was reagan federalism good for business? privatization and state administrative capacity in the...

WAS REAGAN FEDERALISM GOOD FOR BUSINESS?

PRIVATIZATION AND STATE ADMINISTRATIVE CAPACITY

IN THE CLEAN WATER STATE REVOLVING FUND PROGRAM

John C. Morris Mississippi State University

This research addresses the impact of New Federalism, as defined by the Reagan administration, on the ability of states to implement and administer a major national environmental program. Based on data collected @om two national studies of the Clean Water State Revolving Fund (CWSRF) program, the research seeks to link the sufficiency of initial state resources with the inclusion ofprivate sector actors in CWSRF administrative structures. Both survey data and case study data support the hypothesis that states which lack resources to implement the CWSRFprogram reb more heavily on private sector actors in the decision making processes of the program. The paper explores the implications of this relationship, and suggests that the net result of New Federalism may not be a devolution of authority to state governments, but to private sector agents of the states.

R e c e n t trends at the election polls have once again brought the term “New Federalism” into the mainstream of American political discourse. A large part of the public debate about the future of the nation has been couched in terms of a restructuring of the complex relationships between national, state, and local governments. The casual observer might be aware of the term “New Federalism” but not its meaning. The more astute observer might notice that the same term seems to be operationally defined differently from time to time, leading to a certain amount of confusion about its “true” meaning. Indeed, New Federalism has become a catchword for almost every American president (and almost every presidential hopeful) since Richard Nixon.

As David Walker points out, the term “federalism” is often used interchangeably with “intergovernmental relations.” While federalism is

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324 Southeastern Political Review Vol. 27 No. 2

a “...constitutional, legal, jurisdictional, power-political, and two-tier formal systemic concept” (1 995, 22), intergovernmental relations encom- passes a broader scope of activity, including formal and informal relationships across fiscal, functional, and administrative paths. For the purposes of this paper, “New Federalism” is defined to encompass Walker’s definitions of “federalism” and “intergovernmental relations.”

Although New Federalism has been operationally defined in somewhat different terms by successive presidents, one fact remains reasonably clear: when presidents speak of a “New Federalism,” they speak of a process or a plan to alter the existing pattern of relationships between the national government and state and local governments. Most scholars agree that the past two hundred years of U.S. history have been marked by changing patterns of relationships between the national government and the states, at numerous levels of interaction (Walker 1995). The general trend has been toward a growth in the national government in size, political stature, and budget. In recent years, New Federalism has been applied to efforts aimed at limiting the size, scope, and budget of the national government, coupled with a return of political and budgetary authority to the state governments.

The move to a “New Federalism” has been driven by a series of events and movements within the political, social, and economic context of the nation (Walker 1995). New Federalism has been seen as a change from “business as usual,” as a way to distinguish between competing political and ideological viewpoints, and perhaps as a means to legitimate changes in party control over the presidency or the Congress. While much has been said and written about the potential consequences of changes in state-federal relationships, little empirical work has been done to examine the policy implications of those changes. This paper seeks to address the policy implications of a redefinition of federalism during the Reagan years. The vehicle for this exploration is the Clean Water State Revolving Loan Fund (CWSRF)’ program, a policy instrument that reflects many of the values and goals of Reagan’s New Federalism (Conlan 1988; Nathan and Doolittle 1984). This research is particularly relevant given the outcome of the national elections in November 1996; the issues raised in the 1996 presidential election, and the renewed discourse about a “New Federalism” are similar in rhetoric, if not content, to the New Federalism of the 1980s. In addition, legislation passed by the 104th Congress extended the “New Federalism” into areas such as welfare reform, highway construction, drinking water: and other policy arenas.

The clear trend in recent years has been toward a devolution of responsibility for program implementation from the national government to the states (Johnson and Heilman 1987). Although Congress continues to set

Was Reagan Federalism Good for Business? 325

national standards for environmental quality, recent policy instruments have lefi an increasing amount of responsibility to states to implement and administer federally-initiated programs to meet those goals. Although there has been a substantial partnership between states and the national government in environmental policy since the 1960s (Vig and Krafi 1997), movement in the past twenty years, particularly in the area of water quality, has been toward increased state authority and responsibility. Evidence of this trend is in the concept of primacy (Crotty 1987), in which states may be certified by USEPA to assume responsibility for enforcing water quality standards in municipalities in the state. Furthermore, many states have enacted environmental legislation that goes well beyond existing federal requirements, particularly in areas such as groundwater protection and waste management (Rabe 1997). States still maintain close working relationships with both USEPA regional offices and headquarters, but the nature of the relationship is increasingly a partnership rather than a supe- rior-subordinate ar~angement.~ The effects of this trend are particularly important in the CWSRF program.

