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.I 228 November 24, 1982 WHY BLOCK G RANTS WORK INTRODUCTION The New Federalism initiative is one of the Reagan Admini stration's most promising attempts to reduce the size and role of the federal government and to return the responsibility for basic social programs to the states. Recent sig ns that the White House is retreating from its original proposals have appeared, ironical ly, just as evidence emerging from the 1981 block grant experience reveals the states to be sophisticated and efficient when given discretion over such programs.

Statements made during the summer indicate that top White House officials in the Office of Intergovernmental Affairs have all but agreed to the position of the National Governors Association that the only acceptable part of the New Federalism initiative outlined in.the 1982 State of the Union address would be the nationalization of the $30 billion Medicaid program. The Administration has withdrawn from its original plan (opposed by the governors) to turn over the $9 billion Food Stamp program to the states, and has dropped part of its plan to streamline mainten and other rules that increase costs and restrict experimentation. ance of effort standards, mandatory pass-through requirements Yet the experience of the 1981 block grants suggests that the states are capable of assuming administrative and financial responsibilities for even more programs. The data show that the states can absorb the cuts in federal aid associated with the blocks and make appropriate cost savings without unduly reducing services or incr e asing taxes. The evidence also shows, however the need for greater flexibility to enable states to experiment further and better use their block grant funds perience of the 1981 block grants be understood and its lessons It is important to the New Federal i sm debate that the ex2 properly drawn. Failure to appreciate this experience has prompted many legislators and, apparently, Administration officials to press less vigorously than they should for the decentralization of basic support programs that is a ke y element of New Federalism.

BACKGROUND Federal grants-in-aid to the states have been growing rapid ly. 'Since 1961, the number of categorical aid programs slated for states has trebled, reaching 510 in FY 1981.l Federal spen d ing for those programs amounted to $94.4 billion in FY 1981, up 3 billion from 1980 and $12 billion from 1979.2 The average annual growth rate for those programs over the twenty-year period was 13 percent, or roughly three times the growth in Gross Nati o nal Product. Categorical grants-in-aid to the states constituted 3.4 percent of the 1981 GNP, compared to 1.4 percent of the 1961 GNP.3 The Advantages of Block Grants The rapid growth in federal aid was seen by many as a wel come indication of a national c ommitment to resolve supposed national problems and to offer states needed monies to finance basic service programs. However, such growth brought with it increased federal influence over state and local policies. The typical grant featured 300 to 500 sepa r ate spending requirements on state government regulations attached to just one of the nutrition programs involved 62 million Itburden hourst1 of paperwork annually. Those millions of man-hours spent on paperwork did more.than siphon resources that could h a ve been directed to actual service delivery. They also were a clear signal that federal authorities intended to use the spigot of public monies to change the course of state and local policies White House officials estimate that This "mandate millstone,I1 as New York City Mayor Ed Koch described the hundreds of thousands of changes states must make routinely in their own programs to accommodate federal direc tives, is a major problem to states in securing block grants The millstone burdened each of the 500 -plus categorical aid A cogent history of categorical grants is given in Thomas Ascik, "Block Grants and Federalism Backgrounder #144, June 5, 1981, pp. 18-23.

See Reagan and the States (Washington, D.C Council, 1981 p. 4 Decentralizing Decisions," Heritage Foundation American Legislative Exchange Additional statistics about categorical grants-in-aid are provided in Fact Sheet: Federalism Initiative," distributed by the White House Office of the Press Secretary, January 27, 1982, pp. 2-4.

Ibid -9 P- 3.

Ibid -9 P- 4 3 programs for the states. In some cases, mandates were reinforced with sanctions imposed by federal authorities to force states to comply.

The regulations and spending mandates that accompanied the Elementary and Secondary Education Act (ESEA) are but one example of federal influence. Federal spending in 1981 amounted to only 8 percent of all monies spent on education. Yet this had a dispro portionate impact on states and localities because it financed almost 100 percent of student loan, nutri t ion, and specially targeted aid programs. To qualify for this 8 percent, the states which bore 88 percent of all education costs) were required to prove compliance with a variety of curriculum, hiring, and admis sion standards. These forced states to star t new programs or revise existing ones without regard to efficiency or local desires.

Among the most controversial of the requirements are bilingual education and school busing.

The Critics of Block Grants Criticism of block grants has mounted on several fronts. It is argued, for instance, that the states' own sources of revenue are so strained they cannot afford to bear the cuts in federal outlays that are a part of the block grant strategy.

A May 14, 1981, letter to all Members of Congress signed by 63 public interest groups maintained that: "These [block grant proposals will certainly mean two things: less assistance to those in genuine need in these areas and a brutal political struggle at the state level where the most vulnerable and those without cl o ut are certain losers.1'6 These critics presume that reductions in block grant monies would prove insurmountable obstacles to the states. The assumption was that costs would not.be balanced by reduced overhead and compliance costs. This ignores the proved capability of state governments to make significant changes in priorities and coverage within a relatively short period.

