorial reach of a local government, the less its capacity for
redistribution, Most small suburbs in metropolitan areas have almost no capacity to meet
the special needs of low-income citizens, because the effects of such actions would be
immediately felt in the suburb’s tax rate, property values, and attractiveness. to business.
Big cities are somewhat better able to undertake redistribution because of their greater
geographical reach and their control over extremely valuable land at the heart of the

nation’s transporiation system.


1

16 Federalism

recent migrants would for six months only receive a level of benefits equal to that of the
State from which they were migrating. In the past, courts have declared such
discriminatory treatment of newcomers as unconstitutional, but the Supreme Court
announced last fall that it would be willing to revisit this issue. If discrimination against
newcomers to a state is given constitutional blessing, a new round of state welfare cuts
can be anticipated.

Time has shown that the national government has a different sphere of
competence than that of state and local governments. The new breeze blowing through
Washington should capitalize on this increasingly well-known fact and return to states
and localities most of the responsibility for maintaining the nation's physical and social
infrastructure necessary to sustain economic growth. But some things, namely programs

for the sick, the poor, the needy, and the elderly, remain a Washington responsibi

To turn these responsibilities over to the states is to tum the clock backward.


16

Medicaid concerns outweigh all of these programs combined. For fiscal 1995, the federal payment is $92
billion, but it will require a $62 billion or 43 percent match from state government. This program's cost is
increasing by 10.3 percent per year, while the economy is growing at less than 3 percent. Unless health
costs for Medicaid ($154 billion) and Medicare ($178 billion) are controlled, all other functions and

services of government will be reduced.

Health care costs are concentrated on the elderly. One hundred percent of Medicare and 69 percent of
Medicaid funds go to the aged, blind, or disabled, not welfare mothers and their children. The elderly are
perhaps the strongest voting block in America, so controlling costs for their programs is the most difficult
domestic and political issue facing the nation and federalism. Solutions include broad flexibility for states
to manage Medicaid without federal prescriptions and time-consuming requests of waivers from current
law: repeal of legal restrictions and mandates for methods of payments, eligibility, and range of services;
plus liability and administrative reforms, Nearly one-half of the proposed budget savings, which would

produce a balanced budget by 2002, will come from controlling the public health care costs.

Welfare reform is the third concern for states and nearly everyone. All states agree that reform is needed
to require more recipient responsibilities and actual work for the benefits received; broad flexibility for
states to design programs that meet each state's particular needs, a contingency fund to cover increased
costs during economic slowdowns; and a new philosophy for assistance programs of a hand-up rather than

a hand-out

Block Grants. The Governors agree with the February, 1995 report by the General Accounting Office that
there are 100 many separate categorical federal programs for the same purpose. Currently, there are over
600 separate categorical aid programs to state and local governments: 150 for job training: 77 for
elementary, secondary, and vocational education; and over 200 for various welfare programs. GAO says
“un the employment training area, we found 163 federal programs administered by 15 departments, with
appropriations of $20 billion for fiscal year 1995. In the youth development area, we found 46 federal
programs administered by 8 agencies, with appropriations of $5.3 billion specifically earmarked for
delinquent and at-risk youth for fiscal year 1995. Similarly, we found over 90 early childhood programs

administered by 11 federal agencies.”


ATTACHMENT-2

History of Block Grants

The nomenclature of grants is not easy to explain when it comes to terms like

"block grant." Historically, one can go back to the pre-Constitutional period for

cases in which broad intergovernmental fiscal subventions were made to the states.

During the period when the United States operated under the Articles of

Confederation, the Continental Congress adopted the first grants-in-aid to the

states, putting aside land for the support of public schools in territory west of the
io River.

It was not, however, until the twentieth century in the Woodrow Wilson years
that the United States developed specific cash grants to the states that came io be
known as “categorical” grants.

In an important way, the history of block grants is an outgrowth of this steady
narrowing of categorical grants with specifications about their eligible uses, often a
requirement of matching funds from the states, as well as other requirements
regulating the use of these funds. Increasingly over time, there have been strong
reactions to these practices, often referred to as the "proliferation" of federal grants
and criticized for heavy handedness and intrusiveness on the part of the federal
government.