THE CLEAN WATER STATE REVOLVING FUND PROGRAM

A U.S. Environmental Protection Agency (USEPA) task force was established in 1984 to examine the national government’s role in water quality, specifically the municipal wastewater treatment grants program (Heilman and Johnson 1992). Among the task force’s recommendations was a greater role for states and communities in terms of responsibility for WTW funding (EPA 1984). A consensus among task force members soon emerged for a program that would create revolving loan funds in each state, using a series of initial grants from the federal government. The states would contribute at least a 20 percent match; these funds would be used to capitalize a fund from which loans would be made to communities for the construction of water quality treatment projects. As the communities repaid the principal and interest, the money would in turn be available for new projects. Congress incorporated the revolving loan fund concept in the 1987 amendments to the Clean Water Act, known as the Water Quality Act (P.L. 100-4), and implementation began almost immediately thereafter.

States have chosen a wide range of arrangements to administer the CWSRF program. The typical arrangement is to place the program within the purview of the state environmental agency, with other agencies contrib- uting as necessary. In other states, water quality is located in a state health agency. States that have operated state-funded infrastructure loan funds prior to the advent of the CWSRF program tend to operate separate public

326 Southeastern Political Review VuL 27 No. 2

authorities or agencies (e.g., New Jersey, Georgia, New York, and Penn- sylvania). At least one state places dejure authority in a state environmental agency, but then contracts with a private sector consultant to carry out the day-to-day administrative functions of the program. Within these differences, some states choose to operate leveraged programs; some states operate simple loan programs; some states combine the CWSRF program with state-run and state-funded loan or grant programs; other states operate CWSRF programs for water quality needs only. Heilman and Johnson (199 1) have detailed the array of institutional arrangements employed by states to administer the CWSRF program, and conclude that in the CWSRF program states truly are “policy laboratories.’’

The CWSRF program was intended as a replacement for the national construction grants program, a policy instrument in place since 1972 and administered by USEPA. Although both policy instruments address water quality funding, the CWSRF program differs from the construction grants program in at least two important respects. First, the CWSRF program requires states to assume responsibility for the design, administration, management, and long-term operation of the program. Where the grants program was shaped and governed in large part by the USEPA, the CWSRF policy instrument shifts major policy and program formation decisions to the states. Although CWSRF institutional arrangements differ from state to state, many place responsibility for the CWSRF program, at least in part, in traditional state environmental agencies (Heilman and Johnson 1991). This means that state environmental agencies, in addition to being facilita- tors of federal environmental policy implementation, assume a much greater role in the administration and implementation of national water quality policy.

Second, the change in policy instruments fiom a grants program to a loan program requires a change in the kinds of skills needed to administer the program. The grants program was clearly an environmental program focusing on clean water. The loan mechanism, however, places different and sometimes conflicting financial demands on state administrators. The incentives under the grants program were clearly environmental-applicant communities with the greatest environmental need were served first. Under the CWSRF program, however, the addition of a more complex (and very different) loan scheme means that in order to meet the requirement for long-term solvency, state administrators must take financial factors into consideration. While still concerned with clean water policy objectives, state administrators must also address the financial components of the CWSRF. The ambiguity inherent in the CWSRF model means that state


administrators are faced with satisfying two very different, and not entirely compatible, policy considerations.

The tension between the environmental and financial components of the CWSRF program is complicated by the fact that the initial CWSRF alloca- tions are, for many states, insufficient to meet current water quality needs (GAO 1992). As a result, some states must find ways to increase the amount of CWSRF money available for loans. Because many states are faced with strong fiscal limitations, they may not be able to invest, for political or financial reasons, additional state resources in the CWSRF pool. One result is that some states have increased their CWSRF funds through financial leveraging of the CWSRF capital pool. Although leveraging schemes vary widely (see Holcombe 1992), leveraging generally involves the sale of bonds, backed by money in the CWSRF fund, as a means to increase the current size of the CWSRF resource pool. Leveraging places additional financial demands on CWSRF administration, impacts interest rates applied to CWSRF users, and adds to the tensions between the financial and environmental features of the program.