Critics also maintain that the states would be unwilling and uncaring administrators of services. This implies that only the federal g overnment is capable of compassion. Dozens of welfare and civil rights groups complained that states would use block 6 "Coalition Condemns Plan for Block Grants to States," Washington Post May 21, 19

81. A June 24, 1981, memorandum written by Susan Philli ps of The Conservative Caucus demonstrates that many of the 63 groups were recipients of large amounts of federal grants. Mrs. Phillips documents among other facts, that some of the groups are actually affiliates or projects of groups mentioned elsewhere o n the list. Other groups had no phone numbers, were unaware that they were on the list of 63 groups, or were projects that existed solely through a federal grant.grants as an opportunity to gut basic benefits and service delivery for the needy.7 Carl Rowa n , in a column entitled "Help for Needy Retreats to Block Grants Shelter wrote: "In hundreds of [econom ic] areas of life, state and local officials were unable to meet the needs of families that couldn't pay fuel bills or dental bills, or bills of other v i tal needs. In some cases--food programs for example--troglodyte local officials even rejected what they could have for free from Uncle Sam.Il8 Key lobby groups, such as the U.S. Conference of Mayors and the National Conference of State Legislatures (NCSL oppose wholesale distribution of discretionary power to states-not because states are inexperienced or incompetent overseers of programs but rather because they see the states as stingy in distributing monies to the cities and counties.

Concern over the ca pabilities and.dedication of state govern ments ignores the impressive political maturation of state legis latures during the last ten to fifteen years. Between 1974 and 1980, the number of legislative committees and support staff doubled. Professor Alan R osenthal of Rutgers University con cludes State Legislatures have recently undergone significant change Legislatures are more likely to meet annual ly than biennially. They spend more time in session than before. Professional staff has increased. Re searc h agencies nearly everywhere are larger, many more important standing committees have assistance and leaders in more than-half the states have full-time staff support.

In fact, it has been these improved resources that have enabled the states to establish such a commendable record on assuming responsibility for the block grants THE 1981 BLOCK GRANTS The nine block grants, passed by Congress as part of the 1981 Omnibus Reconciliation Act, contain the following principal provisions Maternal and Child Health Services. Seven categorical grants are consolidated--Maternal and Child Health, Supplementary For specific comments by those groups, see "Block Grant Proposal Carries Few Strings," Washington Star, March 7, 1981.

Washington Star, May 31, 1981.

Dr. Alan Rosenthal, Legislative Performance in the States (New York: The Free Press, 1974 pp. 2-3 5 Security Income [Children Hemophilia, Sudden Infant Death Syndrome, Lead-Based Poisoning Prevention, Genetic Diseases, and Adolescent Pregnancy. The consol idation is designed to enable states to. improve the health of mothers and children and support special research, training, and service programs. This block grant is funded at $373 million for FY 1982.

Preventive Health and Health Services. This program co nsoli dates eight categorical grants including Home Health.Incentive Grants, Fluoridation, Rat Control, Health Education/Risk Reduction Hypertension, Emergency Medical Services, and Rape Crisis Counsel ling. The consolidation is designed to improve the he alth of recipients by preventing incidence of unnecessary injury, ill ness, or death. This block grant is funded at $95 million for FY 1982.

Alcohol and Drug Abuse'and Mental Health Services. This consolidates five programs--Alcohol Project Grants, Alcohol Formula Grants, Drug Abuse Project Grants, Drug Abuse Formula Grants, and Mental Health Services. The consolidation seeks to improve the health of recipients by providing treatment, preven tion, and rehabilitation services. This block grant is funded at 4 91 million for FY 1982 Primary Care. This applies to only one categorical grant the Community Health Centers, which is converted into a block grant by increasing state alternatives for providing primary health care. It is funded at $302 million.for FY 198 2.

Social Services. This block redesigns three programs pre viously authorized under Title XX of the Social Security Act Social Services, Day Care Services, and S.tate and Local Training.

The primary purpose is to prevent or remedy neglect, abuse, or exploitation of vulnerable children and adults and to prevent inappropriate institutional care. It is funded at $2.45 billion for FY 1982.

Energy Assistance Program a block grant gives the states more flexibility in their assistance to eligible households for heat ing, cooling, and weatherization costs. Consolidation also reduces federal requirements for state assistance under the program. This block is funded at $1.87 billion for FY 1982 Low-Income Energy Assistance. Designating the Low-Income Community Serv i ces. The consolidation redesigns programs previously administered by the Community Services Administration including Community Action, Senior Opportunities and Services Community Food and Nutrition, Training and Energy Conservation Evaluation, and Technic a l Assistance. Consolidation is.designed to enhance the anti-poverty efforts of federal, state, and local governments. This block grant is funded at $389 million for FY 1982. 6 State Community Development Block Grant Proqram for Small Cities. This consolid a tion gives states the option of taking over responsibility for a program previously administered by the Department of Housing and Urban Development. It seeks to enhance housing, income, and environmental living conditions for low income individuals. The b lock is funded at $1.08 billion for EY 1982.

