The New Federalism

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With President Bush placing a heavy emphasis on volunteerism in the aftermath of the September 11 terrorist attacks, one would think this would mean good times for nonprofits. Yet nothing could be further from the truth. There has been a profound shift in the way Washington is working that will have a direct effect on the nonprofit community—and little is being done about it.

This shift was best articulated by House Majority Leader Dick Armey in a post-tax cut message on July 5, 2001.1 “Did we Republicans come to Washington merely to slow the growth of leviathan government?” Armey asked. “Or did we come to shrink and re-limit it? I say we came here to shrink and re-limit it… Restraining government [through the tax cut] was step one. Step two is roll-back.” (emphasis in original)

This agenda is being implemented with precision by the Bush administration, which has pursued it on three fronts:

  • The disinvestment in public needs resulting in large measure from a tax cut agenda that primarily benefits the wealthy;
  • The dismantling of regulatory protections that have taken years to develop, including the proposed removal of accountability protections for faith-based organizations that receive government dollars; and
  • The devolution of federal responsibilities, including enforcement of laws and regulations.

These three D’s—disinvestment, dismantling, and devolution—spell trouble for the nonprofit community.

The budget—who gets what resources—is where the pedal hits the metal for the nonprofit community. Nearly one-third of nonprofit revenues come from government grants and contracts, and this does not count the impact of subgrants and subcontracts. Despite this heavy reliance on government resources, the Bush administration is proposing a vast retrenchment on funding.

Three numbers may best illustrate the historical decline of government spending. In the last year of the Reagan administration, government spending was roughly 21.2 percent of the Gross Domestic Product (GDP). In Clinton’s last year, spending had dropped to 18.2 percent of GDP. By 2006, President Bush proposes to shrink federal spending to 16.6 percent of GDP—the lowest percentage of government spending since 1956. This decline would occur despite rapid spending growth in military and homeland security—which points to a massive shrinking of domestic spending, with potentially dire consequences for nonprofits.

The process has already started. President Bush has proposed a budget that would take a huge whack out of domestic discretionary spending. According to the Senate Budget Committee, Bush’s proposal would cut by 6.2 percent the budget needed in order for domestic programs (other than homeland security) to maintain the current level of services. Over the next decade discretionary spending would go up $428 billion or 25 percent. But that masks a non-defense spending drop of $167 billion—without adjusting for inflation—while defense spending would go up $595 billion.

Moreover, there are hidden costs of last summer’s $1.3 trillion tax cut that undoubtedly will heighten pressure to cut domestic spending even further. For instance, Congress still has to set aside $300 billion to revise the Alternative Minimum Tax for individuals, which most agree is necessary, and come up with money to extend popular tax breaks, such as deductions for college tuition, that are set to expire. This does not count the additional tax breaks just proposed by the president in his recent budget submission to Congress.

Meanwhile, state budget crunches also mean reduced spending on domestic programs. In the end, this issue is not simply about less money for nonprofit organizations, it is about less money for critical services in our communities.
This federal disinvestment in social issues and programs is startling. A year ago many had hopes that the healthy economy and the build-up of budget surpluses meant that the federal government could begin investing in needed services. People such as former Secretary of Labor Robert Reich were calling for “big think,” and national organizations banded together under the Invest in America mantle to demand that resources be targeted to unmet needs and to new long-term initiatives.
Even today, there is strong support for delaying or canceling the tax cuts in order to pay for domestic priorities. A Zogby poll conducted February 2, 2002, found that 63 percent favor rolling back the tax cuts if it means more money would be available for environmental protection. This figure grows to 69 percent for increased education funding and 71 percent for a prescription drug program for seniors. These results echo polls taken by the Los Angeles Times, CNN/USA Today/Gallup, and an Ipsos-Reid poll done for the Committee for Education Funding. Despite the will of the public, the Bush administration and Congress continue to pursue a course of disinvestment, which will hurt the nonprofit sector and issues we care about.

While money is key to nonprofits for delivery of services, government regulation is key to protections for which we advocate—from civil rights and worker health and safety to consumer needs and the environment. Without regulations, laws become unenforceable and meaningless.

Unfortunately, the Bush administration is leading a campaign to dismantle regulatory protections that have taken decades to put in place. Perhaps most familiar to nonprofit organizations is the administration’s effort to allow direct federal funding of faith-based organizations—that unlike Catholic Charities, for instance, are not distinct entities from their houses of worship. This approach, known as “charitable choice,” would effectively exempt such organizations from account-ability protections (for instance, protections against discrimination) applied to other nonprofit grantees.

