LB611 – Require state agencies to provide a federal funding inventory

LB611 – Require state agencies to provide a federal funding inventory

Good afternoon, Chairman Stinner and members of the Appropriations Committee.  My name is Sarah Curry, and I am the Policy Director for the Platte Institute for Economic Research.  I am here today to testify in support of this bill.

As you are all well aware, Nebraska in in the midst of a budget shortfall, and I believe this bill requiring an inventory of federal funds will help prepare Nebraska for what might be a much bigger fiscal problem in the future.

The federal government has an unsustainable spending problem and a large portion of that spending is going to the states in the form of federal grants.  Just a few years ago, we saw what the sequester and government shutdown meant to states.  But the scary part is that government officials didn’t know the details of the federal funding, so it was very difficult to prepare.  States cannot clearly see where federal money is going in their state.  Nebraska is no exception.

For the fiscal year ending June 30, 2016, Nebraska budgeted $3.7 billion in federal grants, which is a 17 percent increase in inflation-adjusted dollars over the last 10 years.  In addition to 30 percent of the state’s overall budget consisting of federal grants, the federal government also ties Nebraska’s purse strings with unfunded mandates across multiple agencies and departments.

Nebraska, along with other states, has become increasingly dependent on federal funds, and if these funds were to be drastically reduced or stopped, the state would be unprepared to provide the essential government services these funds provide for Nebraskans.

A recent example of this is the $3.5 million to developmental disability providers the state covered due to a shortfall in federal funding.  Relatively speaking, this is a small amount – but it is a clear example that federal funding will get cut with last minute’s notice and the state needs to be prepared.

Another example a few years ago was the misuse of federal funds by the Department of Health and Human Services.  A state audit found $15 million of federal funds were not used as intended and delays in food stamp applications almost caused the state to lose $17 million in federal grants for the program.  In response to one of these situations, Governor Ricketts weighed in saying, “Accountability begins with transparency.”  A member of this committee commented saying more legislative oversight may be needed to ensure the state does not lose federal money.

Nebraska is in a better situation than most states because federal funds are appropriated through the budget process, but there is still a lack of information and transparency when it comes to the details of those grants.  Nebraska needs to measure the federal funds coming into the state in order to have a clear picture of what effect they are having on state government.

According to the last Annual Budgetary Summary, there are 34 agencies or programs in Nebraska that are funded with federal money.  Six of these agencies have over 50 percent of their budget coming from the federal government.

  • Commission for the Blind and Visually Impaired – 80% federal funds
  • Commission on Criminal Justice – 52% federal funds
  • Energy Agency – 77% federal funds
  • Department of Health and Human Services – 55% federal funds
  • Department of Labor – 92% federal funds
  • Department of Military – 81% federal funds

This bill creates an inventory of all these funds – essentially an audit that includes how long the grant lasts, if there are any state matching requirements, or if there are any maintenance of effort requirements attached.  Then, the inventory will ask state agencies receiving federal funds to create a contingency plan in the case of a hypothetical 10 and 25 percent reduction.

Other states have implemented similar inventories and some have already seen savings from the information provided through the inventory.

Utah was the first state to enact legislation to address the growing problem of federal funds.  HB 138, Federal Receipts Reporting Requirements was passed in 2011 after a group of Utah lawmakers and the Utah Association of Accountants worked together to create this plan.  In 2013, Utah passed SB 70, the Federal Funds Commission, to start the review process of these federal funds and take a closer look at the impact federal funds are having in their state.

Idaho’s Governor Butch Otter enacted an Executive Order (EO 2014-03) that established annual reporting requirements for state agencies receiving federal funds in 2014.  The following year, the executive order was codified into statue through SB 1152.

Most recently in 2015, Mississippi passed HB 831 that requires state agencies to not only report their federal funds, but also calculate the effort required to maintain those grants.

Indiana took a different approach, and in 2013, former Governor Mike Pence signed an executive order (EO 2013-20) into effect that created the Office of State Based Initiatives.  This office employs someone to inventory and perform a cost-benefit analysis of the grants as they are requested from state agencies.

Because Indiana has started their inventory and cost-benefit analysis concurrently, there have been more examples of cost savings the state has realized than in some of the others.

One of which is when Indiana was offered a pre-school development grant of $20 million over 4 years.  OSBI found that this would have led to a long-term liability to the state because the state would have had to pay for teachers, other staff employment, and buildings.  So Indiana denied the $80 million grant, but decided to pursue the initiative anyway through a pilot program not using any federal money.  They used $10 million from the state and received $40 million in private donations to execute the program.

Another example is a situation where Indiana wanted to purchase some land for conservation.  They looked at using federal grants to offset the purchase price, but further analysis found that it would have required the state to front $450,000 in matching funds as well as future commitments to the land which the state would be responsible for.

There are some examples from Idaho, but I have invited Wayne Hoffman from the Idaho Freedom Foundation to talk to you about Idaho’s journey through this inventory process and what Idaho experienced from this legislation.

I have also invited Jonathan Williams from the American Legislative Exchange Council to speak to you today.  ALEC has studied the checks-and-balances and the general processes used in all 50 states when seeking and administering federal funds.  Their studies survey processes in each state that need to be improved.  I’d like to close by reminding the committee that Nebraska MUST be prepared for the next financial crisis – whether it’s because of a sequester, shutdown, or simply unsustainable funding levels.

You can do this by seeing the federal funds.  We know where our state taxes go, but nobody knows where all the federal dollars go that come into our state, their true costs, or all the strings that are attached to them.  Those federal dollars are not “free;” they come with current and future commitments.  This bill will require an agency-by-agency inventory of all federal funds coming into Nebraska and the strings attached to them.

Measuring the impact of the federal funds and the impact of a coming spending crisis is possible only with the information this inventory will give us.  Today, we simply do not know the impacts of future federal funding cuts.  We do know that Washington will not cut funds with our state’s prosperity in mind; across-the-board cuts will hurt everyone.  This legislation will provide a risk assessment so that state and local officials can see those impacts and make smart decisions in the event of federal spending cuts.

And finally, this legislation makes it possible for all of you to act in the best interest of your constituents.  Imagine this year, amidst our current budget shortfall, that the next recession hits and the federal government enacts another sequestration.  Many Nebraskans would be left without services and jobs they have come to depend on.  What can Nebraska do and how can we ensure our citizens are safe and spending is prioritized for those who really need it?  This bill will enable each of you to create a plan and act on the information you have to make the best decision for all Nebraskans.

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