Elementary and Secondary Education. This consolidation has two chapters. The first streamlines programs in Title I of the Elementary and Secondary Education Act-Basic Grants to Local Education Agencies, Concentr ation Grants, Migratory Children Handicapped Children, and Neglected and Delinquent Children.

Chapter 2 consolidates 27 other elementary and secondary pro grams, such as Basic Skills, PUSH-EXCEL, Metric Education,. Con sumer Education, Library Resources, Community School Aid, Gifted and Talented, Ethnic Heritage, Teacher Corps, and Alcohol and Drug Abuse Education. This block grant is funded at $518 million for EY 1982.

HOW CONSOLIDATION WORKS The Reagan Administration's 1981 economic recovery plan stress ed two aims of block grants 1) to reduce.the cost and number of federal-state categorical programs and (2) to limit the growth of aid under such programs.1 To achieve these goals, the Administration proposed to consolidate almost 100 different categorical programs into seven blocks-=grants that would allow states to implement the programs free from the need for annual reports, maintenance of effort standards, state matching funds or even the submission of applications for the grants. The grants would have been funded automatically without the means tests and application procedures associated with categorical programs.

The block grants were supposed to involve substantive regula This was to result in tory reform for many categorical grants less overhead, a g reater share of benefits going to the needy, increased flexibility for state and local officials, and improved political accountability for the programs. Robert Carleson Special Assistant to the President for Policy Development, sum marized the block gran t rationale In conjunction with regulatory reform, block grants are designed to reverse the trend towards greater federal control over state and local programs. They represent a means of ameliorating the impact of federal spending reductions, which are req u ired in this economic climate lo "Consolidating Categorical Programs into Blocks A Program for Economic Recovery, 1981, pp. 7-1 and 7-2. 7 Block grants reduce state and local compliance costs eliminate waste, reduce federal administrative costs and make s t ate and local officials directly accountable to their constituents.ll Despite Carleson's assurances, some observers point out that the consolidations are not true block grants, for they include the sort of restrictions that characterized the grant consoli d a tions of previous administrations. Many governors, for instance have their doubts. Said Governor James Thompson to the Illinois General Assembly: "We were promised relief from regulations and mandates. Instead, the states will receive these half-hearted watered-down versions of the original proposals. We got the cuts, but not the flexibility.Itl2 Earmarks It is easy to understand why the 1982 grant consolidations might be considered Itcategoricalf1 conversions instead of l1blockit conversions. In some ca s es, Congress attached provisions to the grants that escalated costs beyond what the states m1gh.t have authorized otherwise. In other cases Congress enacted spending and distribution restrictions that made the states little more than a conduit for carryin g out a federally prescribed course of action. One example is the a term referring to the percentage of grant funds that must be set aside for a purpose prescribed by statute of a state. In the Elementary and Secondary Education Block Grant, for example, 8 0 percent o'f the funds available from the federal government must be tlpassed-throughll automatically to local education agencies Ifon the basis of relative enrollment adjusted for relative numbers of higher cost children." With the education block, there f ore, the states not only must give the lion's share of their monies to local entities, but also must distribute the monies in accordance with a formula mandated at the federal level. The earmarks in the education block are typical of the 1981 blocks. Six o f the seven health block grants include such set-asides Earmarks limit the range of spending and management options By reducing the states' ability to assign priorities for funding topic areas, the earmarks inhibit the states from redesign ing previous ca tegorical grants into a system uniquely responsive to their own needs. l1 The White House, Office of Policy Development Summary Fact Sheet: The Administration's Block Grant Proposals," May 14, 1981.

Quoted by Illinois State Representative Penny Pullen in " Guest Editorial in The American Legislative Exchange Council's First Reading, October 1981. a Reporting and Audits The spending mandates are one of the structural constraints Addi- imposed by Congress on block grants conduct reporting and audits of the bl o ck grant programs tionally, the blocks are still subject to federally required cross-cutting mandates," even though the very purpose of the grant consolidations was to relieve the states of onerous tasks associated with federal rules. Cross-cutting mandat e s oblige the states to adhere to a wide variety of federal statutes of which they may not be aware. Those include affirmative action quotas access to handicapped rules, Davis-Bacon construction wage require ments, and the Uniform Relocation Assistance Act . The latter raises potential financial problems for the states in that it requires governmental units to compensate individuals who are displaced because of a government project Others require states to The GAO Findings The block grant pitfalls left open by Congress were recently highlighted in an August 24 Report to the Congress by the U.S.