The State Revolving Fund program is thus a policy instrument designed to address water quality improvement needs through the provision of loans for wastewater treatment facility construction or expansion. Because of the nature and structure of the CWSRF program, this particular water quality policy may place environmental and financial priorities of the program in conflict. Due to the financial features ofthis policy instrument, the CWSRF program provides an opportunity, perhaps an incentive, for the private sector to play an increased role in the institutions created by states to implement the CWSRF program, as well as in the larger clean water policy arena.

RESEARCH QUESTION A fundamental assumption of Reagan’s New Federalism was that states

had built the institutional capacity to assume administrative responsibility for national programs. The efforts of the New Deal and the Great Society, as well as experience with block grants and revenue sharing, meant that all states had the opportunity to build state administrative and managerial resources to the point that states could assume primary responsibility for administrative tasks previously carried out by federal agencies. Thus a policy instrument such as the CWSRF program could be implemented by states with a reasonable expectation that all states could meet the national goals of the policy, including the maintenance of a revolving fund in perpetuity.


Previous research on the CWSRF program (Heilman and Johnson 1991 ; Morris 1994) shows that in the case of the CWSRF program, state institutional capacities are not equal. Heilman and Johnson (1991) reported substantial differences in state capacity, and Morris (1997) linked a particular facet of that capacity (privatization) with differences in the distribution of CWSRF resources. However, earlier research failed to link state administrative capacity to the use of private sector actors.

As noted in the preceding, successful leveraging in the CWSRF program requires substantial financial expertise. Heilman and Johnson (1991) reported that nearly one-third of states identified financial expertise as an area in which their capacity to administer the CWSRF program was lacking. In addition, nearly two-thirds of all states responded that they had involved private sector actors in their CWSRF programs as a means to secure financial expertise.

States also identified other areas in which they initially lacked sufficient resources to administer the CWSRF program. Areas in which states indicated a lack of resources included organizational, managerial, budgetary, personnel, and political resources (Heilman and Johnson 1991). Thus the research question is brought into focus: Do states that lacked initial resources to administer the CWSRF program rely on private sector resources to meet the administrative and managerial demands ofthe CWSRF program? From this research question are derived working hypotheses:

HI: States that report a lack of sufficient initial resources are more likely to seek private sector expertise in order to meet the administrative and managerial demands of the national policy instrument.

H,: States that report a lack of initial resources and that leverage their CWSRF funds are more likely to seek private sector expertise in order to meet the financial and administrative demands of the national policy instrument.

There is an alternative hypothesis that may be drawn from hypothesis 2." Specifically, it is possible that the temporal relationship is reversed-that states first decide to privatize, and then seek justification for that decision. However, there is ample anecdotal evidence available to reject such a hypothesis. This issue will be addressed later in this analysis, and the implications of these hypotheses are discussed in the concluding section of this paper.


METHODS Data for this research are drawn from two national surveys of the State

Revolving Fund program. The first, conducted in 1990,5 provides data on initial state resources. The second, conducted in 1994, provides data on the role and scope of private sector activity in the CWSRF program and leveraging status. Both surveys were sent by mail to the CWSRF Coordi- nator in each state. A state official, the CWSRF Coordinator acts as the state’s chief administrator for the program, and typically assumes responsibility for program administration, including programmatic (environmental or health concerns) and financial activities.

The 1990 survey effort garnered a total of 46 usable responses, and the 1994 effort resulted in 45 usable responses. All but three states-Iowa, North Dakota, and Ohio-are represented in the dataset. At the time the initial survey was conducted, only 45 of the 50 states had CWSRF programs in operation; thus the analysis includes all but one of the universe of potential subjects at that time. Although the dataset analyzed in the quan- titative portion of this paper covers virtually the entire population of states, measures of association and tests of statistical inference are also reported.6

ANALYSIS The 1990 survey asked states about the sufficiency of initial resources

to assume responsibility ofthe CWSRF program. The survey identified six discrete categories of resources: political resources, organizational resources, managerial resources, budgetary resources, financial personnel, and environmental personnel.’ A majority of states reported state resources to be sufficient in all areas, and a small number of states reported their resources to be deficient in all areas. A total of eighteen states reported that resources were not sufficient in at least one of the six areas.

