The federal government is a major source of funding for numerous programs implemented at the state level: infrastructure, education, health care, social programs, and so on. Congress often uses these funds to incentivize certain state policies. One common way the federal government does this is with maintenance of effort (MOE) provisions, which make federal funds contingent on states maintaining or improving on a status quo in regulations or spending.
Indeed, during the COVID-19 pandemic, new federal funding to support state education systems included an MOE provision. Specifically, the Coronavirus Aid, Relief, and Economic Security (CARES) Act required states to maintain spending on K-12 and postsecondary education at or above the average level of their previous three fiscal years to receive federal COVID relief funds, with a provision that the Secretary of Education could waive that requirement for states experiencing a “precipitous decline” in financial resources. The American Rescue Plan Act contained a similar provision. Recently, eight states and Puerto Rico formally requested an exemption from the MOE provisions for education funding they received through federal COVID-19 relief.
The purpose of some MOE provisions is to ensure that state governments do not replace their own programmatic spending with federal funds, as doing so would not actually be increasing the total funds available for a program as intended. In 2020, the Bipartisan Policy Center proposed a flexible federal block grant to states, with up to $5 billion in annual federal spending to be devoted to state-level college affordability policies and programs. The proposed approach included an MOE provision: in order to incentivize states to maintain previous spending on higher education while also increasing their spending on affordability, states would need to maintain previous spending as well as partially match new federal funding.
MOE provisions can be constructed in multiple ways. For instance, MOEs in higher education can be based on either aggregate dollars or per-student spending. They may be based on the previous year’s spending or the average of the previous two or three years of spending.
Another area of complexity lies in crafting federal-state partnerships that are intended to sustain funding through economic downturns. During a recession, state revenues typically decrease along with economic activity and wages. Unlike the federal government, many states also have balanced budget requirements, meaning they cannot spend more than they collect in revenues each year. MOE provisions that fail to recognize these acute budget pressures could mean the loss of federal support just when states need it most. As such, MOE provisions should be flexible during economic downturns—one example is the “precipitous decline” exemption in the COVID-relief legislation noted above. But a more proactive way for federal-state financing partnerships to plan for recessions is through the creation of rainy-day funds that assist states in maintaining funding at previous levels despite spending cuts. BPC has proposed the creation of such funds to help states weather recessions without any loss in total funding for higher education programs.
Crafting MOE provisions in ways that ensure states do not cut programmatic funding when the intention of federal block grants is to increase spending in those areas is crucial but difficult. These provisions need to be flexible enough to be practical but rigid enough to ensure compliance. Additional federal funding to improve college affordability has the potential to bring down prices for students and families—which could boost college enrollment and completion as well—but the impact of those funds would be blunted if state funding were to shrink at the same time. Maintaining state spending is critical to make college more affordable.
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