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Fellow Article: Federal State Coordination of the American Recovery Act During the Great Recession

The three authors include Raymond Scheppach, previously the Executive Director of the National Governors Association during  ARRA and now Professor of Public Policy at the Batten School of Leadership and Public Policy at the University of Virginia. Stan Czerwinski was the GAO Director for state and local governments during ARRA and subsequently Chief Operating Officer for NGA. During ARRA, Ed DeSeve was a Senior Advisor to the President and is currently a Visiting Fellow at the IBM Center for the Business of Government.


The Great Recession of 2008-2009 was not your average secular economic downturn. Instead, it was a financial meltdown which caused GDP to witness four quarters of negative growth from -2.75 percent in the last quarter of 2008 to -3.92 percent in the third quarter of 2009. Similarly, unemployment exploded during this period, reaching 9.9 percent in the last quarter of 2009. On October 3, 2008, President George Bush signed the Troubled Asset Relief Program (TARP) program to purchase financial assets and stabilize the United States financial system.

This was followed by the enactment of the American Recovery and Reinvestment Act (ARRA) of 2009, which was signed into law by President Obama on February 17, 2009. The purpose of ARRA was to preserve and create jobs and promote economic recovery. The act included an estimated $787 billon of tax cuts and increased spending, of which about $300 billion went to state and local governments. That $300 billion was intended by Congress, not only to help stabilize state and local governments’ fiscal position, but more importantly to lessen potential tax increases and spending reductions that states and localities would be forced to make to meet their balanced budget requirements. Congress believed that such austerity actions would only make the downturn more severe.

The additional federal funds ARRA provided state and local governments were to be spent mostly in existing programs to avoid the time-consuming necessity of new rules and regulations that would slow spending. States and localities were to spend the additional funds as quickly as possible, while following all the existing guidelines for the programs that were authorized by the ARRA.

The current economy is now showing mixed signals, as there are several leading indicators, such as an inverted yield curve, a drop-in consumer confidence and the slowing in the growth of manufacturing orders, which all point toward a possible recession within the next year. Therefore, it is important at this time to look back over the ARRA see what we learned. There are clear lessons to be learned regarding the structure and timing of the initiative, but this article will focus on the implementation, more specifically on the federal state coordination of the $300 billion in aid to state and local governments. Most politicians and policy experts focus on the structure of the policy, but history tells us public policies most often fail because of flawed implementation. Thus, there is much to learn here from a look back at the implementation of ARRA.

The five major lessons and how they were implemented are described below.

1.The goals and tone were set by the highest elected officials early in the process. President-Elect Obama and Vice-President-Elect Biden invited the 50 state governors to a meeting at Independence Hall in Philadelphia on December 2, 2008, prior to Mr. Obama being inaugurated. Here, the President-Elect asked for recommendations from the governors regarding state programs that could use additional funds during the downturn. Such a request helped the governors develop ownership over the final bill that included many of their recommendations. The President-Elect indicated that the goal was to create 2.5 million jobs as quickly as possible. He was clear that he wanted to create a strong federal state partnership in the implementation of this initiative. He also talked about Justice Louis Brandeis’s famous quote regarding states being the “Laboratories of Democracy.” Essentially, he wanted states to experiment and be innovative in their approach to spending the funds. While he emphasized spending the funds as quickly as possible, he also stressed transparency and accountability. Finally, he indicated that some of the funds were to create a foundation for longer term growth. The involvement of the elected officials continued after the meeting, as the Vice-President and the governors had conference calls throughout the implementation period and the Vice-President hosted two Washington D.C. meetings for state staff.

2.Several informal and flexible working groups with specific missions were created. The elected official’s group, which included the Vice-President and the 50 governors, was created to resolve major issues and share information. Second, there was a worker bee group of federal and state staff who coordinated on a day-to-day basis to ensure new information was shared quickly and obstacles were designated. The third group, which audited spending, watched for potential fraud and promoted transparency, was referred to as the accountability group, and included staffs of the Government Accountability Office (GAO), Recovery Accountability and Transparency Board (RAT Board), Inspector’s General of the key agencies, and representatives from the state and local audit community.

The Elected Group - At least twice a month, the Vice President would reach out to governors and other elected officials.  The purpose of the phone calls and occasional meetings was to give the officials a chance to let the Vice President know directly if there were any problems or concerns that the officials had.  As concerns were voiced, Vice-President Biden instructed staff to resolve the matter and report to him within 24 hours.  All issues were resolved within this time frame.  Mr. Biden also used the calls to urge the officials to act in areas where spending was lagging.  For example, applications for additional wastewater funds from EPA were lagging, and the Recovery Act placed a deadline on using or losing these funds.  Last minute calls from the Vice President directly to governors helped assure that the deadline was met.

Worker Bee Group- This group was composed of the budget officers of the 50 states, some National Governors Association (NGA) and National Association of State Budget Officers (NASBO) staff, as well as staff of the Office of Management and Budget (OMB), which was the lead agency for the administration. Weekly conference calls were held by this group to share information and determine obstacles to either quickly spending the funds or ensuring full transparency. Once a problem was determined, it was quickly referred to an ad-hoc group to be solved. Much of the conversation here involved state staff getting questions answered by OMB staff regarding the timing of when funds would become available or technical questions regarding how the funds were to be spent. Over time, staff from the GAO participated on the calls, where they would talk about problems they were seeing in some states regarding accountability.