General Accounting Office (GAO The 57-page report noted the same earmarks and reporting requirements outlined above. The GAO added the observation that mandatory pass- through provisos and the slow rate of federal-state money disbursements complicated state planning efforts. In some states, according to the GAO federal requirements forced the states to "sharply increase expenditures in some of the b10cks.l for 'overcomi ng initial obstacles to block grant efficiencies.

One of the most important factors that favored the states at the outset was their working familiarity with block grant recipients.

The report cited Colorado, Kentuc ky, Washington and Michigan as prime examples of states continuing to use previously funded grantees as service delivery systems Because of states' prior experience, relatively few organizational adjustments were needed stated the GAO report. The GAO adde d In addition to employing existing organizational structures, states drew upon their insti tutional knowledge for carrying out block grant responsibilities.

For most block grants, details on-how the previous programs were run, their purposes, and the activities required were well known.

Moreover, states often had existing relationships with service providers. If states' abilities to be creative under pressure. However the report raises some unanswered questions that will be dealt with In general, however, the GAO gave high marks to the states The GAO report is useful to the extent that it reaffirms the l3 Report to the Congress by the Comptroller General Early Observations On Block Grant Implementation U.S. General Accounting Office, Report GGD-82-79, Aug u st 24, 1982, p. 25 l4 Ibid p. 12 9 elsewhere made few in this Backgrounder. The report declares that rqanizational chanses durins the catesorical-bl states ck grant transition, but does not identizy savings-that states made in the process. The report ment ions that private contractors from the categorical system were retained under the blocks, but does not examine how previously covered recipients are affected.

It notes that state legislatures are becoming more active in oversight and implementation of the blocks, but does not analyze how their increased role affected eligibility criteria. The report identifies institutional obstacles that impede program efficiency, but does not suggest ways to improve the block grant structure in a meaningful way. And fina l ly, the report restricts itself to 13 specific states, without any reference to successes achieved in the other 37 Flexibility The GAO study is correct in stating that the block grant legislation enacted in 1981 gives the states some important flexibility . In the Social Services and the Alcohol and Drug Abuse and Mental Health blocks, Congress repealed a matching fund requirement which, under the categorical system, obligated the states to appropriate monies from their own treasuries equal to the federal o u tlay. In four new blocks (Low-Income Energy Community Services, Preventive Health, and Alcohol and Drug Abuse and Mental Health states can transfer funds from one block to another. In all the blocks, states can decide.how to design and write their applica t ions for funding. Freed from standard forms the states will lfsavel1 5.4 million man-hours that would otherwise have been spent on paperwork, according to Office of Management and Budget estimates. These reductions in man- hours will reduce paperwork time by 83 percent.

Flexibility is also gained in that the states can now decide This the date of their participation in the block grant program option is an important political concession to the states since the final form of block grant legislation was not c lear until several months after the statesf fiscal year began (for 46 states the date is July of each year). States needed time to develop applications, prepare demographic data, project expected partici pation, and itemize probable outlays. Granting disc r etion to the states regarding the date of participation gave them the opportu nity to phase out efficiently the categorical system and the,time to solicit bids from the private sector for some block grant functions In sum, it is debatable whether the 1981 grant consolidations represent true block grants. State governments did not have l5 U. S. Office of Management and Budget Block Grant Implementation: Effect of Block Grants on Paperwork Reduction Attachment 83, September 21 1981 10 unbridled discretion re g arding financial and administrative management regarding contracting out of services, transfer of funding, and gradual conversion from categorical to block grants ly, the block grant consolidation offered significant reductions in compliance costs and pap e rwork burdens On the other hand, the states did have some latitude Additional PROGRESS OF THE BLOCKS: IMPLEMENTATION Block grant enabling legislation was purposely vague on the matter of responsibility--in the case of all the blocks except education, "the state" meant the governor or the legislature It was equally silent about process, state compliance with civil rights guarantees, distribution of benefits, and the procedures that each state should use to ensure public participation in the block'grant proc e ss. The Children's Welfare League, the League of. Women Voters, the Center for Community Change, and other interest groups expressed serious concern that the public would be excluded from the block grant process, once those jurisdictional and technical qu e stions were resolved.16 Two-thirds of the nation's governors have formed task forces to review block grant problems; these are mainly advisory bodies and are not authorized to dictate the nuances of implementation.17 Similarly, several state legislatures have voted themselves the authority to apply for or accept block grant applications.. Most states are administering the blocks by using existing personnel.

A handful of states, notably Louisiana and Texas, are using the federal block grants as an opportunity to merge similar state programs into a single state office.

