Reagan budget cuts revive New Federalism

Ronald Reagan has cut off the elephant's tail -- but the trunk is growing at the other end. While the President is chipping away at government in Washington, state goverments are expanding their roles. Like it or not, from Oregon in the West to Maine in the East, the states are shouldering more responsibility for government services.

Overlooked in the general debate about deficits and the growth of government is a significant result of the conservative ``Reagan revolution'': the transfer of power from Washington to the states. If the President gets his proposed budget cuts for fiscal 1986 -- including block grants, transit subsidies, general revenue sharing, and medicaid -- the trend will continue into the second term.

This means that more and more of the federal government's resources are now going to strictly national responsibilities: defense, social security, medicare, and interest on the debt.

Decentralization of power, the experts say, could be one of the most long-lasting effects of the Reagan presidency. Judging by the outcry from some governors over the proposed budget cuts, it is also stirring controversy.

``People think that Reagan cut the budget and abandoned his New Federalism plan,'' says Richard P. Nathan, head of Princeton University's Urban and Regional Research Center. ``But he has actually brought about considerable change in the direction of the New Federalism.''

In recent decades, other Presidents have sought to alter the relationship between the federal and state governments. Lyndon Johnson talked of a ``creative federalism.'' Richard Nixon also spoke of a ``new federalism,'' and Jimmy Carter's national urban program similarly reflected a strong federalism concept.

``But,'' says Mr. Nathan, ``no modern President has had so clear and consistent a philosophy of federalism as Ronald Reagan.'' And, by contrast with Presidents Nixon and Ford, Reagan has sought to increase the role of the states as opposed to counties and cities.

Under the New Federalism plan of 1982, Reagan proposed that the federal government take over the funding of the fastest-growing domestic program -- medicaid -- in return for the states assuming the burden of Aid to Families With Dependent Children (AFDC). Taxes and grants also were to be restructured.

The plan was quietly dropped when it ran into opposition from Congress, the states, and the public. But Mr. Nathan cites four areas in which there has been a significant devolution of responsibilities for carrying out programs:

Reagan in 1981 drastically cut federal-aid levels in entitlement programs, such as welfare and food stamps, forcing the states either to reduce the programs or to look to themselves and local jurisdictions to keep up the funding.

He also cut back grants to states and localities for operating programs, and consolidated 80 categorical grants into nine general block grants under which federal funds went directly to states rather than to cities or nonprofit organizations. States thus gained new authority to set their own priorities and distribute the funds.

He pushed through the Job Training Partnership Act in 1982, which cut funding from previous levels and gave the states the lead role in job training, contrasted with the old CETA program, which was run by the localities.

He also gave states considerable new flexibility in the management of medicaid, enabling them to control costs.

``We're calling this the `sleeper' issue of Reagan's domestic policies,'' says Nathan, who is working on a book called ``Reagan's New Federalism.''

The trend is also noted by John Shannon, head of the Advisory Commission on Intergovernmental Relations. ``On the surface, it looks as if Reagan did not get what he wanted by way of the New Federalism,'' he says, ``but he is getting a real decentralization shift -- or a de facto New Federalism.'' The trend is being driven by growing fiscal austerity at the national level and by public support for more conservative policies, Mr. Shannon says.

Figures tell the story. In 1953, Shannon says, federal aid accounted for a little more then 10 percent of total state and local expenditures. By 1968, the figure had risen to 17.8 percent, and by 1978 to 26 percent. But after a 25-year growth in federal largess, there began a retreat. In 1981, federal aid equaled 24 percent of local and state expenditures and in 1984 only 19.5 percent. A further decline is expected this year.

In fiscal 1986 the President wants even further reductions. Instead of federal aid to the states and localities increasing by $8 billion (which would be automatic if nothing were done), Mr. Reagan proposes reducing it by $7 billion below the current level. (Total federal aid to the states now amounts to about $107 billion annually; the states provide close to $450 billion from their own resources.)

Overall, says Shannon, the states have coped well with the federal cuts and their new responsibilities. ``The states have had tremendous powers of resiliency during the past six to eight years,'' he says. ``Considering the tax revolt, double-digit inflation, and two recessions, they're coming out looking pretty good.''

The reason for this is that the states have been spending less and increasing taxes. ``They march to a different drummer -- a balanced-budget drummer -- so they're in a better position than the national government,'' Shannon says.

Another factor helping state governments is that, until now, the federal withdrawal has been slow and gradual -- ``withdrawal'' meaning a reduction in the rate of increase. Where federal aid was once the fastest-growing portion of state budgets, it became the slowest growing. In 1984 there was an actual drop.

After studying the impact of the early Reagan cuts over a period of two years, the General Accounting Office reported last week that state governments were able to absorb the 1981 cuts and realignments in federal block grants without putting a sweeping end to programs. To keep up services, the GAO says, states used one-time carryover funds from earlier grants, unexpected federal revenues from an emergency jobs appropriation, and some of their own money.

According to GAO officials, the states have provided various ways for the public to participate in the decisions as to how to use the block grants. Also, surveying 13 representative states, the GAO finds that states have generally simplified and consolidated staffs and procedures, thus reducing the bureaucracy, even though they have had to expand staffs in some areas because of involvement in new programs.

``Basically, the states had a framework and could smoothly assume the new responsibilities, and they moved to provide the public with input,'' says Paul Posner, a GAO official.

What is happening, says Mr. Posner, is that states tend to back the programs they are familiar with, such as maternal and child health care. The programs that have suffered are such things as community services and rat control, because these had not gone through states before and state goverments had no interest in them.

While the states have managed reasonably well, it is the localities that are more vulnerable to hardship because of program cuts. With state governments deciding how and where to spend the money, hard-pressed cities like Gary, Ind., and Detroit, which rely heavily on aid, can be hard hit. There are wide variations, however, and many localities have done well.

``If the economy continues strong, the Reagan cuts will be hurtful, but the localities will manage,'' says Shannon. ``But if the economy goes soft, that is something else again. The cuts can sting the central cities.

Governors across the nation have various views of the trend toward decentralization. Some say it is good, especially if gradual, because it enables the states to make their own decisions, forces them to tighten their belts, and reduces federal constraints on them.

But the President's latest proposals are arousing widespread concern. Some governors charge that the aid cutbacks penalize the states for their sound fiscal policies while the federal government runs up gargantuan budget deficits. The three-day National Conference of State Legislatures this week and a meeting of the National Governors' Association later in the week will focus on the issue.