Federal-State coordination was vital during the last recession

Recessions are hard to predict and their causes are complex. Even now, as the economy continues the longest expansion in its history, economists are divided about the imminence of the next downturn.

But if the when and why of recessions are unclear, the consequences are all too familiar. Consumption will decline; employment will fall; and state governments, which rely on sales and income taxes, will face decreasing revenues, paired with a surging demand for programs such as unemployment insurance and Medicaid.

This double blow — of falling revenues and rising program costs — hit states hard during the 2001 and 2007-2009 recessions, putting extraordinary pressure on budgets. In 2002, state revenues fell by 4.2 percent from the prior year; between 2008 and 2010, they fell by 9.9 percent. 

In each case the federal government responded by providing a fiscal counterweight to offset falling state revenues. Congress allocated $20 billion to help states balance their budgets after the 2001 recession.  

This relief funding was highly flexible and simple to implement: Half came in the form of increased federal Medicaid assistance, and the other half was essentially unrestricted assistance — a flexible arrangement that allowed states to deploy funds quickly, albeit with few requirements to track and publicly report on the spending.

In 2009, the federal government once again stepped in to support states — though its approach could not have been more different. Faced with a much steeper downturn in state revenues than in 2001-2002, Congress provided — and the administration oversaw — a significantly larger stimulus package: the $787 billion American Recovery and Reinvestment Act (ARRA). 

The measure provided more than $275 billion in federal funds to states and localities, in three tranches: an increased federal Medicaid share, an education and workforce fund and a series of line-item appropriations for specific projects and programs. 

“It was the right remedy at the right time,” said Gov. Jim Douglas (R-Vt.), who served from 2003 to 2011, at a recent event hosted by The Pew Charitable Trusts. But he also expressed concerns about the restrictions the federal government placed on some of the ARRA funds. 

“I believe we should persuade the federal government to be flexible. States are different,” he noted, pointing out that while his state’s unemployment rate was very low during the Great Recession, the rate in some states — such as Oregon — was above the national average. “Let governors make their own decisions.”

Speaking at the Pew event, Gov. Ted Kulongoski (D-Ore.), who served during the same time period as Gov. Douglas, said he was leery of ARRA’s one-time increase in funding for special education — because accepting the grant would lead to the state having to fund the budget increase itself in subsequent years. “Every governor knows from experience,” he said, “that what the feds giveth, they can also take away.” 

Gov. Douglas agreed that single grants could be problematic for future state budgets. But overall, he said, he was pleased with ARRA’s effect on the states: “There was such a sudden collapse of our revenue structure that an infusion was necessary — and welcomed.”

The administrative challenge of deploying and tracking federal funds across a wide range of state programs in a short time frame required state and federal policymakers to communicate extensively, to implement systems for sharing key information, and to develop a robust understanding of systems and processes across levels of government. 

Implementing ARRA was “the best coordinated activity I’d seen in my 28 years in this position,” said Ray Scheppach, who was the director of the National Governors Association from 1983 to 2011. Each state appointed a “stimulus czar” who, along with the state budget officer, had weekly calls with federal liaisons. And then-Vice President Joe Biden personally spoke with governors throughout the process.

Ultimately, the state and federal coordination effort was highly successful. Approximately three quarters of funding was deployed within just 18 months; a GAO report found no recommendations for improvement. 

But much of the knowledge and institutional relationships that were built during the recession have been lost in the ensuing decade. The online database for tracking ARRA funds, Recovery.gov, has been shuttered, and a new generation of lawmakers and officials, many with no firsthand experience of either a recession or stimulus effort, have taken office.

It’s true that no one can predict when the next recession will occur. But given the nation’s experiences during the past two recessions, federal and state policymakers should consider developing now the intergovernmental knowledge and relationships they’ll need to quickly deploy critical funding across levels of government during the next economic downturn.

Anne Stauffer is director of The Pew Charitable Trusts’ work on fiscal federalism, broadband research and student loan research.