Some states have found that block grants are useful for giving local governments more control over basic benefit pro grams. California and Oregon are the two states most actively decentralizin g block grants to the county level--so-called mini block grants. California officials have already given counties complete authority to administer the Social Services Block Grant.

As a result, state officials feel that they can absorb the funding reductio ns that accompanied the block grant. Only a minimal number of state personnel is needed to oversee the counties efforts. The counties, meanwhile, are using volunteer services and private contractors to cut costs have attracted attention; the Pennsylvania a nd Illinois General Assemblies, for example, are now debating the prospect of estab lishing mini-block grants for their state-local grant awards I The California innovations l6 Those concerns are detailed in a lengthy "Briefing Book" about block grants (W a shington, D.C l7 James Stockdale, Deputy Undersecretary for Intergovernmental Affairs Memorandum to Regional Directors, U.S. Department of Health and Human Resources, May 24, 1982 p. 23 Center for Community Change, 1981 11 Critics' fears that the public w o uld be excluded from the process have proved unfounded. Federal enabling legislation requires states to conduct an initial public hearing about the distribution and structure of the blocks. Indeed, states had to hold such hearings before they could receiv e the block awards.

The states have complied with this mandate and are making public hearings a regular, integral part of the block grant process. In a few states (notably Utah and Virginia the executive branch of the state government has established toll- free telephone numbers through which the public can report problems or successes with the blocks.

Other states have been equally innovative in tapping public views of block grants. Efforts range from advertising in news papers and on television to holding field hearings in the loca tions most likely to benefit from the blocks. .At a Nebraska hearing, approximately 1,500 people turned up.

The block grant program is the first major federal-state effort that gives the public an opportunity to comment on plan s for major grants-in-aid policies. This alone makes it a critical element of the New Federalism structure. The states' hearings constitute the first instance of the public at state and local levels being brought into the policy planning process ary 1982 s urvey by the National Governors Association (NGA) found that state public hearings on block grants will be even more widespread in 1983.18 "If nothing else concluded the NGA survey, "the data provided by the states clearly and emphatically show that citiz e ns were provided a multiplicity of opportunities to participate in the process F]or all the programs (except Title XX and Social Services Block Grant) this is generally the first year in.which the public has been involved so heavily in the process of prog r am decisions A Febru PROGRESS OF THE BLOCKS: FINANCIAL MANAGEMENT Once the states resolved the issues of authority and public participation, the immediate problem was how to manage the finan cing of the block grants. Initially, funding was not technically a part of the state budgets, since the states' fiscal years had already started at the time Congress approved funding. When the blocks were enacted, therefore, the states faced a number of problems 1. How to accommodate the budget reductions. The Reagan A d ministration originally requested that the blocks be 75 percent l8 The NGA survey also shows that 35 states plan to increase public partici pation during FY 1983 1982 Governors' Guide to Block Grant Implementa tion National Governor's Association (Februar y 1982 p. 21.

Ibid. 12 of the Fy 1981 funding for the relevant categories were expected to make up the budget gap through reduced overhead and compliance costs however, estimated that administrative costs associated with the categorical grants amounted to only 5 to 15 percent of total outlays. Moreover, the economic recession increased normal demand for services under the grants program--services that, under the federal enabling legislation, required the states to cover certain categories of persons legisl a tion allowed the states to transfer certain amounts of grant funds from one block to another a small percentage of unused monies to another grant program in order to compensate for unexpected shortfalls in the blocks, such a grant diversion might reduce t he funds available from the federal government in future cycles strative costs. This issue is particularly poignant for block grants because of the federally mandated cap on administrative expenses.

Accommodating the reduction of federal funds did not beco me a major problem. The reason outlays to the states. Though all state officials had come to expect a uniform 25 percent reduction in funding for the blocks the final cut, as set by congressional Continuing Resolutions amounted to only 10 percent the mark estimates that, as of February 1982, the collective outlays for those programs (at the state level) dropped an average of just 0.5 percent,20 meaning that the states have not had to cut budgets or raise taxes to accommodate the anticipated reduction in bl ock grant funding--it never took place.

States were concerned with the distribution procedure for the funds. Disbursement is governed by two federal processes, the Intergovernmental Cooperation Act (ICA) and the Continuing Resolution of Congress. The first posed a cash-flow problem for states b e cause it obliges the federal government to give grants to states only on an actual or immediate need basis. In other words, the state governments count block grant funds as part of their state budgets, but the federal government will disburse funds only o n an incremental, quarterly basis. This restricts the states' abilities to deposit block grant monies for inter est-yielding purposes in banks and other lending institutions--a The states The General Services Administration 2. Whether to transfer funds bet w een blocks. The enabling Though states8can direct 3. How to maximize service delivery with a minimum of admini there was almost no cut in federal Even this turned out to be far over The National Association of State Budget Officers 2Q Ibid p. 37 ranged' f rom +2.3 percent to -19.8 percent.