Both the 1990 and 1994 surveys asked states about their leveraging status. During the two study periods, a total of twenty-one states operated leveraged CWSRF programs. In addition, the 1994 survey asked a detailed set of questions about the role and scope of private sector activity in the CWSRF program. In addition, a summary question about the role of the private sector asked for an overall evaluation of private sector activity in the state’s CWSRF program. The present study employs two variables describing the role and scope of private sector activity. In the first, state CWSRF coordinators were asked to evaluate the overall role of the private sector on the basis of three categories: major role, minor role, and no role (Table 1).


Table 1 Overall Role of Private Sector Actors in

CWSRF Program Administration

Major Role Minor Role No Role

18 17 9

41 39 20

The more detailed questions about the role of private sector activity in the CWSRF program were designed to aid in the creation of an index to measure the extent of private sector activity in the CWSRF. To this end a series of ten questions addressing the hnctions of the C WSRF program was presented to each respondent, and respondents were asked to identify specific actors with authority in that area.

For the purposes of the present analysis, state responses about sufficiency of initial resources are collapsed into two categories-sufficient or insufficient. Four categories are chosen for inclusion in the analysis: organizational, managerial, budgetary, and financial personnel resources.8 If a state indicated that it was initially deficient in any of the four areas, it is coded as “not sufficient.” If a state reported it was sufficient in all four areas, it is coded as “sufficient.”

An analysis of the relationship between the overall role of private sector actors and the sufficiency of initial resources (Table 2) indicates that in states where initial resources were deemed insufficient, private sector actors play a more substantial role in the management and administration of the CWSRF program. A closer inspection of the table reveals that two of the cases reporting insufficient resources and minorho role for the private sector were deficient in only one area-budgetary resources. Two of the

Table 2 Role of Private Actors in Program Administration

by SuZficiency of Initial Program Resources#*

Role of the Private Sector in CWSRF Were Initial Major Role MinorhJo Role

Yes 7 (27) 19 (73) Resources Sufficient? N (Yo) N (Yo)

No 1 1 (61) 7 (39)

%e initial program resources include poliitcal, organizational, managerial, budgetary. financial personnel, and

*Xz=5.143 b . 0 2 3 ) ; Cramer’s V=.342 @=.023) environmental personnel. See note 7 for further explanation.


cases reporting a minorho role for the private sector and insufficient resources were also deficient in budgetary resources. Two others reported deficiencies in financial personnel, and one reported an additional deficiency in environmental personnel. Of the eleven states reporting deficient resources and a major role for the private sector, seven states were deficient in personnel (five in financial and two in environmental); two states were deficient in organizational resources; two states were deficient in budgetary resources; and four states were deficient in managerial resources.

Thus there is evidence of a pattern between role of the private sector and sufficiency of resources. States that perceived they had sufficient levels of state capacity to assume responsibility for the CWSRF program (as defined by the given categories) are less likely to seek private sector assistance to manage and administer the CWSRF program.

A similar pattern emerges if the role and scope of private sector activity is measured by the number of discrete decision processes that include private sector actors. As discussed in the preceding, respondents were asked to provide detailed information about the actors given decision making authority in the CWSRF structure. Table 3 examines sufficiency of resources and the number of private sector actors given decision making authority in the CWSRF program.

The pattern in Table 3 is similar to the pattern in Table 2, in that states with little or no private sector decision authority in the CWSRF reported that initial resources were sufficient to assume responsibility for the CWSRF program. In this case, however, the Cramer's V statistic indicates a much stronger association (0.727). The one state that reported sufficient resources, but three decision areas involving the private sector, limits the authority for the private sector to decision areas that are administratively routine-program audit, loan payment monitoring, and evaluating appli-

Table 3 Sufficiency of Initial Resources* by Number of Private Sector Actors

Given Authority in CWSRF Decision Making

Were Initial Resources Sufficient? Number of Yes No

Private Actors N (Yo) N (Yo)

0 18 (69) 1 (6) 1-2 7 (27) 6 (33) 3-4 1 (4) 5 (28)

6 (33) 5+ 0 (0) 18 (100) Total 26 (100)

'See note 7 for fulther explanation. I 2 X =23.269 w.01); Cramer's V=.727 w.01)

332 Southeastern Political Review VOI! 27 No. 2

cant credit worthiness. At the other end of the spectrum, three of the six states indicating five or more decision areas for the private sector allow private sector decision making in areas such as determining who gets a loan, setting the size of the loan, setting the environmental priority list (a traditional function for the state environmental agency), setting interest rates charged on CWSRF loans, and establishing the financial structure of the CWSRF program. In short, the private sector has taken a substantially more active role in the CWSRF program in states that reported insufficient initial resources. Hypothesis 1 is supported.