After a significant legislative fight and much controversy, the administration appears to have reached a compromise with Senate leaders that sidesteps this problem. Yet the president’s original plan may not be dead; the Bush administration could bypass Congress and use the administrative apparatus to implement many of its ideas through revised regulation. Indeed, an August report from the White House lays the groundwork for precisely this approach. “It is not Congress, but these overly restrictive Agency rules that are repressive, restrictive…” the report states. “[They] unnecessarily and improperly limit the participation of faith-based organizations.” It would not be surprising to see the administration get what it can out of Congress, and then, once a law is signed, proceed to implement the rest of its agenda through executive powers.

This power to use administrative mechanisms to carry out the president’s dismantling agenda extends further to a broad array of issues that are central to nonprofits. Upon taking office last January, President Bush halted all regulatory actions in progress—effectively blocking last-minute actions by the outgoing administration—and began to roll back a slew of regulations implemented at the end of the Clinton administration. This included protections for ergonomics hazards in the workplace, standards for hard rock mining, and a ban on building new roads through national parks, to name a few.
In pursuing this aggressive de-regulatory agenda, the Bush administration was stung early on when it attempted to undo Clinton regulations dealing with arsenic in drinking water and salmonella testing in school lunches. In each case, public opinion ran strongly against such action, and the administration was forced to retain the Clinton-era standards. Around the same time, Bush repudiated the Kyoto accords on global warming, touching off international protests from U.S. allies. Public polls at the time showed Bush’s popularity tailing off because of this broad attack on environmental protections.

In response, the administration attempted to be more discreet without compromising its original de-regulatory agenda. David Broder commented on this in the Washington Post on January 2, 2002, shortly after the repeal of a Clinton “contractor responsibility” standard. “It was a classic stealth maneuver—and it worked,” Broder wrote. “Two days after Christmas, with President Bush at his Texas ranch and most of official Washington on vacation, the White House announced the rejection of regulations that would have barred companies that repeatedly violate environmental and workplace [and civil rights] standards from receiving government contracts.”

The Bush administration has also pursued its de-regulatory agenda through inaction. As alluded to above, the administration worked closely with Congress to veto the Clinton workplace ergonomics standards, which the National Academy of Sciences advised were needed to address the serious and widespread problem of repetitive motion injuries. The Bush administration’s pitch to Congress at the time was that the rules were poorly written and that the Bush Occupational Safety and Health Administration would make them “more reasonable.” With this understanding, Congress stopped the Clinton rules in a contentious 56 to 44 vote. However, as Broder commented, “A phone call to the Labor Department last week elicited the information that no new regulations have been issued, and no one could say when they will be. That is the game: Kill the rules you don’t like quickly and quietly, then take your sweet time writing new ones. Don’t worry about how many strained backs or stiff wrists people suffer in the meantime.”

Besides action on specific rules, there are other tools at Bush’s disposal to limit health, safety, civil rights, and environmental protections. For instance, Bush is relaxing enforcement efforts in favor of “voluntary compliance”—a key feature of his recently announced plan on global warming. As part of this effort, Bush has proposed that EPA’s enforcement budget be slashed dramatically and more responsibility be devolved to states (see next section). The Bush administration is also busy trying to affect the process by which regulations are made. Specifically, agencies are being pushed to elevate cost considerations in their rulemaking deliberations to in effect rig the game in favor of inaction. If agencies do not follow these instructions, OMB’s Office of Information and Regulatory Affairs (OIRA)—headed by John Graham, a longtime opponent of new regulation—will be waiting. All major regulations must receive approval from OIRA before they can take effect; already 18 have been rejected in the last six months, all because OIRA found them too costly and none because they were insufficiently protective.

The dismantling of the regulatory infrastructure will have a huge impact on nonprofits. First, nonprofits have been major advocates in the creation of existing regulatory protections; we serve as voices to safeguard those who often do not have political clout, such as low-income families, those with disabilities, or our children. Yet through backdoor approaches, many of these protections can be gutted, undoing years of work. Second, there is interconnectedness between regulatory protections and program services. When a pollution regulation is softened, for example, it has implications for health care delivery to children and other vulnerable populations in the community. Thus, it is not uncommon for regulatory changes to have a direct impact on nonprofits that are providing community-based services.

Devolution

Beginning with the Contract with America in 1994, congressional conservatives have aggressively moved to “devolve” more and more federal responsibility in the name of “states’ rights.” While giving states more responsibility in certain areas may not always be a bad thing, this push has been deeply ideological, with devolution seen as an end in itself. In some cases, the Clinton administration resisted this new states’ rights movement, and in others, it relented, as in the case of welfare reform.
The devolution crusaders see a more steady ally in Bush, which could be an ominous sign for various nonprofit concerns. In particular, it will be important to watch the actions of the Bush administration in at least the following three areas.
Judicial appointments. Since the mid-1990s, the Supreme Court (through a series of 5-4 votes) has been flirting with a radical notion of federalism that seems to have us headed back to the Articles of Confederation—leaving the federal government fewer and fewer powers to protect civil rights. For instance, last year the Court ruled in separate cases that state government employees were constitutionally prohibited from suing in federal court under the Age Discrimination in Employment Act and the Americans with Disabilities Act. Also last year, the Court struck down a key provision in the Violence Against Women Act—which creates a civil rights remedy for victims of sexual violence—again citing states’ rights principles.
This makes future judicial appointments—and not just those to the Supreme Court—extremely important. Ominously, President Bush has said he would model his judicial choices after Clarence Thomas and Antonin Scalia, the two most aggressive proponents of the states’ rights agenda on the Supreme Court.