Individual state changes in federal funding for,the blocks 13 common cash management practice. The ICA thus effectively re duces the total funds available for services.21 The federal government's reliance on a Continuing Resolution The to fund programs compounds the cash management restrictions.

Continuing Resolution usually covers program funding for no more than a few,months. In the case of block grants, the federal government's use of such stop-gap budgeting prevents t he state governments from receiving funds on a predictable and regular manner.

The double restrictions of the ICA and the Continuing Resolu tion have caused particular problems for blocks subject to un- usual demand, such as the Low-Income Energy Block Gr ant, designed to give aid to needy individuals who cannot pay their high heat ing bills. The Low-Income Energy Block Grant naturally incurs its greatest outlays during the winter months, but ICA guarantees the release of funds only gradually; financing vi a the Continuing Resolution, meanwhile, assured that the funds would be less predictable. Officials at the Office of Management and Budget apparently attempt to take into consideration the states' pro blems and give a high priority to expediting block gran t disburse ments ly payments, OMB officials try to make funds available in line with actual program operations.

Although there were fears that Low-Income Energy funds would be inadequate to meet states' needs, over two dozen states, as of Spring 1982, had transferred funds, capped at 10 percent by federal legislation, mainly to augment funding for the Social Services Block Grant. Five states transferred Low-Income Energy funds into weatherization programs,22 and 26 states transferred funds into Title XX of the Social Services Program.23 Therefore in spite of initial cash-flow problems, the states have found surplus funds to be redirected into other block grants While the ICA required the government to make only quarter In the short run, the interblock trans f er of funds has enabled states to reassign priorities within the blocks to the extent allowable under law. The long-run consequences are not as clear, however, because the transfer of funds out of a block may signal to future federal administrators that t h e state was awarded too much money for that block I 21 The technical procedure by which states receive their funds is explained in "The Block Grant Award and Cash Disbursement Procedures sheet (Office of Management and Budget, October 2, 1981 Additional d etails are given in a question-and-answer paper, untitled (Office of Management and Budget, September 29, 1981).

Colorado, Kansas, Maine, North Dakota, Oklahoma.

Louisiana, Maryland, Michigan, Missouri, Montana, Nebraska, New Jersey New York, North Dakota , Oregon, South Dakota, Utah, Vermont, Virginia Washington State, West Virginia, Wisconsin, and Wyoming a fact 22 23 Alabama, Arkansas, California, Florida, Georgia, Iowa, Kansas, Kentucky, PROGRESS OF THE BLOCKS: SERVICE DELIVERY It is becoming evident t h at service delivery under the blocks is better than it was under the previous categorical pro grams. The states' successes can be examined in terms of the nature of new recipients previously excluded from the cate gorical grants and the scope of new servi c es available; (b) the level of administrative activity and the proportion of block grant monies consumed by administration a Scope of Block Grants In all the blocks, there has been an increase in new, pre- viously uncovered recipients--a change directly a t tributable to the reassignment of priorities within the blocks. In Montana, for example, one portion of the Maternal Child Health Block Grant was merged with the Handicapped Children's program consolidation increased the projected participation in the pro gram by about 11 percent. Similarly, Louisiana is regrouping all state community service programs into the same State Department of Labor division that will handle the Community Services Block Grant. New York State officials are merging the Social Service s Block Grant and Alcohol and Drug Abuse and Mental Health Block Grant into an existing lfConsolidated Services Planning Process.I1 Thirty state governors have established a lead agency responsible for coordinating the blocks with state programs state gove r nors have created task forces whose mandates include the identification of existing federal or state rules that pre vent augmentation of the blocks Montana's Thirty-two This consolidation by the states runs counter to the predic tions of critics who belie v ed that states would use block grants to cut aid to needy individuals. In fact, the consolidation has improved service to the needy since the programs are now designed to give priority to categorically needy persons risk factors" to serve as a preconditio n for distribution of block grant benefits. In the case of the Preventive Health Block Grant, states are giving priority to areas with either high rates of communicable diseases or areas with high propensity for health related problems (e.g., high crime ar e as where rape prevention pro grams may be useful Services Block Grant to contract with private providers willing to address the needs of unserved populations ty Services Grant, there is a trend for new services to be provided for previously unserved group s via competitive bidding for con tracts competitive bidding/contracting-out process affecting previous recipients audits of the blocks, no definitive answer is possible. Thus far, however, the states seem to be taking steps to offset seri The majority of s tates have drafted comprehensive lists of Similarly, some states are using the Community Under the Communi Delaware and Arkansas have been especially active in the Are the consolidations and redesigning by states adversely Until the states complete their 15 ous shortfalls in projected aid.

