Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Unfunded Mandates Shift Costs from Washington to Your Town
Transcript
- Lucas: Luna, here's a number that sticks with me: about one point five trillion dollars a year. That's roughly what state and local governments spend complying with federal rules — rules Congress passed but didn't fund. Luna: Unfunded mandates. The gift that keeps on taking from local budgets. Lucas: Exactly. The term itself is straightforward: the federal government requires states or cities to do something — upgrade water treatment, change driver's licenses, test students a certain way — without sending the money to pay for it. Luna: And the scale is enormous. The Congressional Budget Office tracks some of the bigger ones, but most never get a formal cost estimate before they're signed into law. Lucas: That's the key. The Unfunded Mandates Reform Act of 1995 was supposed to fix this — it requires the CBO to flag any mandate that would cost states more than about 85 million dollars in a year. But there's a catch. Luna: Let me guess: exceptions. Lucas: Huge ones. Bills that enforce constitutional rights, that ban discrimination, that deal with emergency powers — those are exempt. And anything attached to a grant program can be structured so that compliance is 'voluntary' but practically mandatory. Luna: So the 1995 law has more holes than a colander. Lucas: It's not that it does nothing. According to the Government Accountability Office, between 1996 and 2020, the CBO identified about 200 mandates that exceeded the threshold — and Congress actually modified or killed maybe a dozen of them. So the process exists, but it doesn't stop much. Luna: Let's get concrete. What's a classic example that real people feel? Lucas: The Real ID Act. Passed in 2005, implemented over the next decade and a half. It required states to redesign driver's licenses with specific security features, verify identity documents, and link databases. The Department of Homeland Security estimated total compliance at about 4 billion dollars nationally. Luna: Four billion that states had to find — from their own DMV fees and general funds. No separate federal appropriation. Lucas: Right. And if a state didn't comply, its residents couldn't use their driver's license to board a commercial flight or enter federal buildings. So it's not optional. Every state eventually complied. California alone spent over 600 million dollars retooling its DMV systems. Luna: And that cost gets passed down. Higher license fees, longer wait times while systems were being upgraded, and in some states, general fund money that could have gone to schools or roads. Lucas: Another big one: the Clean Water Act's requirements for combined sewer overflows. Big cities like Atlanta and St. Louis have been under federal consent decrees for decades, forcing them to spend billions on underground storage tunnels and treatment upgrades. Luna: Small towns too. A town of five thousand people might need to spend forty million dollars on a new wastewater plant because the EPA tightened nitrogen limits. That's basically their entire annual budget. Lucas: The EPA's own estimates show that water infrastructure mandates could cost local governments as much as 750 billion dollars over the next twenty years. Federal grants cover maybe ten percent of that. Luna: So the mandate is real, but the funding stream isn't. And that forces towns to raise water rates, issue debt, or defer maintenance — which leads to even more expensive problems down the road. Lucas: And it's not just environmental. Consider the Individuals with Disabilities Education Act — IDEA. When Congress passed it in 1975, it promised to pay forty percent of the excess cost of educating students with disabilities. Today, federal funding covers about fifteen percent. Luna: So school districts have to provide the services — legally required — and make up the difference with local property taxes. Lucas: Exactly. The National Education Association estimates that shortfall amounts to roughly 30 billion dollars a year nationwide. That's money that flows out of local budgets because of a federal promise that was never fully funded. Luna: And the political dynamic is almost perverse. Members of Congress get to claim credit for passing a popular law — cleaner water, safer schools — while the cost is shifted to mayors and county commissioners who have to raise taxes or cut services. Lucas: Right. It's a classic case of 'the federal government writes the check, but your local government has to cash it.' And because mandates are often tucked into larger bills, there's rarely a floor vote on the mandate itself. Luna: Have any states tried to fight back? Lucas: Yes. A few states have passed laws requiring their own agencies to produce mandate impact statements. Colorado's Office of State Auditor, for example, has a unit that tracks new federal mandates and estimates their cost to the state. They found that between 2015 and 2025, federal mandates cost Colorado taxpayers an additional 2.3 billion dollars beyond what federal grants provided. Luna: So transparency helps, but it doesn't stop the mandate from arriving. Lucas: Not directly. But it gives state legislators ammunition to push back — to ask their congressional delegation to amend or delay implementation. There have been a few successes. For instance, in 2022, state pressure led to a two-year delay in EPA's lead and copper rule revisions, giving small water systems more time to comply. Luna: That's progress, but it's slow. And in the meantime, the accumulated cost keeps growing. Lucas: And there's a new front opening up. In February 2026, the Supreme Court agreed to hear a case from Ohio — Ohio v. EPA — that challenges the EPA's authority to impose a specific mandate on states without a clear cost-benefit analysis. The state argues that the Clean Water Act's 'pollution trading' requirements impose billions in compliance costs without measurable environmental benefit. Luna: That could be a big deal. If the Court rules that agencies must do a more rigorous cost-benefit analysis before imposing mandates, it could change how a lot of federal rules are written. Lucas: Or the Court could uphold the agency's discretion, and mandates keep rolling. Either way, the fiscal stakes are enormous. We're talking trillions of dollars over the next decade. Luna: And it's not just federal. State governments impose unfunded mandates on cities and counties too. In California, the state requires local governments to provide certain health benefits to retired workers — a cost that helped push cities like Stockton and San Bernardino into bankruptcy. Lucas: That's a great point. The same dynamic cascades down. The state capitol does something popular, and the local tax base absorbs the cost. The League of California Cities estimated that state mandates cost its members about 4 billion dollars a year in unreimbursed expenses. Luna: So the problem is structural. The people who decide don't pay, and the people who pay don't decide. Lucas: That's a perfect summary. And it's why this issue matters beyond wonky budget debates. It affects your water bill, your driver's license fee, your property taxes, your child's school resources. Luna: Speaking of the show reaching people who care about these connections — and I realize this is a bit off the main thread, but it's something I've been thinking about. Lucas: Sure, go ahead. Luna: We do this show ad-free, and that's intentional. It means we can talk about things like unfunded mandates without worrying about a sponsor who might have a stake in the conversation. The economics of keeping it going are simple: a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. Lucas: And it really is that — coffee money. No big donations, no corporate underwriting. Just enough to keep the lights on and the research flowing. It's a model that lets us stay independent and focused on topics like this, where the details matter. Luna: Yeah. Anyway, back to mandates. So the case from Ohio — what's the timeline? Lucas: Oral arguments are scheduled for October. A decision could come by late spring 2027. If the Court rules in favor of Ohio, we could see a wave of litigation challenging other EPA rules, and maybe even rules from other agencies like the Department of Education. Luna: So this year's Supreme Court term could be a turning point for federalism and fiscal responsibility. Lucas: It could. But regardless of how the Court rules, the underlying problem remains: Congress has strong incentives to pass popular mandates, and weak incentives to pay for them. Until that calculus changes, state and local governments will keep shouldering the burden. Luna: And voters will keep wondering why their taxes are high and their services are stretched. Lucas: Exactly. The mandate machine keeps running — unless we decide to put a meter on it. Luna: Well said. Thanks for digging into this one, Lucas. Lucas: Always a pleasure. Until next time, keep an eye on whose budget is really paying for that new federal program.