By Christopher Haight
August 2011

Two years after the onset of the Great Recession, states are still facing monumental fiscal challenges. Brought on by an unfortunate combination of poor budgetary management skills, the worst recession in decades, and growing demand for services and entitlements, it seems most of the states are united by only one thing - red ink.

So it may come as a particular surprise to learn that some states are turning away federal grants for a variety of purposes that could help ease the budgetary pressures.
Most recently, California Governor Jerry Brown (D) returned $6 million the Golden State had received as part of the State Longitudinal Data Systems grant that would have supported implementation of more robust student and teacher information systems. Brown made the move as part of the $129 billion budget deal.

Brown's counterpart in Florida, Governor Rick Scott (R), has made an even fiscally larger declaration of "Just Say No" by refusing to apply for any grants related to implementation of the Affordable Care Act (ACA), the health care reform law passed in 2010. As reported by the New York Times, the state has declined funds related to consumer counseling and new Medicaid programs ("Opposing the Health Law, Florida Refuses Millions," 7/31/2011). Kansas recently returned over $30 million in grant funding from the Department of Health and Human Services that would have supported technology infrastructure to develop health insurance exchanges, a key component of the ACA.

Scott also refused High-Speed Rail grants in February of this year, effectively ending the hope of the first U.S. high-speed rail line being established between Tampa and Orlando. The move followed refusal of high-speed rail funds by the incoming administrations of Scott Walker (R) in Wisconsin and John Kasich (R) in Ohio late last year.

The return of funds has been motivated by both economic and political underpinnings. Governors Scott, Walker, and Kasich have argued investments like high-speed rail will prove neither self-sustaining nor economically beneficial to the regions served. In this way, grants act more like an inadvertent trap - luring states to participate with money now, only to be left with larger bills later.

Politically, refusing federal funding can be a boon to a politician's image at a time when public perception of what happens in Washington is at an all-time low. Even though the returned money is usually just re-allocated to other applicants and not appropriated towards reducing federal spending (as happened with the high-speed rail funding), saying No to the federal government can be symbolically positive for many voters predisposed to trusting national initiatives.

Many states, of course, are pursuing just the opposite strategy and embracing as many dollars as they can. New York State, for instance, which won a $700 million Race to the Top grant, is now re-applying for up to a $100 million grant from the Race to the Top-Early Learning Challenge fund (RTT-ELC). Thirty-four other states and the District of Columbia (also a Race to the Top winner) have indicated they will also join the competition.

In fact, Race to the Top and the RTT-ELC also provide an important distinction in that not all federal funds are created equally-unpalatable. Despite their high-profile renunciations of high-speed rail grants, Governors Scott and Kasich each retained their respective $700 and $400 million Race to the Top wins, awarded under the efforts of the preceding administrations. Governor Walker has also announced his intention to apply for the RTT-ELC.

The seeming dissonance between refusing funds in some areas but embracing them in another can seem confusing or even downright hypocritical. However, these governors may be acting rationally, given education has one of the few points of potential bipartisan agreement while healthcare remains a highly contentious debating point.

Whether in transportation, healthcare, or any other sector, any return of funds or refusal to apply will only strengthen the opportunities for other states to win an even greater share of money for their constituents. As previously noted, returned money is not placed back into the Treasury or used to shore up the nation debt or Social Security - it's typically just used to enhance other states' awards. A limited applicant pool only bodes better for those still in it.

These unusual displays of rejection can bear an important lesson for smaller grantseeking organizations: There is no such thing as free money, even when it comes to grants. Even the smallest grant is likely to come with strings attached (reporting requirements, audits, etc.) and very few funders, whether a governmental or private source, will favorably view an applicant with repeat requests year after year. Many grants are offered as one-time cash infusions intended to assist organizations start-up or scale-up projects - not support them indefinitely. Hence the concerns among some governors that start-up funds for high-speed rail will only ensnarl states in another long-term, costly commitment.

Project sustainability is a key consideration when accepting grant money. That is why smart grantseekers shouldn't just be focused on "Where is the money now?" but just as importantly, "What happens when the money runs out?"