Earlier Block Grants

Lyndon Johnson saw the writing on the wall. It was during his presidency
that the idea of broader and less conditional block grants began to take hold in
response to what the chairman of Johnson's Council of Economic Advisors, Walter
Heller, called "the hardening of the categories."

In 1966, President Johnson proposed a block grant that consolidated several
relatively small public health grants into a single more comprehensive grant for 2
range of health services. Then, a year later in 1967, Johnson took a bigger leap into
rant blocking (although not enthusiastically) when his administration, with
epublican urging, backed the creation of the law enforcement assistance grant.
‘AA funds were distributed on a formula basis to states with a requirement that
75 percent of the funds provided be passed on to localities.

Block grants in the modern era have involved the consolidation of pre-
existing categorical grants into broader grants with the combined stream of grant
funds from the folded-in programs allocaed, to states and/or loealities on an
automatic formula basis. President Nixon's New Federalism saw the creation of
several such block grants, notably for community development, employment and
training, and social services. Nixon also won passage of the genefal revenue sharing
program in 1972, which provided flexible aid on a formula basis to states


21

Congress of the United States BA.
Foouse of Representatives Siaeoe,

‘Wasrnaon, OC 20515-6143 Ba

July 21, 1995 sores!

Hall of the States
444 North Capitol St.
‘Washington, DC 20001-1572

Dear Mr. Martin

[listened with great interest to your testimony atthe hearing entitled “Federalism. Why Doesn't
‘Washington Trust the States?” As I remarked to you at the hearing, I am very interested in the
problems associated with Medicaid and state waivers. To this end, I request that you provide me
with a brief summary of the problems that exist, and more importantly, proposed solutions.

| would ask that you provide this material by Monday, July 31, 1995 so that it can be included in
the record. Please send your response to Kevin Davis of the Committee Democratic Staff it
Room B350-A of the Raybum House Office Building, and Doris Jacobs of the Republican Staff
in Room B-372 Rayburn

Ifyou have any questions or concems. please contact Kevin Davis at (202) 225-5056. Thank
‘you for your cooperation in this matter.

Sincerely

Cle

Ranking Member

CC: Rep. Christopher Shays


50

REMARKS BY:
CONGRESSMAN WILLIAM MARTINI
HUMAN RESOURCES SUBCOMMITTEE
FEDERALISM HEARING
JULY 20, 1995

| WANT TO JOIN IN CONGRATULATING CHAIRMAN
SHAYS FOR HOLDING THIS IMPORTANT HEARING
TODAY.

MR. CHAIRMAN, | HAVE ONLY HELD ELECTED FOR
A VERY SHORT TIME. | HAVE BEEN A
CONGRESSMAN FOR EVEN LESS TIME.

ONE OF THE MAIN REASONS | RAN FOR CONGRESS
IS THAT | WAS TIRED OF THE FOLKS IN
WASHINGTON D.C. TELLING ME IN CLIFTON, NEW
JERSEY HOW-RUN THINGS AND HOW TO SOLVE
OUR UNIQUE PROBLEMS.

MR. CHAIRMAN, WE HAVE TAKEN GREAT STRIDES
IN THE PAST SIX MONTHS TO HELP RETURN THE
POWER TO THE PEOPLE.

BY BLOCKGRANTING MANY LONG STANDING
FEDERAL PROGRAMS, WE ARE EMPOWERING
STATES AND LOCAL COMMUNITIES TO TAKE
CONTROL AND DEVELOP INNOVATIVE SOLUTIONS
THAT MEET THEIR INDIVIDUAL NEEDS.


95

sounding but elusive goal of social program integration the wrong way. We have tried
to do it top side by taking on bureaucratic battles that are not understood by the bushy-
tailed policy wonks who invent new coordination systems.

