Abstract

Fiscal federalism is a staple of economic theory that underlies the federal-state partnership in the nation's largest federal grant-in-aid programs, such as Medicaid and Title IV-E Foster Care. The theory is founded on a simple principle, the collaboration of the federal government's financial power and stability and state governments' ability to deliver services tailored to regional needs. However, the theory ignores a vast industry that has grown around the flow of federal funds. In addition to providing operational and consulting services for all aspects of government aid, this poverty industry—which usurps inherently governmental functions and is rife with organizational conflicts of interest and a revolving door of personnel—has now tapped into grant-in-aid funding at its source. Through revenue maximization contracts, the poverty industry helps states increase claims for federal aid, and the additional funding is often diverted from its intended purpose. The contractors take as much as 25% as a contingency fee and assist cash-strapped states with strategies to route the aid dollars into general revenue rather than targeted assistance. Then, while maximizing claims on behalf of state clients, the industry simultaneously contracts with the federal government to reduce payout of the same federal funds. Analogous to the iron triangle formed by the military-industrial complex, the vertical relationship between the federal and state governments in grant-in-aid programs has been transformed by a poverty-industrial complex. And as the structure of fiscal federalism is subverted, the benefits of the theory break down. As the intended social welfare maximization goals of government turn to revenue maximization, and intergovernmental collaboration turns to conflict, the integrity of fiscal federalism in grant-in-aid programs is undermined and statutory purpose is lost.

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