Block Grants Create State and Federal Trade-Offs

Will block grants lower budgets for many

by / April 30, 1996
Federal government downsizing and curtailed funding is creating an increasing gap between what the federal government will continue to provide and what American taxpayers believe they are entitled to. Caught in the crossfire are state governments which are forced to reconcile and comply with federal changes while simultaneously meeting constituent demands. The recent momentum behind federal block grants clearly illustrates this shift to focus on the states, and
has stirred up national debate -- particularly during this election year -- over the roles and responsibilities of government.

Block grants consolidate federal categorical programs and funds and give state officials more discretion over their use. Although numerous governors support increased flexibility with regard to their programs, debate ensues over the fixed dollar amounts of federal allocations as well as the extent of reduced federal regulation and oversight for programs.

As the funding source for many state programs, the federal government has long imposed restrictions on program design and required data and reports on the impact and regulation of many state programs. Such federal oversight forced states to justify their information systems before implementation, undergo a lengthy approval process, lose state funds utilized for planning systems which were later denied support, and regularly adopt "one size fits all" certified systems which not only required numerous modifications but were often outdated.

In contrast, block grants provide states opportunity and responsibility for creativity and innovation to restructure programs and make major systemic changes. For example, under the Workforce Development block grant, California plans to integrate all of its workforce development programs into a comprehensive system, as well as to develop a One-Stop Career Center system to provide necessary services to employers and job-seekers.

However, while block grants eliminate traditional restrictions imposed on states by federal oversight, they fix a decreased amount of federal allocations. By combining Aid to Families with Dependent Children, food stamps, child care and child nutrition into a single $222 billion grant, the federal government will cut welfare funds 30 percent, or $89.5 billion by the year 2002.

Particularly focused in the areas of welfare, health care and workforce preparation, current block grant proposals mandate changes to many of the largest federal programs. Policy, program and funding changes which will affect states directly include:

Welfare -- states will be forced to determine new eligibility requirements, priorities and resources in order to maximize federal support, slated for a 30 percent decrease.
Job Training -- funding for 91 job training programs across the nation would be consolidated into a single $7 billion block grant to the states, cutting available funds by 15 percent as early as 1998.
Medicaid -- Medicaid will become a $158 billion block grant, with state-specific allocations based on an average of the past three years' allotments. This block grant will reduce the annual rise in federal health care spending from 10.4 percent to only 4 percent. Projected federal savings are near $182 billion by the year 2002. Under this scenario, the annual 6.4 percent gap will be felt at the state level.
Transportation -- responsibility for transportation policy would belong to states despite a proposed $36.9 billion in support during the next fiscal year, a decrease of $2.3 billion.
Environment -- the significant push to abolish requirements established by the Clean Air Act, Clean Water Act and various other EPA regulations would eliminate $1.3 billion in state environmental spending support. States would be responsible for their own environmental regulations.
In order to reconcile these new responsibilities with the fundamentally affected governmental finances and budget allocations, state governments will need to step back, reevaluate and redefine their programs and processes. State and local government agencies will be forced to reevaluate the business of government and potentially model the traditionally private-sector perspective in an effort toward managing by outcomes rather than inputs.

Moreover, states and localities will develop an increasing number of revenue-maximization initiatives. For example, in an effort to minimize fragmentation and duplication of responsibilities among states, cities and municipal agencies, California plans to incorporate cost-effective managed health care delivery approaches into its Medi-Cal program.

Information technology will be a critical tool for agencies adjusting to the changing environment, both in terms of freeing up existing resources and supporting new processes. Information technology's strategic importance will become even more apparent as states and localities attempt to manage without raising taxes. Government executives and legislators will need to create new solutions to survive this new environment. Such solutions are highlighted by the following:

Once legislators have established new policy directions for public-sector programs -- such as welfare or education and training -- state and local executives will be responsible for executing changes in order to operate in a new environment and achieve new goals with less federal direction or financial assistance. Reducing redundancies inherent in government will be one of the primary objectives. As a result of reevaluation efforts, business process reengineering (BPR) will grow to a degree not yet experienced in state and local government.
Once policy decisions have been made and BPR initiatives are under way, many state and local governments will embark on large-scale systems reengineering projects. While many agencies will decide to develop entirely new information systems to support their new programs and agency environments, many other governments will attempt to leverage their previous investments in information systems. For instance, a state health department could leverage its existing claims processing system and databases of Medicaid providers and benefit recipients while improving its accessibility to HMOs, primary care physicians and home health care organizations.
Agencies will have to upgrade to deliver more services through more networks and client/server environments. If states believe that an outsourcing firm can better control the cost of doing business, they may choose to outsource IT operations or an entire program (like employment or human services). Establishing outsourcing contracts at the outset will be facilitated because federal funds are fixed beforehand. In addition, because large-scale systems implementation will not come without risk, agencies will undoubtedly look to other innovative ways to "share" risk with IT services providers.
In total, block grants will no doubt create fewer redundancies for states; however, the end result will be a need for larger, more flexible, complex systems to support the new environment. Despite the time frame, state and local government agencies will face looming federal budget cuts while simultaneously receiving increased responsibilities, ultimately changing the definition of state and local government agency operations and challenging the traditional relationships between federal, state and local governments.

For more information contact Heidi Stayn at G2 Research Inc. at 415/964-2400.