There is a techno-fix that we are excited about in our work at the Rockefeller
Institute that could give added power to program linkages under the new domestic
policy regime. I refer to GIS, geographic information systems. When "Boston Market”
locates a new restaurant, they use sophisticated computer mapping to assess the site.
The same techniques are used by those awful telephone solicitors who call us all the
time, by cable T.V. companies, and by marketers of all shapes and sizes. Why shouldn't
the public sector (both for program management and program evaluation) use the same
tool to modernize social services? There is no reason we shouldn't. The GAO points
out that often these programs serve the same people. Jokes are often made about how
case workers for different social services can't find parking places to meet with clients
because so many agencies are serving the same families. If states really linked up their
data systems for health, welfare, jobs, and social services, by requiring state agencies to
share data for these programs, the new world of social program management would
never be the same again. Instead of top down coordination that agencies and interest
groups fight and defeat, put the data together to create "One-stop" systems for social
services,

There is a little bit of good in everything: The little bit of good in the new world
of domestic program devolution and federal deficit reduction is that states could be
really innovative. Both governors and legislators have to be involved. Governors often
devise bold new ways to organize programs and then direct that new systems be adopted,
boasting that the salvation of society is at hand, But political bargaining in the
legislature often prevents these "sliced-bread” schemes from ever being put into effect.

Tf we are serious as a Nation about making basic structural change in the domestic


33

‘The non-A-B-D poor will suffer dramatically not because the states don’t care, can't manage, won't
respond, or refuse to pay, but because states will be funding an ever-increasing burden of Medicaid
services for the permancatly eligible A-B-D population, which should be totally financed by the federal
government, along with pensions, Social Security, Medicare, SSI, and 57 percent of current Medicaid
costs of $173 billion for fiscal 1996 ($77 billion state; $96 billion federal).

“The unchecked escalating cost of programs for this population that is now robbing the federal and state
governments of options to deal with most other problems, including the poor and especially the deficit.
AAs long as programs for this population are taken off the table—more like put under the table—real
welfare reform will never occur. Most current state programs and new federal proposals only bite at the
edge of the cost problems because states are spending so much on the A-B-D population ($55 billion in
Medicaid in fiscal 1996).

Sometime soon, at Jeast before the 2000 presidential election and trying to balance the federal budget, the
‘A-B-D funding problem must be faced.

‘Summary:

‘The federal government would assume 100 percent of the A-B-D portion of Medicaid programs and
costs of the permanently eligible A-B-D population over a five-year transition period in exchange for
state assumption of an equivalent amount of the non-A-B-D safety net programs and dollars for welfare
reform.

Benefits ofa Welfare/A-B-D Swap:

1. Federalism would be better served without a continuing second guessing, blaming game, about who
cares the most about the poor: children, disabled, and the aged.

2. The booming “entitlement crisis” would be placed at the federal level for reasonable integrated
solutions that must be made in the near furure. (Single women having children are a grave social
‘concer but in no way are they even a significant cause of the deficit problem.)

3. A clean swap would clear the budget of billions of costs for duplicating federal and state personnel,
bureaucracies, service providers, single and special interest groups, lobbyists, accountants, and
auditors. It costs $7 billion annually to administer AFDC, FS, and Medicaid under OMB Circular A-
87 cost allocation principles. ‘The Circular is so complicated that most states hire specialized
consultants to comply rather than use their own financial management procedures thet cover over
$500 billion of state own source funds.

4. A five-year phase-in would give time for necessary transitions, hold harmless formula allocations,
budget planning and certainty, and performance auditing.

5. It would speed up and complete the federal government's assumption of programs for the
permanently eligible poor, which is already occurring but with design and purpose.

6. It would better enable the federal government to honestly meet the challenges faced by the aging of
the population,


133

Mr. Suays. I thank you, Mr. Seay.

What I’d like to ask each panelist, I'd like to ask you what the
most—what statement you disagreed with most by another panel-
ist. In other words, take the comment you disagree with most, and
then explain why you disagree with it. And some of you may need
a little more time to think about it, but someone want to start off?
T mean you all didn’t get to comment on what was being said there,
but what did you disagree with most that was said by someone
else?

Mr. Peterson.

Mr. PETERSON. Well, I would like to first preface that by saying
that I agreed most strongly with the comment——

Mr. Suays. That’s fair.

