Intergovernmental Relations in a Time of Transition and Uncertainty

Article excerpt

Evidence of serious problems in the American intergovernmental system is everywhere. Senator Lamar Alexander (R-Ten.) recently called for an exchange by the federal and state governments of responsibilities for education and health policy to solve critical state financial problems. News stories report municipal bankruptcies and that state and local governments have laid off more than 700,000 employees during the past two years.

The State Budget Crisis Task Force, co-chaired by former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch (D), documents serious long-term issues. The Government Accountability Office (GAO) has found that state and local revenues have shrunk to the point that federal grants represent a bigger percentage of total revenue than any single self-raised tax revenue source. Those same governments' healthcare expenditures will ultimately become almost 50 percent of their budgets.

Nevertheless, it took the Supreme Court's recent highly publicized decisions on immigration and healthcare to remind Americans that no individual governmental institution--or set of institutional relationships--is more important to effective public policy making and government service delivery than our complex intergovernmental system.

The Intergovernmental System Faces Multiple Challenges

The contemporary intergovernmental system faces numerous administrative, political, and fiscal challenges. The administrative challenges involve both short-and long-term issues. Short-term issues include coping with the increased service demands and the dramatic personnel reductions due to a weak economy. Longer term is the challenge of attracting and retaining a qualified public-sector workforce. This is exacerbated by the reductions in salary, health, and pension benefits that have demoralized state and local employees.

In addition, the decline of institutions with expertise on intergovernmental issues has diminished the system's capacity for sound decision making on policy and management issues. Plus, partisan polarization is crippling the nation's ability to deal with budget, economic, and social issues, and sometimes even meet basic policy responsibilities.

It is widely recognized that there is a mismatch between current revenues and citizens' demands for public services at all three levels of government in the United States. Numerous studies suggest the problems will become worse in the absence of significant action. What is often not recognized is that these situations are interrelated across all three levels of government. The country will face an intergovernmental revenue crisis if it does not address its fiscal problems from an intergovernmental perspective.

As they face up to these challenges, the nation's governments have three choices: go it alone, engage in fiscal offloading to other governments, or enter a new era of institutional and fiscal collaboration. For example, Washington's block grant proposals for Medicaid would constitute a massive cost shift to states unless they found ways to cut payments to doctors, dramatically reduce services, or reduce the number of clients. A go-it-alone approach by each level of government will make the hard fiscal choices that much harder.

In another example, federal tax cuts materially affect the revenues available to the vast majority of states, whose income taxes are linked to the federal tax code. The estate tax cut and phase out in 2001 opened a large revenue hole for many states that for decades had relied on a cooperative federal-state framework to enforce the state portion of the estate tax. Conversely, state staffcuts have adversely affected such federal programs as disability determinations for social security; these programs rely on states to help evaluate actions, a classic cooperative federalism program that is undermined by unilateral budget cuts.

When all governments in our federal system suffer from common maladies, joint solutions are preferable. …