The Office of Management and Budget last week rejected Gov. Mark Sanford's request to pay down South Carolina's debt using $700 million of stimulus funds. But can't Sanford just ignore the OMB? What's really stopping governors from spending stimulus money however they see fit?
Politics and the law. The vast majority of the $800 billion doled out in the American Reinvestment and Recovery Act has strings attached. Some of it must be spent on one-time expenses like extending unemployment insurance, and some must be siphoned into pre-existing government programs like Medicaid or food stamps or highway projects. Each of these programs is supervised by a federal agency. For example, the Department of Transportation manages spending for light-rail projects, and the OMB makes sure that money is being spent as intended. If a governor were to take money earmarked for, say, school lunches and use it to pay down the state debt, the USDA, which oversees the National School Lunch Program, would send the governor a warning or, if necessary, take legal action.
More likely, interest groups would shout loud enough to keep the governor in check. For just about every government program, there's an outside group that monitors spending and performance. For example, the National Education Association would complain if secondary education were getting short shrift, while the American Society of Highway Engineers would protest if the governor chopped promised freeway projects. In other words, it would be hard for a governor to redirect money without interested observers making lots of noise—and campaigning against him in the next election.
Governors may still be able to use accounting tricks to redirect funds. Say a state usually spends $100 million on highway construction. The governor could always use the stimulus money to cover that cost and then send the state revenue intended for highways elsewhere. The effect is the same as siphoning off government funds. To prevent this, most provisions in the stimulus bill have a "maintenance of effort" requirement that says states have to keep up their usual spending to qualify for additional federal funds. In other cases, stimulus money has matching requirements. For example, to receive money to create electronic health records, a state needs to contribute "an amount equal to not less than $1 for each $5 of Federal funds provided under the grant." (Read the whole bill here.)
There's some wiggle room with "fiscal stabilization" funds, set aside to help states make up for budget shortfalls. (Forty-nine states are constitutionally required to balance their budgets.) Because every state's budget is different, the money isn't specifically earmarked. Yet the OMB still needs to approve how the funds are spent. The agency plans to keep tabs, too: Cash from the stimulus bill will be tracked separately from other government funds.
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Explainer thanks Chris Edwards of the Cato Institute, Michael Ettlinger of the Center for American Progress, and Robert Lynch of Washington College.