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Opinion: Aid to states should include safeguards, transparency

Jonathan Bydlak, Adam Schuster and Sheila Weinberg

A hefty number of column inches have been dedicated in the last few weeks to covering what private businesses received Paycheck Protection Program aid.

But who’s watching how state governments spend federal aid?

If the American public can get information on how much money the feds gave to McDonald’s franchises, any future federal relief package to state governments must ensure the same level of transparency, as well as enforce the same level of fiscal responsibility as aid distributed to private businesses.

"Although fiscal conservatives might be an endangered species in Washington, this rapid expansion of government outlays should give us all pause," the columnists write.

Amid the coronavirus pandemic, nearly everything has become controversial — everything, that is, except for the bipartisan agreement that the federal government needs to spend enormous sums of money. So far, Congress has appropriated nearly $3 trillion to mitigate the economic effects of the pandemic.

Most of this eye-popping total has consisted of aid to individuals and businesses, but in recent weeks, House Democrats have upped the ante with a new call for $915 billion or more for state and local budgets that are, to varying degrees, facing strain of their own.

So far, Congress has given $150 billion in relief to states, but this figure hardly illustrates the full picture. The CARES Act dramatically increased support for various local governments and continuing state-administered programs such as unemployment insurance, nutrition assistance and hospital reimbursements.

This is troubling in part because it’s unclear whether many states even need further aid to begin with. A recent report found that when existing aid and Federal Reserve lending is “combined with state rainy day fund balances, state governments have more than $450 billion in liquidity available to address budgetary needs.” That total is $15 billion more than the $435 billion in state budget shortfalls that even the Center on Budget and Policy Priorities estimates through fiscal year 2021.

Although fiscal conservatives might be an endangered species in Washington, this rapid expansion of government outlays should give us all pause, regardless of whether one believes it was necessary. As Congress returns from recess and debates handing out even more aid to the states, they ought to consider what they haven’t taken time to do so far — take some basic steps to ensure that they are not creating boondoggles that they will have to answer for years later.

Congress has a responsibility to ensure limited resources go where they are needed. With the federal deficit projected to be $3.7 trillion in 2020, Congress has no excuse to allow states to use federal funds to paper over legacy costs of programs unrelated to the pandemic.

Congress must ensure funds to states are well spent. It can and should require states to publish online how they spend funds within a reasonable period of time. This common-sense requirement would reassure both citizens and federal officials that recipients disbursed the provided aid effectively and efficiently.

The realities on the ground have changed rapidly in many states since the start of the pandemic, and the fairest method for apportioning any direct aid is doing so on a per capita basis, similar to the CARES Act. Formulas based on context-specific metrics, such as public health data, could be outdated before the ink is dry on them. What’s more, they risk creating perverse incentives. Congress should also limit the amount of aid to actual revenue losses, rather than relying on uncertain projections. Any further federal aid provided to states and localities must not exceed the expenses incurred directly as a result of the pandemic.

Finally, Congress should take steps to ensure funds are not squandered by mismanaged states or used to cover legacy debt unrelated to COVID-19. 

Lawmakers should strongly consider structuring the program to create incentives for states and localities receiving further federal aid to have: (a) sound pension funds that are on a path to fully eliminating unfunded liabilities; (b) truly balanced budgets that don’t achieve balance through borrowing or transfers from other state funds; (c) comprehensive general fund accounting that includes earned revenues and accrued expenses; and (d) rainy-day funds that have safeguards in place to prevent use of the funds for non-emergency purposes.

Following these basic principles will not balance our budget or close historically high deficits overnight. But it will help avoid potential fraud and abuse while ensuring that Congress is getting taxpayers the best bang for their buck. This will minimize the pressure to dole out more aid in the future, probably the biggest win we can ask for at a time when national resources could not be more precious. 

Many Americans are increasingly divided, but we should all be able to stand behind these common-sense goals.

Jonathan Bydlak is director of the R Street Institute’s Fiscal and Budget Policy Project, and the creator of SpendingTracker.org. Adam Schuster is director of budget and tax research at the Illinois Policy Institute. Sheila Weinberg, CPA, is the founder and CEO of Truth in Accounting. They wrote this for InsideSources.com.