Mr. PETERSON [continuing]. With the fellow from the Heritage
Foundation. So maybe that—maybe that should just——

Mr. Suays. Tell me what you agreed with most, and in a succinct
way I want you——

Mr. Peterson. I will. And that was the point, that block grants
divorce taxing from spending. I’ve never seen a Governor who
hasn’t wanted a block grant. What’s better than having the Federal
Government give you some money and you can spend it any way
you want? Terrific.

Let Congress get the blame for raising the taxes and then you
get to spend the money free for nothing. That’s great. I agree with
that. It really says that if the Federal Government’s going to spend
the money, they should say, OK, this is what you shoul nd it
on. And if—if you think the States can do it themselves, then let
them raise their own money to do it. And there’s a lot of things
States can do very well.

The thing that surprised me was Professor Nathan’s comments,
because as Bob Greenstein just pointed out to me, his position on
federalism was included in a report, “To Form a More Perfect
Union.” And in this, he said exactly—in this report, that was
signed by Charles Robb and Daniel Evans and included Alice
Rivlin on it and Richard Nathan. The report recommended basi-
cally what I’ve recommended to you today, turn over responsibil-
ities for the economic development to the State and local govern-
ments and leave the redistributive responsibilities to Washington.
So that—why he would disagree with this principle that he agreed
with when he wrote this report is curious to me.

Mr. NATHAN. Can I get equal time?

Mr. Suays. Unless I disagree with your point. No, I’m being face-
tious. Everybody’s going to have a chance here. Please indicate
what you agree with and what you disagree with most about what
someone else said.

Mr. GREENSTEIN. I guess the—it’s a question of framework.
Among the things I-—.

Mr. SHays. Excuse me, you know what I am going to do? J am
going to go back and forth here. Is that right?

Mr. GREENSTEIN. That’s fine.

Mr. SHays. Would someone here like to make a comment, Mr.
Nathan? Would you like to?

Mr. NaTHAN. Well, I'll respond. When you asked me the question
what I most agreed with, I was going to agree with the gentleman


17

Second, state and local governments already effectively manage a wide range of 15 block grants, with over
$32 billion in funding. States are already doing good job with block grants. - The President has also
recommended similar consolidations through 28 “performance partnerships.”

Third, since the President and Congress agree that the budget should be balanced by a time certain, this
means we must find ways to do the same job with less funds. Block grants provide for some of these
savings through less categorical programs, less service providers with multiple layers of government
decision makers, and less micro-management and paperwork.

Experience has taught us repeatedly that the federal government cannot manage 260 million people.
Government must be decentralized, intergovernmental trust must become real again, and government
officials must work together to make federalism work both in the broad constitutional arena and in the
operation of specific federal assistance programs.

‘States are also concerned about sustained federal commitments as a federalism partner in domestic services
that transcend state boundaries and are in the national interest, such as transportation, liability reform,
environmental protection, taxation, criminal justice, and civil rights.

None of these state interests or priorities are new, but the urgency of effective action has arrived. It is
driven by a call from the people to stop deficit spending by a time certain. What is new is a bottoms-up
move by the people to make each government—federal, state, and local—more responsive to the taxpayer
and average citizen and less than to special and single-issue groups.


61

6 Federaliem

redistributive spending edged up only slightly, from a very low 2.2 percent of GNP in
1962 to only a slightly higher 3.5 percent in 1990. The modest increment at the state and
local levels is particularly striking, inasmuch as this was the period when the civil rights
movement awakened the country to problems of poverty, the Great Society was
introduced, and entitlements became an entrenched part of American social policy. Yet
the percentage of state spending devoted to redistribution increased only from 28.9 to
33.0 percent. And at the local level the increase was barely detectable, from 13.5 percent
to 14.1 percent,

State and local reluctance to participate in the redistributive movement can hardly
be attributed to the political climate. Over most of this period Democrats controlled at
least part of state government in most states, and they held unified control over both
houses of the state legislature as well as the gubernatorial chair in many. And despite the
intent of today’s congressional majority to transfer welfare policy :o the states, there is
no indication that states are becoming either more suited for or more capable of such
policy.