The Effects of Leveraging As discussed in a preceding section, leveraging often places substantial

burdens on state CWSRF administrative structures to maintain the financial solvency of the fund. While previous research has examined links between leveraging and private sector activity in the CWSRF program (Heilman and Johnson 199 1 ; Morris 1994), one would expect leveraged states to include a more substantial role for the private sector, and to report an initial shortage of resources. Table 4 shows evidence of a substantial relationship between these variables.

An examination of the percentages in Table 4 suggests a clear difference for leveraged states, in that states that reported insufficient initial resources were significantly more likely to seek private sector assistance. The Cra- mer’s V statistic supports this relationship, resulting in a coefficient of 0.452. On the other hand, sufficiency of initial resources for non-leveraged states appears to make little difference in the inclusion of private sector actors (Cramer’s V=0.024).

The majority of the leveraged states reported insufficient initial resources, and also reported a much larger role for the private sector. Of the seven non-leveraged states reporting insufficient resources, five states

Table 4 Role of the Private Sector by Sufficiency of Resources,*

by Leveraging Status

Leveraged* * Non-Leveraged* ** Major Role MinorMo Role Major Role MinorMo Role

N (Yo) N (%) N (Yo) N (Yo)

5 (50) 5 (50) 2 (13) 14 (88) Were Initial Yes Resources Sufficient? No 10 (91) 1 ( 9) I(14) 6 (86)

*See note 7 for further explanation. **X2=4.295 k.038); Cramer’s V=.452 k . 0 3 8 ) ***X2=.014 k . 9 0 7 ) ; Cramer’s V=.024 k.907)

Was Reagan FederaIism Good for Business? 333

(including the state with a major role for the private sector) reported a lack of budgetary resources, and two states reported a lack of environmental personnel. Among leveraged states reporting insufficient resources, six states were deficient in environmental personnel; two states were deficient in managerial resources; three states lacked budgetary resources; and two states lacked organizational resources. Hypothesis 2 is also supported.

An earlier section of this paper suggested the possibility that the temporal relationship of hypothesis 2 might be reversed; that is, that government oficials might first decide to privatize, and then seek justification for the privatization decision. There are two reasons to reject this rival hypothesis. First, leveraging places substantial demands on state officials to design and administer a complex financial program. As noted by Holcombe (1 992), leveraging may threaten the long-term viability of a CWSRF. States are well aware of this danger (this issue is regularly addressed at national and regional CWSRF conferences, and in EPA program guidance documents), and have sought ways to avoid these pitfalls. If a state requires advanced financial expertise to operate a successful leveraging program, such expertise is typically found outside of state government. On the other hand, states that have experience with leveraged infrastructure finance programs are more likely to have such expertise available. States such as New York, New Jersey, and Pennsylvania have operated state-financed revolving loan programs for a number of years, and have accrued a cadre of financial experts in state government. These experts are thus already in place as a program resource. None of the states with existing state programs prior to CWSRF implementation reported an initial insufficiency of program resources. Thus there is reason to accept the temporal relationship in hypothesis 2.

A dimension not considered in the preceding analyses concerns the sufficiency of political support for the CWSRF program. Although many states indicated on the survey that political support was initially sufficient, case study evidence suggests that many states found political resources lacking, although the shortage may have played out through other resource areas. Massachusetts CWSRF officials suggested that although its state legislature had passed CWSRF enabling legislation, the legislature had provided no staff support, and no funding support. A similar story was given by CWSRF officials in New York, Georgia, Utah, Texas, and Cali- fornia. Alabama’s enabling legislation created a CWSRF organizational structure, but provided no staff support, administrative budget, or state match money to receive the first federal capitalization grant. The private sector consultant in Alabama worked with the governor’s office to push through a state bond issue from which both matching money and administrative resources were funded. Arizona suffered a severe lack of resources


across the board until a new coordinator was hired in 1996. The new coordinator convinced the legislature to provide minimal funding, and worked to secure relationships with other state organizations.