Child Health Services Grant, the use of supplemental appropria tions by the states is especially noticeable. Forty-five states are offering the basic matching fund required by federal law ($3 in state funds for every 4 i n federal funds);24 19 states are matching federal funds in excess of the match prescribed by federal law;25 and 19 states are requiring some sub-unit of state government to provide an additional match of federal monies.26 As of June 1982, approximately t w o-thirds of the states had not made changes in eligibility requirements for either individ uals or grantees. The remainder of the states are considering changes in eligibility, but those changes, if enacted by the state general assemblies, will only affec t recipients of the FY 1983 block grants me-ans that the blocks are still servicing the same broad groups of beneficiaries under whichthe recipients are given benefits ance with nondiscrimination provisions of the federal block grant laws As of July 1982, n o state had been sued or charged in a similar civil action that alleged discriminatory practices vis-a vis block grants. Given the high degree of public and inter governmental interaction on the block grant program, there are adequate checks to detect vio l ations of civil liberties In the case of the Maternal and This preservation of eligibility requirements What has tended to change is the priority The states also have adequate safeguards to assure compli Economies in Administration One group only has suff e red from the institution of block grants or otherwise certify the progress of categorical grants of the blocks cies with an annual independent audit. Still, the paperwork burden formerly imposed on states through categorical grant regulations is noticeabl y absent It is still too early to assess the impact of reduced paperwork on individual states.

State budget officers, however, believe that the paperwork costs will be much lower than those under the categoricals--if for no other reason than that the latte r required several reports for 57 different programs. In contrast, the new block grants require the state bureaucrats who usually audit, survey, monitor Federal legislation still ensures a full public accounting Each state is required to provide federal a gen 24 The five exceptions are: Iowa, Nebraska, New York, Oregon, and West 25 26 Virginia.

Alaska, Arizona, Arkansas, Georgia, Idaho, Illinois, Louisiana, Maine Maryland, Michigan, Mississippi, Missouri, Nevada, New Hampshire, North Carolina, Ohio, Rhode Island, Tennessee, and Wyoming.

Alabama, Connecticut, Delaware, Georgia, Illinois, Indiana, Kansas Minnesota, Montana, Nebraska, New Jersey, North Carolina, North Dakota Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, and Wisconsin 16 only one or t wo smaller reports for just seven individual pro grams. Accordingly, states expect to spend at least 40 percent less on conducting audits and compliance reports than in FY 1981 Preliminary trends suggest that the very modest funding reductions are not str a ining state financial resources. Inter block transfers (especially for the Social Services block supplemental funding (beyond the matching fund requirements of some blocks), and the projected reduction in compliance and paperwork costs have all contribute d to the solvency of the blocks In a handful of states, some innovative administrative action has further bolstered the self-sufficiency of selected blocks. Montana's decision to terminate specific projects under the Maternal and Child Health block and Was h ington State's action to impose limited user fees for.nonpriority services are but two instances of cost-saving measures. That the states are making such decisions demonstrates that a fundamental purpose of the block grant system has been achieved for pro g ram operations, to the point that they are now account able for the grants states have responsibility Increasinq Decentralization The states also have shown that block grants are only a first step down the ladder of decentralization. For some states it ha s prompted the mini-block grant approach that has helped reduce unneeded overhead while returning responsibility to local officials In the interim, the states' decentralizing programs are demonstrating a sophistication and sensitivity to local needs that r efutes arguments of early critics that the states could not handle the grants fairly and effectively.

The irony is that states are making strides in spite of continued federal restrictions. Those restrictions, which have more to do with congressional actio n than with Administration policy, will dampen future state innovation. The restrictions are unnecessary, redundant, and inconsistent with the blocks goal of permitting maximum flexibility for the states. That states established the mini-block systems on their own initiative suggests that they do not need the guidance and supervision inherent in the spending restrictions imposed by Congress.

Unless such restrictions are removed, a future Administration or Congress may add further burdens or repealing these restrictions now can decentralization accele rate Only by drastically revising NECESSARY REFORMS Finance Neither the National Governors' Association report nor the GAO study offers substantive recommendations about how to improve the block grant program enacted in 19

81. The recommendations 17 that the two reports do make are limited to technical transition and data collection changes hardly the sort of needed reforms that can bolster the long-range security of the blocks. The evidence presented'above suggests that at least three financial reforms are needed. First, the federal qovernment should require immediate disbursement of all available block grant monies to the states. The theory that the states should only be allotted funds on an actual and immediate need basis presumes that states will either overspend or misuse the funds. States have the financial maturity to handle large public funds deposits. Trans mitting available funds to states immediately would reduce the reliance of the states on federal authorities fo r permission regarding the disposition of funds. State governments deserve a free hand in the management of public funds, if only because they are the entities responsible and accountable for block grant operations.