To the contrary, the division of responsi

lity between national and state
governments is growing more pronounced, as each level of goverment has learned to
concentrate its spending on the things it does best. States and localities, ever more
constrained by market forces, are increasingly competent at making choices affecting
state and community development. But state and local capacities to care for the needs of

poor and disadvantaged citizens has been diminishing.


130

national office can be persuaded to adopt a platform of having Washington do less for his
constituents or that the electorate can be convinced to vote for him.

To the contrary, many are not satisfied with existing pace of federal action. As ever-wider
areas of economic and social policy are concentrated in Washington, there are constant pressures
to accelerate the process of decision-making by the federal government and also to increase the
detail. Especially prominent are the perennial calls to remove "gridlock." These range from
inveighing against any obstacle to swift legislation to proposals for merging aspects of executive
and legislative power.

The pejorative connotation of "gridlock," however, is a profound misreading of the
purposes of the Constitution: gridlock was deliberately incorporated into the operations of the
federal government so that decision-making would be made deliberately difficult. This was not
just to make decisions more contemplative and consensual but to prevent many decisions from
being made at all. Opposition to an activist government that is constrained only by its own self-
limitations -- regarded as the source of tyranny regardless of its motivations -- was the central
purpose of the Revolution and a central focus in the framing of the Constitution. Removing those
restraints on action which remain would constitute the last step in the complete overturning of the
intentions of the Founders.

Even assuming electoral success by those pledged to limit or even roll back Washington's
reach, any successes in so doing are likely to prove disappointing and ephemeral. It is unlikely
that the U.S. will elect a more conservative president than Ronald Reagan, yet under his
administration only limited successes in retrenching federal power were possible, and most of
those were quickly rolled back by his successors, Republican and Democratic alike. To a large
extent, the system mandates activism: conservatives in power will be forced to address problems
from a national perspective or risk being accused of irresponsibly allowing problems to go
untreated when an array of federal instruments are at hand to address them. As long as the
federal government's power exists unchecked, the pressure to use it -- to “do good” -- will be
politically irresistible.

What is required are systemic changes, Because the Constitution has been so profoundly
altered, a restoration of a balance of power will require constitutional changes. These changes are
easy to enumerate, but the mechanism for their enactment is far from obvious. The current route
of amending the Constitution is not workable: Congress has been unwilling to forward to the
states any amendment which truly limits the federal government's power or the workings of any of
its branches.

The Revival of the States

Once the states were toppled from their collective position as the principal enforcers of
limits on Washington, no other restraint on the federal government arose to take their place.
Inexorably, they have been relegated to the sidelines, powerless to prevent the further evisceration
‘even of their own prerogatives. Nevertheless, the responsibility for bringing about the necessary
changes to restore a new form of federalism inevitably devolves upon the states.

Given that many in the state governments have become used to a subordinate relationship
toward Washington, with litle leverage to extract favorable decisions from federal officials on

10



114

Thus, the question the people and the states are increasingly
putting to Washington is simply this: By what authority do you rule
us as you do? That is a question that takes us to First Principles
of a kind the Supreme Court itself revisited less than three months
ago when it found, for the first time in nearly 60 years, that the
power of Congress to regulate interstate commerce is not the power
to regulate anything and everything.

The Court’s opinion in United States v. Lopez sent shock waves
through official Washington, not least because Washington had
simply assumed, since the era of the New Deal, that its regulatory
powers were plenary. Indeed, with the statute in question, The
Gun-Free School Zones Act of 1990, Congress had not even bothered
to cite the source of its authority under the Constitution. One
can hardly fault the average American for finding in that a certain
indifference, if not contempt, for constitutional limits.

Yet it is just such limits that federalism, in the end, is all
about. To appreciate the point, however, it is necessary to go
beyond the federal-state and states’ rights debates that have
dominated the federalism discussion. For the issues, at bottom,
are not so much jurisdictional as substantive. And nowhere is that
more clear than in the Tenth Amendment, properly understood.!

I. The Tenth Amendment and Enumerated Powers

The Tenth 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."

By its terms the amendment tells us nothing about which powers
are delegated to the federal government, which are prohibited to
the states, or which are reserved to the states or to the people.
To determine that, we have to look to the centerpiece of the
Constitution, the doctrine of enumerated powers.

