All states except Vermont have constitutional amendments that prohibit budgets intentionally based on deficit funding, even during recessions. Changes in the federal funding structure bring state and local relations into the spotlight. Because block grants come to the states, their political incentive may be to retain control of funds but push down responsibility for implementation. From the trenches, local agencies worry that state government would merely replace the federal government as a source of unfunded mandates. States could impede local efforts to innovate by adding new restrictions and accountability requirements, finding ways to divert block grants to other uses, and reducing safety-net spending.
State balanced-budget requirements, too, raise the specter of funding cuts to localities.
The debate over the new fiscal federalism underscores the tension between devolving greater authority to the states by means of block grants and maintaining the strength and resiliency of the safety net by means of entitlements. Block grants can help the federal government reduce the deficit, but the end of entitlements spells the end of federally underwritten, open-ended support for all eligible people among the nation's disadvantaged. Compromise between these positions, should it occur, might take the form of constrained entitlements, that is, maintaining the federal entitlement concept but with changes in program structure that control usage and limit cost growth. But maintaining the entitlement concept, even with constraints, is at odds with devolving authority to the states. Entitlements require the federal government to bear major funding liability, rather than capping it as block grants would, and history suggests that so long as it bears the brunt of the funding burden, the federal government will want to retain considerable control.