Centralized Confusion

For the first time in our nation’s history federal grants are the dominant source of revenue for state and local governments.

Implications: erosion of local control and increased spending at all levels of government.

Things to watch in the coming months and years: what happens to your local tax bill. In theory, aid is meant to lessen the need for localities to find revenues to balance their books. But one  possible outcome of intergovernmental aid is that it creates fiscal illusion,  inducing a permanently higher demand for spending on the part of the recipient government. When the money retreats the new spending brought with it, does not.

But while spending of this intensity and magnitude centralizes the provision of  government it does not bring with it centralized or clear reporting. An interesting but, perhaps not too surprising, corollary to fiscal dependency.

Congress really doesn’t know what happens to federal money once it flows to local government. States and localities have separate procedures for budgeting. This  flows from federalism -the very thing the presence of aid undermines. But once states and localities accept the aid it is difficult to understand why they resist efforts at a centralization of budgetary reporting.

There is fiscal illusion with aid.  And, there is also the stubborn (and illusory) insistence of  autonomy  (see: the Illusion of Home Rule) once that money becomes institutionalized in budgets.

Yesterday, the House Committee on Science and Technology held a second hearing on stimulus accountability. On the expert panel, was the CIO of a technology company that tracks procurement spending. His testimony describes this ”transparency barrier,’ on how federal funds are ultimately spent.  That barrier is very high up in the reporting chain.

The provisions of ARRA do nothing to illuminate this. Reporting requirements stop at the state/city level. There are no requirements for local reporting or tracing ultimate recipients – contractors and subcontractors.

In other words, if you want to know how stimulus dollars are being spent in your town, better to read your local newspaper, than the federal budget.