Accountability Group- This group, consisting of the Recovery and Transparency Board, the Government Accountability Office, relevant Federal Agency Inspector’s General, state and local Auditors, Controllers, and Treasurers, routinely met to coordinate work and compare findings

The RAT Board was composed of the Inspectors General from each of the major agencies receiving funds under the Recovery Act.  The Board had a budget of $50 million to operate and construct a data collection system to meet statutory requirements for quarterly reporting of spending and performance.  The system was modeled after one used in the Environmental Protection Agency for grant reporting and featured more than 90 data elements.  Reporting was done at the grantee level with more than 75,000 grantees ultimately reporting.  One of the key features of the system was the geo-spatial character of the data.  The RAT Board created a mapping system that allowed the public to see what was being spent and how many jobs were created in a particular area.  The data were reported directly to the RAT Board which was responsible for the data’s integrity.

Of the several roles that ARRA specified for the Government Accountability Office, the most significant was conducting bimonthly reviews of selected states’ and localities’ use of funds made available under the act. GAO embedded teams in 16 states and the District of Columbia, as well as covering 60 localities within those 16 states. Every other month, GAO provided ongoing longitudinal reports that analyzed approximately $200 billion, or about 2/3, of ARRA funds for states and localities.  Those 16 states also covered about 2/3 of the US population.

To do this, GAO worked closely with governors’ offices; “Recovery Czars;” State Auditors, Controllers, and Treasurers, as well as state and local program staff to evaluate use of, accountability for, and impact of ARRA funds. Such interactions were iterative, with GAO giving real-time feedback about what they were finding, thereby enabling states and localities the opportunity for timely mid-course corrections, while GAO was able to immediately fact check its work.  This required replacing the typical audit role of providing after-the-fact critiques with instead constructive engagement aimed at helping to improve ongoing implementation.

At a time of critical national importance, when time was of the essence and activity under close scrutiny, such oversight not only evaluated, but facilitated, performance, as auditors constructively engaged with those implementing programs, gave immediate feedback, and enhanced communication across levels of government and functions.

3. A free flow of information across all three working groups was developed. This meant the worker bees could listen in on the conference calls between the Vice-President and the 50 governors and members of the accountability team could participate on the weekly worker bee conference calls. It also meant that any interested staff member could participate on the conference calls of the ad-hoc groups. Over time, all members involved in the coordination had access to almost any meeting or conference call. This insured that virtually everyone knew the status of every issue in real time. 

4. Ah-hoc groups of state budget directors, federal agency and OMB staff were created to quickly eliminate obstacles. Obstacles often arose because of differences in interpretation in the federal rules that governed spending. Thus, it was necessary to get the three staffs together to work through the problem. Sometimes the problem was the interpretation of a so-called Maintenance-of-Effort (MOE) rule or law which generally indicated that a state needed to continue to spend from their own funds, a least at the same level of a given previous year. This was a particular problem for some education funds. Other times, such as with the weatherization program, it was just trying to determine why spending was so slow.  Still other times it might be whether the Davis Bacon law applied for certain construction projects. If these were serious obstacles, then staff would ask governors to flag the issue for the Vice-President on the next call, so that it would receive attention at the highest level.

5.The accountability group operated in parallel with the two operations groups instead of after the fact. As noted above, ARRA required the accountability community to replace its usual business model with one better suited to responding to the exigencies of the worst economic downturn since the Depression.  In short, auditors needed to report quickly, and to be sure that their reports were accurate.  The only way to do this was to network both with others in the accountability community and those providing the auditors with their data.

 

The RAT Board, with its ever-growing data base, and GAO, with its legislatively-required real-time reporting, formed the hub of a network that included inspectors general and state auditors, controllers, and treasurers, and engaged with states and localities charged with reporting on the funds they were receiving. With a database that was evolving as more data were coming in, and audits conducted under tight time frames and high scrutiny, it was essential that everyone was working with data that were accurate and consistent.  The RAT Board and OMB tried to develop clear guidance and state and local recipients tried to follow that guidance. GAO and other auditors made use of the data, but also noted where breakdowns occurred.

The network was most effective when continuous communication enabled recipients to provide direct feedback on what was or was not working. OMB and the RAT Board showed openness to making necessary changes, and the auditors provided timely reality checks. The result was a database where the public could see, often down to the neighborhood level, what funds had been provided, how much had been spent, for what purpose, and to what end. The auditors provided context and confidence around these numbers.  This bright light of transparency was aimed at making the Recovery Act both real and trusted.

Conclusion The coordination helped create a win-win situation for both the administration and the states as it limited the length and depth of the downturn and thus total unemployment while also stabilizing individual state fiscal conditions. Creating individual working groups, that were very flexible, and ad-hoc groups to quickly eliminate barriers and other problems allowed the funds to be spent quickly and consistent with Congressional intent. Continuous communication was also a high priority. Finally, it was critical that accountability was done in parallel with the other groups as opposed to after the fact.

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