Second, the cash management of public fu nds should be re formed. currently, states are allowed to use grant awards only for actual grant outlays, meaning that they cannot deposit block grant funds in banking institutions for interest-yielding pur poses. The problem with this restriction is that unobligated grant funds (however large or small) should be accumulating interest while not being used. If the states are allowed to invest block grant funds on a periodic basis, they have a way to augment their initial grant award. As such, Washington sho uld either authorize cash management of monies by states; or, at a minimum, allow states to receive proceeds from the federal management of undisbursed but obligated block grant monies.

A aird financing reform concerns the day care'portion of the Social Se rvices Block Grant. Currently, almost two dozen states are implementing some form of Community Work Experience Program (CWEP also known as l'workfare.ll These CWEP programs require recipients of certain public aid programs to work off their benefits by ta k ing positions with public service agencies which often include day care centers a goal of the Administration, and since the CWEP option is current ly nonbinding on the states, the Social Services block should be revised to give states an incentive to esta b lish a workfare program that includes day care options. The incentive for the state could be financial: States with a certified CWEP proqram that includes substantive day care provisions ought to be allowed to transfer funds from the day care portion of S o cial Services into another grant proqram. This approach would have the advantage of encouraging the remaining two dozen states to establish full Since the CWEP approach is or partial-CEP programs, while at the same time freeing a sizable portion of the la rgest block grant for use elsewhere.

Administration There are several reforms that can be made in the administ The reforms also would increase the ration of block grants grant system, introduce competition into the process, and increase flexibility for the states service delivery potential of the blocks Each would reduce the costs of the block 18 Brinq block qrant activity'under the jurisdiction of OMB A-85 mandates, or else require states to contract-out certain functions of the grant awards. The contract i ng-out process can either be broadly worded to cover all possible activities that are not inherently governmental in nature; or the procedures can be restricted to services that are directly "privateii in nature such as data processing, records keeping, p rocessing of claims or warehousing.

Allow states the riqht to seek discretionary regulatory relief from the federal qovernment. This option would allow states to seek a waiver from any federal regulation that is particularly inappropriate or inapplicable t o their geographic area.' Relief could require that federal waivers be printed in the Federal Register, along with the,normal comment period and review cycles block grants. Currently the Community Services block allows only a 5 percent transfer, the'Low-I ncome Energy block 7 percent, and the Alcohol and Drug Abuse and Mental Health block 7 percent.

Expanding the scope of transfer capabilities would not necessarily diminish block grant service delivery since the evidence shows sincere efforts by the states to focus block grant benefits on needy and previously unserved populations. Increasing the inter block transfer ability encourages states to find ways to better manage finances Allow states to transfer larger portions of funds between Allow states to deli v er block grant benefits in the form of vouchers. The voucher approach, already used in the federal Food Stamp and G.I. Education prpgram, would encourage block grant recipients to reduce expenses and would introduce more competi tion among vendors of serv ices.

Repeal the matching fund requirements. These requirements increase block grant costs by forcing specified levels of state outlays. States can provide useful in-kind services to compen sate for reduced matching requirements Current efforts to consolid ate state programs alongside federal programs and provide supplemental matching funds by sub-units of government suggest that states will augment blocks regardless of matching fund requirements.

All the suggested reforms require some statutory change by C ongress. As yet, no effort has been made by Administration officials or congressional aides to introduce the reforms required in these recommendations. In fact, no effort has been made to reduce the regulatory burdens usually associated with the grants in -aid system then much more reform is needed.

If the block grant strategy is to be successful CONCLUSION In addition to reforms in the present block grants, Congress and the Administration should press forward with a plan to extend 19 the block grant mechan ism to the major social programs, as envi sioned in the President's original New Federalism proposal.

Income maintenance, nutrition, health, housing, and economic development should be examined as candidates for block grants. A blueprint for the consolida tion of certain categorical grants in these areas has been outlined in publications by The Heritage Foundation and the American Legislative Exchange Council.27 Consolidating another $50 billion in categorical programs would not hamper their administration or undermine the eligibility rights of needy individuals. Indeed, as this study has shown the service programs surely would become more responsive to reci pients, less expensive and less bureaucratic.

Far from retreating on the initial goal of transferrin g the planning and operation of major social programs to the states the White House should make the consolidation of programs into block grants a top priority of New Federalism. While the desir ability of funding these basic services at the state level ma y still be uncertain, the benefits of administration by the states are very clear.

Prepared at the request of The Heritage Foundation by Edgar Vash 27 Thomas M. Humbert, "Budget Cuts: The Key to Economic Recovery," Heritage Foundation Backgrounder #151, Se ptember 18, 1981; White Paper on New Fed eralism: The ALEC Alternative (Washington, D.C The American Legis lative Exchange Council, 1982).

Edgar Vash is a Washington, D.C.-based consultant on state and local finance.