Leave it to the states: and it won't get done.

By the time the Clinton administration put forth its balanced-budget plan in early January, it was clear that the stalemate in Washington wasn't about slashing the federal deficit. Both the Republican and Clinton plans would wipe out federal red ink in seven years. Yet, the two sides remain as far apart as ever, and with good reason. For while the Clinton plan cuts funds (and essentially maintains the status quo), the GOP package is the most radical fiscal document the nation has seen since the Roosevelt administration. The centerpiece--block grants to the states--effectively demolishes large portions of the New Deal, returning to the states power over vast sections of social policy that for decades have resided solely with legislators in Washington.

Why the shift? Republicans, playing on the popular notion that the federal government is too large, contend that states will be more responsive to people's needs. They also point to a long record of balanced state budgets--largely the result of local laws that ban deficits--and policy innovations in areas like welfare reform, to argue that states are better at governing than the debt-laden, stodgy federal government.

For evidence, Republicans point to governors like New Jersey's Christie Todd Whitman. When she arrived in office two years ago she promised to slash New Jersey's income tax by 30 percent over three years. Last year she achieved her goal--a year ahead of schedule. Whitman delivered the tax cut, worth $444 million so far, while holding state spending increases to 1.7 percent a year, down from over 8 percent during previous years. To top it off, New Jersey should post a budget surplus of over $540 million in fiscal 1996, thanks in part to streamlining which reduced the state's payroll by almost 5 percent. Now Whitman is bulldozing ahead with a welfare-reform program that will force recipients to look for work.

It may be no surprise that congressional Republicans, as they prepare to cede control over everything from welfare to transportation to environmental policy to the states, have found ready allies in politicians like Whitman. She insists that her fellow governors can do a better job than Washington. "I'm looking forward to an era when states really are laboratories of democracy," she says

It's easy for politicians to make such pronouncements. Governors like Whitman are frequently long gone before the consequences of their passions become apparent. And the easy embrace of this latest states-rights movement is no exception. While governors and state legislators will end up with a lot more power, they also will be forced to make do with much less money than the feds ever imagined possible. The fiscal crunch won't come for several years--the budget cuts proposed by the GOP are graduated and don't bite until year three--but when they do, coping will require a level of ingenuity and financial acumen that even state executives like Whitman haven't mustered.

Just what are the Republicans asking the states to do? Their 1996 budget hands responsibility to state lawmakers for dozens of major programs, the two most important and costly being welfare and Medicaid. Congressional Republicans desperately want the statehouses to do something they won't--make the tough decisions needed to balance the federal budget. While Congress is willing to give the states more responsibility, it plans to unleash them with a lot less funding. Congress plans to freeze federal funding of social programs for five years, no longer permitting such entitlements as Medicaid and welfare to increase lockstep with need. Spending would plummet 30 percent in the case of Medicaid and welfare, or nearly $270 billion between now and the year 2002.

The impact of the reforms can't be underplayed. The 1996 Republican budget, if enacted, demolishes the federal role as protector of the poor, leaving that responsibility to the states. They will have to make do with what they've got, economizing by shifting Medicaid users into managed-care programs, and setting limits on how long people can stay on welfare.

There's a huge overriding problem with the scheme. It won't work. The states are not up to the task. While state coffers are currently flush, thanks to three years of robust economic growth, most states face large deficits early in the next century, the result of rising health, education, and prison costs. Minnesota, for instance, running a surplus today, will shoulder a $2.5 billion deficit by 2005, according to a recent study done by University of Minnesota economist John Brandl. Few governors expect block grants to cover the expenses associated with programs like Medicaid; most are already pondering such difficult options as cutting spending on higher education and economic development. Worst of all, no state possesses the infrastructure to run much beyond small experiments to reform welfare. Even the most celebrated of those experiments-like Wisconsin's Republican Governor Tommy Thompson's workfare program--haven't been around long enough to determine whether they actually work or not.

Perhaps the most flawed premise of "devolution" is the notion that the states are more efficent delivery vehicles for services than the federal government. How many states can boast about their oversight of public education, long the most important program under their control? Over twenty states are under court orders to reform their child welfare systems. And state supervision of existing block grants leaves much to be desired. The Job Training Partnership Act, for instance, distributes around $1.6 billion to the states for youth and adult job training. But critics charge that half the program's funding goes for administration. Many of the training efforts are flawed--at best. In one instance, Illinois paid a car wash to train new employees--for six months.

The states aren't the paragons of innovation their supporters boast about, either. During the 1930s, governors, unable to cope with the Depression, turned to the federal government. Three decades later the feds had to enforce civil-rights codes. Even recent reform efforts seem to be less the product of original thinking than a tendency to copycat. Every governor who has overhauled a welfare system during the last two years has followed a basic recipe: strict time limits on benefits and a requirement that recipients work. Medicaid reform is no different. The state solution to rising costs has been to shift recipients into managed-care programs like health maintenance organizations. Still, even limited Medicaid reforms seem to tax the strength of some states. When Ohio won a federal waiver to begin shifting 41,000 Medicaid patients in the Dayton area into managed-care programs, the Ohio Human Services Department claimed patients received better care than ever. However, it had no way of knowing that, since the state didn't collect comparative data: doing so was too expensive. Ohio now admits the experiment, which state officials once promised would deliver big cost savings, proved "budget neutral." And the Kaiser Commission on the Future of Medicaid has found that Medicaid managed-care programs typically cut costs by only 1 to 2 percent, and this is largely because elderly and disabled Medicaid enrollees are excluded. Care for these groups, which constitute only 30 percent of Medicaid's participants, accounts for over 60 percent of spending.