That doctrine is discussed at length in the Federalist Papers.
But it is explicit as well in the very first sentence of Article 1,
section 1, of the Constitution ("All legislative Powers herein
granted . . .") and in the Tenth Amendment’s reference to powers
“not delegated," "prohibited", and "reserved."

| I have discussed the issues that follow more fully in "A
Government of Limited Powers," The Cato Handbook for Congress, ch.
3. (Washington, D.C.: Cato Institute, 1995); "on the Folly and
Illegitimacy of Industrial Policy," 5 Stanford Law & Policy Review
103 (1993); and "Freedom, Responsibility, and the Constitution: On
Recovering Our Founding Principles," 68 Notre Dame Law Review 507
(1993). For my brief thoughts on the Lopez decision, see "It’s Not
About Guns," Washington Post, May 21, 1995. at CS.

2


116

increasingly, that those powers are illegitimate.’ How then did we
get to this point, where the federalism debate is increasingly a
debate about the very foundations of our system of government? I
have discussed that question at length elsewhere.’ Let me simply
summarize the answer here, then turn to an issue that seems to
concern the subcommittee, and not without reason--the connection,
historically and prospectively, between federalism and "states!
rights."

IX. The Demise of the Doctrine of Enumerated Powers

Our modern regulatory and redistributive state--the state the
Framers sought explicitly to prohibit--has arisen largely since
1937, and primarily through just two clauses in the Constitution,
the Commerce Clause and the General Welfare Clause respectively.
It is striking that this is so, for if the Framers had meant for
Congress to be able to do virtually anything it wanted through
those two simple clauses, why would they have bothered to enumerate
Congress’ other powers, much less defend the doctrine of enumerated
powers throughout the Federalist Papers? That is the question that
cries out for explanation.

The explanation, of course, is that the Framers intended no
such thing. The modern state arose through judicial legerdemain,
following Franklin Roosevelt’s notorious 1937 Court-packing scheme.

In a nutshell, the Commerce Clause, which gives Congress the
power to regulate commerce among the states, arose out of concern
that the free flow of commerce among the states might break down if
states, as under the Articles of Confederation, had the power to
erect protectionist measures on behalf of indigenous enterprises.
Thus, its principal aim was to ensure the free flow of commerce by
giving Congress the power to regulate, or make regular, such
interstate commerce. Not remotely did the Framers intend that the
clause would be converted from a shield against state abuse--its
use in the first great Commerce Clause case, Gibbons v. Ogden’--

5 See, e.g., Gary Lawson, "The Rise and Rise of the
Administrative State," 107 Harvard Law Review, 1231, 1231 (1994):
"The post-New Deal administrative state is unconstitutional, and
its validation by the legal system amounts to nothing less than a
‘bloodless constitutional revolution"; Richard A. Epstein, "The
Proper Scope of the Commerce Clause," 73 Virginia Law Review 1387,
1388 (1987): "I think that the expansive construction of the
[commerce] clause accepted by the New Deal Supreme Court is wrong,
and clearly so... ."

* See note 1, supra.

7 22 U.S. (9 Wheat.) 1, 187 (1824).

4


4

It is imperative that the Congress critically examine the sugges-
tions to transfer power to the States to ensure that national inter-
ests are not sacrificed at the altar of local interest. We should not
abrogate our responsibilities to address difficult and conflicting na-
tional issues by block granting a program and putting it to the
States. It makes no sense to simply replace one bureaucracy with
another.

Also, I am concerned that we may allow the argument of devolv-
ing power to the States as a pretext to replace one set of Federal
priorities with another. Specifically, how can you argue devolution
of power and block-grant welfare on one hand and increase Federal
control over law enforcement on the other hand? We must be hon-
est about our objectives.

Mr. Chairman, as you well know, the issues that we are consid-
ering today will impact how we govern and may very well dictate
what type of country we leave for our children and our children’s
children. In this light, I applaud your leadership in holding this
hearing and I look forward to hearing from our witnesses because
I think that this is a very serious matter and I think it should not
be taken lightly because we are really talking about the future of
our Nation.

L yield back.

