Federal Aid to States: A Threat to State Sovereignty

Maureen Bader

During the Wyoming Liberty Group’s October 4 meeting, our Senior Fellow and economist Sven Larson told listeners about Federal Aid to States (FAS). Under this program, the federal government sends large amounts of money to each state. In 2009 FAS handouts topped half-a-trillion dollars for the first time ever. And every dollar comes with strings attached.

States lose control because this ‘free’ money is not free. Congress attaches strings that dictate how, for example, states can run their Medicaid programs and how they can and cannot test kids in public schools. Instead of saving states money, FAS actually causes state budgets to increase due in part to matching requirements.

In 2009, Wyoming received a total of $1.2 billion designated for a host of FAS spending programs. Of that, $384 million went to Medicaid, $137 million went to schools and another $147 million went to other welfare programs. This is just one part of the problem.

Dr. Larson also told listeners that in addition to dictating the design and operation of Medicaid, welfare, infrastructure and public schools, the federal government also insists that Wyoming contribute matching funds to these programs, known as Maintenance of Effort (MoE). The three largest MoE outlays here are: Medicaid at $227 million, Temporary Assistance to Needy Families at $9.7 million, and Transportation at $2.4 million. The state must comply with the regulations the federal government puts in place for the programs that the MoE fund go to. MoE is yet another example of how Washington lords over Wyoming’s spending decisions.

Compared to other states Wyoming is relatively lucky. Wyoming’s effective dependency on the U.S. government – federal funds plus MoE payments from our state budget – is marginally less than 30 percent. In 25 states the effective dependency rate is higher than 40 percent, meaning that more than four dimes of every dollar the state spends are either federal funds or the MoE money to get those federal funds. States are becoming mere agencies of the federal government.

Economic analysis shows Wyoming does not have to continue down this road – we can turn this around. Legislators can assert Wyoming sovereignty and ask themselves:

Do they want to lose control of their own state budgets?
Suppose the federal government decides to reduce its budget deficit with significant cuts to FAS programs. Is the state of Wyoming prepared to handle such cuts?

Wyoming Liberty Group has solutions we are taking to legislators:
The state government must put eliminate unnecessary programs because bureaucratic overgrowth is smothering the Wyoming economy. For example, does Wyoming need to take federal money to fund a Coast Guard?
We are devising ways, to transition people to proven marketplace alternatives. For example, responsible legislators are asking us about alternatives to Medicaid such as health insurance compacts.