Government’s Balancing Act: Giving States a Leg Up--but Not a Crutch

One rare point of agreement between the political parties these days is that the states should take the lead in delivering social services. Vice President Al Gore has structured almost all of his major initiatives--from plans to provide health insurance for working-poor adults to a proposal for universal access to preschool--as grants that leave states great leeway to design their own programs. George W. Bush takes a similar tack and, in some areas, would go much further: He wants to consolidate dozens of existing federal education programs into broad grants that states could more freely spend as they choose.

Generally, this tilt toward the states is a good thing. As the best private companies have learned, in the Information Age it’s almost impossible to run flexible organizations from a central bureaucracy. The past decade’s most innovative social policies--the new Children’s Health Insurance Program (CHIP), President Clinton’s initiative to help cities hire more police, welfare reform--have all followed a decentralized model. Each of these programs lets Washington do what it does best (especially in a time of surplus): Identify a national goal and write checks to help meet it. Then the states, under broad federal guidelines, customize the delivery to meet their local needs.

For this approach to work, though, the states must hold up their end. And even as Bush and Gore want to push more authority out of Washington, questions are mounting about how conscientiously the states are administering some of their new responsibilities, particularly in programs for the poor. In three distinct areas--welfare, Medicaid and CHIP--the states are accumulating piles of unspent cash that demonstrate why Washington must continue to demand accountability even as it provides local governments more authority.

The numbers are largest in welfare. Before the historic 1996 reform bill, welfare was a federal entitlement, like Social Security; that meant Washington and the states spent as much as was necessary to cover everyone eligible. Welfare reform ended the entitlement and instead gave states a fixed sum of money each year to cover the needy.

Liberals originally worried that this change would leave families destitute if the need exceeded expectations. Instead the opposite has occurred. The grants to the states are based on their caseloads as of the early 1990s. But since 1993, the number of people on welfare has fallen by more than half. As a result, the states have much more money than they need just to cover benefits; the Congressional Budget Office estimates that by 2002, when welfare reform faces renewal, the states could be sitting on as much as $12 billion in surplus welfare dollars.

It makes sense for states to accumulate some welfare surplus as a “rainy-day” fund they can tap if unemployment, and the demand for assistance, rises. But the states are asking for trouble by not using their surplus funds more creatively. In particular, many experts say states could use this bounty to more effectively move recipients from welfare to work--with transportation, child care and even wage subsidies. “If the states had been more aggressive in making sure that families got support for work, we would be doing much better . . . in terms of child well-being,” says Wendell Primus of the Center on Budget and Policy Priorities.

Compounding the problem, some states (such as Wisconsin) are raising eyebrows on Capitol Hill by applying their federal welfare dollars toward existing state anti-poverty programs. Money being fungible, that allows states to shift funds toward other programs unconnected to welfare. If that practice spreads, pressure will grow in Congress to cut the welfare block grant--and the opportunity to use these surpluses to move the toughest cases into the work force will be lost.

The states’ motives are even more suspicious in Medicaid, the joint federal-state health care program for the poor. Traditionally, eligibility for Medicaid and welfare were linked. But in the 1996 reform law, Congress mandated that women moving from welfare to work should retain their health benefits so long as their income remained low. Congress even provided states $500 million to create programs to ensure that those eligible for Medicaid would still get it after leaving the welfare rolls.

But a recent report showed that the states have spent less than one-fourth of that outreach money--even though, by some estimates, as many as 750,000 parents and children eligible for Medicaid have lost benefits since 1995. Another recent study found that only one-fifth of former recipients were receiving Medicaid one year after leaving welfare for work.

Part of the problem is the 1996 law’s complexity. But the states, which bear almost half of Medicaid’s cost, also have a financial incentive to make it difficult for those leaving welfare to receive their health care benefits. “It’s a question of who do you put the burden on,” says Yolanda Vera, an attorney at the Western Center on Law and Poverty in Los Angeles. “Right now, the burden is being put on the family to prove that they are still eligible.” Vera’s group is backing a bill in the California Legislature to streamline the Medicaid application process and impose uniform rules for terminating benefits.

The story on CHIP, which provides health care for children in working-poor families, has more bright spots. The most recent figures show that, since the program was created in 1997, the states have signed up 2 million kids. But progress varies enormously, and in a few states more children have been dropped from Medicaid than added to CHIP.

Partly because of this mixed record in enrolling eligible children, the states have accumulated a $1.9-billion surplus in CHIP funds. This summer, governors beat back an attempt by Senate Republicans to rescind the money. But that pot will grow ever more tempting for Congress if states don’t spend it by reaching more of those eligible for the aid.

So far, Gore has focused on these problems more than Bush (who is under fire himself in Texas for making Medicaid enrollment difficult). Gore wants to give states bonuses when they enroll a high percentage of children eligible for CHIP and Medicaid--and penalize them when they don’t. That’s the right instinct. Relying on states to deliver more services makes sense. Writing them a blank check doesn’t.

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