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Washington Examiner


Cut the Strings on the Stimulus

January 06, 2010

By Josh Barro

As a chorus grows in Washington for a second stimulus package, an appealing alternative is coming out of Sacramento, Calif.: Don’t give us more money, just stop telling us what to do.

This month, Gov. Arnold Schwarzenegger, R-Calif., is expected to ask Congress and the Obama administration to cut many of the strings it attached to state aid funds in last year’s stimulus bill. Bloomberg reports that he will propose $8 billion in cuts to federal-state programs to help close the state’s $21 billion budget gap -- but first, he needs Washington’s permission.

Schwarzenegger’s beef is that, to accept stimulus dollars, states had to agree to “maintenance of effort” (“MoE”) guidelines. This means they cannot cut spending or eligibility below specified minimums in the funded areas.

MoE requirements impose sharp restrictions on state budget cuts, especially in education and Medicaid. For example, the stimulus bill required that states maintain education funding on a par with 2006 levels. California’s revenue situation has been so dire in recent years that this sets a higher bar than the state’s usually stringent education funding formula.

These requirements are particularly burdensome for high-spending states like California, which are locked into their generous pre-stimulus programs. Nevada’s Medicaid program qualifies for stimulus dollars; but if California restructured Medi-Cal to look more like Nevada’s less generous version, it wouldn’t qualify.

States are particularly strictured when it comes to health care spending. The principal rule in the stimulus bill is that states cannot tighten Medicaid eligibility requirements. Theoretically, they can take other measures to save money, like cutting reimbursement rates or eliminating optional coverages (California covers acupuncture, chiropractic and even the non-religious aspects of faith healing).

However, these moves can trip other federal funding triggers, as California discovered last year when it tried to cut home health care workers’ pay. Egged on by the Service Employees International Union, the Obama administration forced California to reverse the cut or risk losing stimulus funds.

Together, the bundle of federal requirements sharply limits states’ options on health care spending. A review by the Evergreen Freedom Foundation found that, of the $3.4 billion that Washington state spends annually on low-income health care and disability programs, just $400 million is eligible for cuts without running afoul of federal MoE rules.

Congress will say that it’s giving states the money and should have the prerogative to dictate how it’s spent. But Congress is not a parent doling out a clothing allowance.

In tying state budgets up so tightly, MoE rules undermine the purpose of federal aid to states -- making it easier to resolve their budget gaps. Aid to states should look as much like a unrestricted grant as possible, with state governments making decisions about what their local economies need.

Washington should heed Schwarzenegger’s request and go one better, unleashing all 50 states from the strictures of the stimulus. This will help states balance their budgets without growing the federal deficit, which is already projected at $9 trillion through 2019.

Education Secretary Arne Duncan is empowered to waive certain MoE requirements unilaterally. President Obama should direct him to do so.

Other changes to MoE rules would require congressional action. The administration should push Congress for relaxation, especially as part of any further stimulus bill.

Opportunities to help states close their fiscal gaps without costing taxpayers a dime do not come along every day. The Administration should seize on this one, because it’s hard to argue with “free.”

Original Source:



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