It’s Time for States to Break Their Dangerous Dependence on Federal Funds

A recent memo from President Trump’s Office of Budget and Management directing federal agencies to suspend grant payments launched fire drills among state and local governments, as well as nonprofits, as they scrambled to assess the potential budget impact. While the administration has since rescinded the memo, its officials still maintain that grants supporting policies it opposes remain restricted. The confusion surrounding this directive laid bare the extent to which state and local program budgets are deeply entangled with federal funds. And herein lies the problem.

In 1993, the average state counted on federal agencies for 23 percent of its revenue. Last year this average reached 39 percent, with two states — Alaska and Louisiana — dependent on D.C. for half their funds. Though many state leaders present themselves as conservatives who despise federal bloat, it might be hard to blame them for taking all that free money — if not for the fact that anyone who pays more than rudimentary attention to the mechanics of federal grants knows that this money is neither free nor is it reliable.

Federal money isn’t free because it often carries conditions that drive up state costs, like maintenance-of-effort requirements that lock states into higher spending, and government payroll growth that drives up their pension burdens. But the funds increasingly create an even more destructive kind of shackle in the form of ideologically driven conditions that often have little basis in the congressional statutes that authorized them. Under the Biden administration’s “whole of government” strategy, federal agencies were directed to implement practices advancing that administration’s priorities, which included climate change, transgender rights, and race equity — the targets of OMB’s memo — that infiltrated thousands of the grants states have accepted for the past four years, affecting everything from 4-H programs to highway construction.

One example is Inflation Reduction Act grants that had the opposite effect on inflation, distributing funds for electric school buses that cost three times as much as diesel buses, and dangling incentives to require more insulation and renewable grid readiness in building codes, driving up building costs at a time of housing shortages. Or take the many millions the Department of Justice spent to promote not just DEI but a concept called restorative justice, which it, alongside the Department of Education, pushed as an alternative to traditional disciplinary methods. School systems hesitant to take the carrot received a stick in the form of a federal bulletin explaining that the Department of Justice might investigate them if their continued use of traditional disciplinary methods evidenced racial imbalances.

While rooting out these programs is rankling states, they would have been better prepared had they adopted contingency plans for interruptions in federal funds, a lesson they should have learned after the federal budget sequester of 2013, when federal revenue flows were similarly disrupted. In the course of developing our Federalism Scorecard at the Center for Practical Federalism, my team found that most states do not have an adequate plan for even a temporary loss of federal money — and many have no discernible plan whatsoever.

Just as troubling, we found that most states allow unelected state officials to apply for and accept federal grants with no legislative oversight and only minimal awareness. If you’re a conservative lawmaker and you’re wondering why your state is spending federal grant money on electric lawn mowers and unreliable disciplinary fads that undermine classroom safety, start by looking in the mirror. State legislatures that do not police their agencies’ interactions with federal agencies are effectively abandoning large swaths of their state operations to the whims of federal overseers.

While this OMB directive was rescinded for its lack of clarity, it’s clear that every federal grant is going to be scrutinized in the light not just of the Trump administration’s commitment to root out ideologically radical programs, but also our massive federal debt. These realities will affect every state, regardless of which political party controls it. Therefore, we can all agree that state dependency on federal funds, and, worse still, being blind to the extent of that dependency, borders on malpractice. The good news is that state leaders, most of whom are in session right now, can do something about that.