Mr. Suays. I thank the gentleman and I thank both my col-
leagues for very thoughtful comments.

Tam going to get a little household—some basic issues out of the
way and ask unanimous consent that all members of the sub-
committee be permitted to place any opening statements in the
record and that the record remain open for 3 days for that purpose.

Without objection, so ordered.

And I also ask unanimous consent that our witnesses be per-
mitted to include their written statements in the record if they
want to summarize, or not even read at all, their written state-
ments. They are free to do what they choose. They have 5 minutes.

And I want to point out and emphasize that we are the Human
Resources and Intergovernmental Relations Subcommittee. The
Intergovernmental Relations Subcommittee.

We are dealing with this issue as the primary committee in Con-
gress. This is an issue which we will be getting into more and
more, as my colleague has pointed out, discussion and votes on
block grants work forward through this Congress.

I would like to say we will invite our first panel alone and then
we will invite panels two and three to come up at the same time.
We are looking to have some good exchange among the partici-
pants. Our first two witnesses are James Martin, the National Gov-
ernors Association. If you would step forward and remain standing,
I will be swearing him in. Julie Belaga, as well, if they would bot!
come forward. If you would both raise your right hand.

[Witnesses sworn.]

Mr. SHAys. Note for the record that both witnesses have an-
swered in the affirmative.

And I would like to again welcome both witnesses.

Mr. Martin, I know of your work. I don’t really know you that
well. Frankly, I don’t know you at all. I am under oath, too. But
I know that you are someone who can shed a great deal of light


3

‘The Implementation Challenge

The familiar saying about problems being turned into opportunities is the theme
of my comments in this section. Assume states receive a much higher degree of
freedom in exchange for much lower levels of federal aid. The rhetoric that goes along
with this bargain is that they can be more efficient if they are in charge. In economic
terms, they can shift the production function, or in the vernacular get more bang for the
buck. Assume further that the President vetoes the reconciliation act, that there is a 90-
day Continuing Resolution, and that late in this calendar year the President, the
Speaker, and Senator Dole shake hands on a deal (which all try to take credit for) that
includes block grants or, whatever they are called, that look like block grants, quack like
block grants, and give the states a lot more policy discretion and a lot less money. This
“Big Deal" if it occurs will have important fine print. One fine-print detail is that the
budget cuts are likely to take effect soon, say April 1, 1996, and that the block grant
policies are likely to go into effect right away, with the understanding that it is up to the
states to pass the necessary enabling legislation to create in each case their own
particular version of this "Big Deal" for American federalism.

Assume further the following: (1) there is an eight-year glide path to a balanced
budget in 2003; (2) the budget reduction numbers are somewhat (but not a lot) lower

than in the recently-passed Congressional budget resolution; (3) there is a capped

Medicaid program, whereby states can set their own benefits and eligibility rules without
Waxman or waivers; (4) there is a welfare block grant with tough cut-off rules; (5) there
is a workforce development block grant (a compromise between Goodling and
Kassebaum) that gives states wide latitude; (6) the food stamp program (the biggest
surprise element) is capped with a CPI escalator and automatic emergency add-on for
recessions; (7) major changes of a similar nature are made in foster care, SSI for

children, and child care for welfare families; and (8) all other federal grants are cut by 6



Jan. F
Pescwr 103- &
FIGURE I1-15.

Share of Total Medicaid Payments
by Eligibility Status of Beneficiaries, FY 1991

Total Payments = $77.0 Billion



125

the state governments and granting them a prominent role in all national lawmaking, including a
collective ability to initiate and veto legislation, as well as the consent to administrative, military,
and judicial appointments. Understanding that the atomized population, as represented in the
House of Representatives, could itself pose no sustained bulwark against the expansion of the
federal government, the Founders sought to achieve an effective counterweight by enlisting the
jealous sovereignties of the states as watchful guards against encroachments by Washington.

Although federalism is conventionally described in terms of a technical arrangement of
divided and shared powers according to competency, in actuality the central purpose of this
division of powers is not one of efficiency but to enable the federal government and the states to
check and balance each other, and thereby prevent either from an unrestrained exercise of its
powers. That it has manifestly failed to do; for the power and reach of the federal government
has undergone an enormous expansion and now has few restraints other than limitations on
Tesources.