The 1996 Republican budget creates block grants--essentially bags of cash--which the states can spend as they see fit in areas as diverse as transportation and welfare, leaving the details to the states. For instance, the federal government would send the states $124 billion to spend on Medicaid in the year 2002, as opposed to the $178 billion the feds had projected paying if they continued to run the program. States would be free to spend this money without the broad guidelines currently imposed by the federal government. Republicans say this approach will save Americans $182 billion between now and 2002, a savings of 30 percent. This assumes the states can slow the rate of Medicaid growth from 10.5 percent today, to 4 percent in 2002.

But there's a huge fiscal catch. Since state Medicaid payments won't be matched by the feds as they are now, if the states can't figure out how to cut their rate of growth to 4 percent, they'll be unable to get any more help from Washington. It's a tall order. States-rights advocates bet the states will be able to cut enough waste and fraud to close any potential funding gap--a questionable assumption. Says Indiana's Democratic Governor Evan Bayh: "Congress simply wants to shift the burden of the deficit to state and local government."

That could spell disaster for the states. Most states rely on the feds for over 33 percent of their revenues. The cuts contained in the 1996 Republican budget could cost the states more than $360 billion from 1996 to 2002, forcing deep spending cuts or tax increases. The Center on Budget and Policy Priorities, a Washington-based think tank, figures New Jersey will lose some $350 million in federal grants in 1996 thanks to the new budget. The losses grow exponentially until 2002, when cuts of $2.9 billion hit. Adding it all up, New Jersey would lose $11 billion in federal aid over the next seven years. Tax-cutter Whitman could easily find herself reversing course within five years. Most likely that task will fall to her successor.

Block-grant backers point to current state budget surpluses to back up their claims that the states will manage. Indeed, over the last three years state balance sheets have been extraordinarily healthy. According to the National Association of State Budget Officers, states posted a surplus of $20.2 billion last year, a contrast to the $203 billion federal deficit. But governors can largely thank the economy for their surpluses. Since the Republicans haven't repealed the economic cycle, most economists figure deficits loom once a recession slices tax receipts and increases demands for social spending. By and large, states haven't saved for these rainy days. Heavy doses of tax cutting-twenty-eight states cut taxes last year--and big spending increases for wages and education have left states vulnerable. "Most states aren't well prepared to deal with the coming problems," says Urban Institute state finance expert Steven D. Gold.

Don't expect any big savings from welfare reform either. At least that's the lesson from experiments undertaken so far. For instance, California's Greater Avenues for Independence program (GAIN) has successfully moved many welfare receipents into the workforce by providing them job training and job-search help. Those who participated in the program saw their incomes rise, while Aid to Families with Dependent Children payments fell. A study of GAIN by the Manpower Demonstration Research Corporation said that over three years the average earnings of participants jumped 22 percent above AFDC recipients who didn't enter the program. Participants also received $961 less in AFDC payments.

But GAIN didn't save California a dime. To move people off welfare California spent an average of $4,515 per participant on such things as job training. Indeed, three of the six counties studied chalked up losses when costs were set against welfare savings. The message: Unless states dump people on the streets, reform is costly.

Worse yet, many governors fret that the rush to cut the federal deficit could undercut reforms that have a chance of working. Oregon's much praised Medicaid managed-care plan is one of the potential victims. Since its inception in 1994 the Oregon plan has extended health care to an additional 120,000 people, mainly the working poor who lack medical insurance but don't typically qualify for Medicaid. The state's Medicaid director, Hersh Crawford, says it's not possible to limit cost increases to 4 percent by the year 2002, especially with Oregon's disabled population growing 10 percent annually.

The effect of Medicaid cuts on providers is clear in states that have already embraced drastic reforms. Hospitals in Tennessee have seen their payment rates drop around 70 percent thanks to the state's managed-care Medicaid plan, TennCare. Because of falling reimbursement rates, the Regional Medical Center in Memphis finished 1995 with a deficit of over $10 million, and is thinking of closing a unit that cares for critically ill babies, the only facility of its type in a Memphis-area public hospital. As frightening as these cuts are, they're the likely future under block grants.

So why would anyone, let alone a governor, support the Republican block-grant scheme? Undoubtedly some proponents believe devolution would work. Ambitious governors clearly relish the power that comes with federal funds. But the GOP attraction to state power is also in the math: thirty states are currently run by Republican governors. Block grants have also been devised to pit traditional Democratic constituencies against each other. Displaced workers, for instance, would have to fight with welfare recipients for their share of job training funds. The infighting could cripple the programs and divide the Democrats.

But the deeper danger of devolution lies elsewhere. Trapped between escalating social costs and budget-cutting demands, governors may simply throw up their hands. Worse still, angry voters who swept Republicans into power two years ago expecting change may grow even more cynical about society's ability to help its least fortunate.

What's likely, in this scenario, is what Harvard University professor Paul Peterson calls "a race to the bottom." States would start making it more and more difficult for anyone to get welfare or Medicaid benefits, with legislatures competing to come up with the harshest program. Since under the new block-grant scheme, levels of federal aid would no longer be tied to how much states themselves were spending, politicians could slash away with vastly diminished concern about any federal reaction. Block grants "could be an empty victory," sighs Indiana's Bayh. Soon enough we may find out.