Federalism initiatives. The Bush administration has started to draft a tough new executive order on federalism, which reportedly instructs federal agencies to “refrain, to the maximum extent, from establishing uniform, national standards for programs and when possible defer to the states to establish standards”2—a philosophy the September 2, 2001, Washington Post reports will be overseen by a new executive branch entity, suggesting the administration’s commitment to enforce such principles.

Of course, it will almost always be “possible” to defer to states, and in some cases, where states set stronger standards than the federal government, it will be preferable. However, the first responsibility of the federal government should not be to protect the discretion of states, as the above quote implies, but rather to serve the broad interests of the American people. In the case of worker health and safety, environmental and consumer protections, or civil rights, this frequently means setting strong national standards using common methods of measurement across states.

It should also be pointed out that national standards can help protect the interests of states. Some states may want stronger health and safety standards, but fear losing business to other states with more relaxed standards. National leadership can help prevent a race to the bottom. Moreover, one state may be adversely affected by pollution from a neighboring state, yet powerless to change the situation. This again necessitates federal intervention.

Budgetary allocations. The devolution movement appears especially dangerous when looked at in combination with the disinvestment initiatives discussed above. At the same time the federal government devolves more responsibility to the states, it is pulling back funding that states depend on. This is where the devolution push gets conflated with the conservative agenda to limit government—and the result is the gutting of domestic services and programs.

Devolution can also get conflated with the dismantling part of the administration’s agenda. Devolution advocates have been strong proponents of block grants to states and greater local flexibility in running federal programs—efforts that come with very few strings attached and minimal oversight. Bush has expressed sympathy for these types of efforts, often saying the federal government should just “get out of the way.” Yet the federal government has a responsibility to taxpayers to make sure that money is spent in the intended way. And again, Bush’s rhetoric assumes there is no legitimate need to set national priorities.

Budgetary decisions to devolve responsibility to states also frequently impact the quality of federal regulatory protections. For instance, the administration’s budget last year proposed cutting EPA’s enforcement staff by eight percent, or 270 positions, while providing $25 million in new grants to states for enforcement activities.3 This move came despite recent evidence that many states do not adequately enforce environmental protections. According to an August 22 report from the EPA’s inspector general, states are doing a poor job of monitoring and punishing water polluters, and nearly 40 percent of the nation’s waters are not meeting standards set for them. Moreover, at least six states failed to report numerous serious violations of the Clean Air Act, according to a 1998 audit by the EPA inspector general.

Nonprofit organizations may not have thought about the changing role of the federal government or its implications for the work they do. After reading this article, some may feel depressed, that all is lost, or that it’s time to quit and get a job doing something else. We don’t feel that way. In fact, we look at the general trend to reduce federal responsibilities and shift them to states, localities, and nonprofits (without new budgetary allocations) as a challenge worthy of the nonprofit community.
There are at least three ways in which nonprofits can do something. First, we need to have thoughtful discussions about the impact new federalism has on our sector. We should use conferences and other venues to begin the debate. Second, we should become engaged in these broad policy issues. The Minnesota Council of Nonprofits, for example, has involved state nonprofits in a campaign to stop state budget cuts for programs addressing community needs. Their slogan is, “We all profit from nonprofits.” And OMB Watch has ways that groups can better follow and get more involved in federal budget and regulatory issues. Finally, we should be action-oriented on specific issues, such as on reauthorization of welfare, where these new federalism trends will emerge this year. There are initiatives, such as the National Campaign for Jobs and Income Support, in which nonprofits can get more involved as federal legislation to renew welfare provisions moves forward.
Now, more than ever—in the aftermath of September 11—we need a strong government presence and stronger partnerships between nonprofits and government. When people like Representative Armey talk about rolling back government—code words for disinvestment, dismantling, and devolution—we need to respond and expose just how foolish that is.

1. (www.freedom.gov/library/retirement/relimit.asp)
2. Reported in the Bureau of National Affairs Daily Report for Executives on August 2, 2001.
3. The Senate restored funding, but the president has proposed virtually the same proposal this year.

Gary Bass is executive director and Reece Rushing is the regulatory project coordinator at OMB Watch, located in Washington, D.C.