The Federal Ascendancy

The federal government's acquisition of greater power at the expense of that of the states
has been a prominent feature of American history, especially following the Civil War and the
‘Amendments enacted in its aftermath. But it is in this century that the greatest expansion of the
federal government's power has occurred, and at an accelerating pace.

‘The new era was heralded by ratification of the 16th and 17th Amendments in 1913, which
together removed key restraints on the federal government's range and the resources it is able to
‘employ, thereby laying the foundation for its subsequent expansion. The 16th Amendment
authorized differing levels of income tax and armed the federal government with a virtually
unlimited taxing authority. By mandating the popular election of Senators, the 17th Amendment
gutted the role of the Senate as protector of the interests of the states and removed them from
participation in national decision-making. At a stroke, the most effective political mechanism for
the maintenance of a balance was abolished, and with it the ability of the states to restrain
Washington.

These innovations were quickly matched by the piecemeal removal of the remaining
constitutional and legal restrictions on the federal government's range of action. The most
important development in this respect was the enunciation by the Supreme Court in the 1920's of
the revolutionary doctrine that the Constitution was fully applicable to the states, a viewpoint
which the Founders and the drafters of the 14th Amendment -- the provision most commonly
cited in support of this new interpretation -- had explicitly rejected. Now, not only were all state
Jaws, regulations, and court decisions subject to federal judicial review and approval, but the
potential scope for national legislation and executive action was greatly expanded into hitherto
untouched areas of state responsibilities and even into areas which no level of government had
previously touched. The determination of the limits of that power were left solely in Washington's
hands.

The federal government was quick to exercise its new freedoms in response to the
emergencies of the Depression and World War Il. Here, the most fundamental change was not
the vast new powers assumed by the federal government but the change in the public's outlook,

5



100

localities. But this was not called a block grant, because the use of this aid was not
limited to a particular function of government like law enforcement, community
development, etc.

Three Types of Grants

Federal grants come in three basic types as to the nature of their end uses -
entitlement grants, operating grants, and capital grants. Nixon's New Federalism
called for blocking operating and capital grants, but not entitlement ts. That is,
not Medicaid or Aid for Families with nndent Children (AFDC), Nixon was a
spender when it came to grants, and also for that matter other domestic policies in
esneral Besides his revenue sharing program (which involved distributing $5

illion per year in new funds to states and localities) Nixon's block grants included
funds known as “sweeteners.” The term referred to extra funds provided on top of
the money contained in the categorical grants bundled together in a new block.
Nixon added these sweeteners as an inducement to state and local officials to
support his initiatives.

But, to reiterate, the main idea in understanding block grants is that Nixon
did no} recommend blocking entitlement grants. The term refers to grants that
transfer income (both in cash and in-kind) to individuals and families based on
defined conditions of need. States determine eligibility for benefits under these
grants within federal guidelines. The national government reimburses the states for
the benefits provided on an open ended basis. Whoever qualifies receives aid, and
the state is reimbursed accordingly. The food stamp program is not a grant-in-aid.
Food stamps are federal government vouchers, although administrative funds for
the food stamp program are paid to the states as a grant-in-aid.

Nixon's "New Federalism"/FAP and FHIP

In advocating the sorting out functions in American federalism, Nixon argued
that income transfers (cash, health care, foster care, schoo! lunches, food stamps)
should be made more - not less - national in order to assure equal treatment of the
needy and to share this fiscal burden on a national basis. Neither Nixon's Family
Assistance Plan (FAP) for welfare reform or his Family Health Insurance Plan
(FHIP), which was similar to Clinton's 1993 proposal, were enacted. Actually, if

"AP and FHIP had been enacted in the seventies, it would have saved a lot of grief
over the past two decades, right now especially.

Reagan's ‘new federalism"

President Reagan's brand of "new federalism" (he didn't use the term, but the
press did to describe his program) departed from Nixon's approach on this very
point. In 1982 Reagan advanced his "swap and turnback" plan, which had the
national government taking over Medicaid. In exchange, the states were to pick up
the full responsibility for .


41

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