One of the most outstanding features of the CWSRF program is the increased role for state administrative discretion. Whereas the construction grants program required a significant level of interaction between states and the USEPA in program administration, the CWSRF is designed to allow for a substantial amount of state discretion. In fact, this issue is often mentioned by state CWSRF coordinators as one of the major strengths of the program. While one may argue that the premise of “New Federalism” is simply symbolic in nature, it is a very real and serious issue for state administrators. The requirements of the CWSRF program are very different from its predecessor, and states typically want even more discretion than they are currently allowed (again, substantially more than under the construction grants program). Interviews with other state-level CWSRF officials and USEPA officials reveal a serious commitment to increased state discretion. While the intent ofcongressional policy makers might have been to create a symbolic policy with real “teeth” (a debatable proposition in itself), the implementation of the CWSRF program has clearly embraced the concept of state discretion.

Finally, it may be that states are able to build administrative capacity over time. Indeed, there is some evidence here to support such an assertion. As state CWSRF programs have gained legitimacy and experience in their operations, they have clearly become more proficient in program administration. However, there are at least two mitigating factors relating to the inclusion of private sector actors in the program. First, survey data over time indicate that the substantial majority of states using private sector consultants early in the implementation process have continued to do so; only three states report they have ceased their relationships with private consultants. Conversely, four states who did not initially leverage their CWSRF funds (but chose to in later years) employed private consultants to help create and administer the leveraged financial structures. Second, state coordinators interviewed during case study visits indicate that program legitimacy has grown; a number of coordinators indicated they have been able to secure adequate operating funds, cooperation from other state agencies, political support from legislators and governors, and qualified environmental expertise with relative ease as the program has matured. The primary administrative deficiency for many states has continued to be a lack of qualified financial expertise in the public sector. This administrative capacity has increased in some states, but it has had little effect on the inclusion of private sector consultants.


IMPLICATIONS AND CONCLUSIONS This analysis examines the ways in which the decentralized implemen-

tation of centralized (national) policy takes place across the fifty states. Furthermore, the analyses support the hypothesis that states that lack initial resources to administer the CWSRF program have a substantially higher degree of private sector involvement in the management and administration of the program. The CWSRF program is the product of a particular set of disparate policy values and desires that converge in a single policy instrument. Although the CWSRF program represents a narrow policy focus (environmental policy) and a single policy instrument, there are some broad implications of this research that bear closer examination.

First, the premise of New Federalism that states have sufficient institutional capacity to assume control of federal programs is undoubtedly true for some states, and clearly not true for others. Even in an area such as wastewater treatment (traditionally a state or local government function), some states are ill-prepared to assume responsibility for the federal program. The CWSRF policy instrument places additional, non-traditional burdens on state environmental agencies by requiring a level of financial expertise not typically found in environmental agencies or, in many states, in state government. Many states have adapted to this need by involving other state agencies or offices in the CWSRF administrative structure, although some states simply do not possess the level of financial expertise needed for the CWSRF in any government agency.

The issue for states is to both locate and acquire needed resources in order to manage the program successfully. The CWSRF program offers states both a carrot and a stick. The carrot is ongoing federal capitalization grants, with the proviso that the fund remain solvent and viable in perpetuity. The stick exists in the form of the standards for water quality that apply to all states, and that all states are responsible for attaining. Failure to achieve federally-mandated water quality standards could result in fines, court orders, and other actions against offending states. At the same time, few states have the resources to meet their water quality needs without federal funding. Thus most states have no choice but to accept the CWSRF program as the means to meet water quality needs.

If states initially lack the resources to implement and administer the national program, they must adapt and change their strategies to allocate administrative resources where needed. States with more highly developed administrative capacities may be able to redirect resources from other public functions, while states without certain kinds of resources must create new resources. The CWSRF program provides a particularly difficult challenge for states because of the complex financial expertise needed to

336 Southeastern Political Review VoL 27 No. 2

manage the program. Few states can justify (or afford) hiring additional financial personnel, especially given the six- and seven-figure incomes garnered by skilled financial experts in the private sector. To the extent they can afford it, these states will take the path of least cost-to contract for the services of a financial expert outside of government.

To the extent this situation occurs, New Federalism does not devolve programmatic authority to the states, but rather to private sector agents of the states. Previous research (Morris 1994, 1997) has shown a significant link between the involvement of private sector actors in the CWSRF program and the distribution of CWSRF loans, such that private sector involvement in the CWSRF program can substantially alter the distribution of resources to target communities. Thus the premise that states have the institutional capacity to assume responsibility for the implementation of national policy is not necessarily valid.

Second, this research has implications for the ability of our political system to achieve national policy goals. Environmental policy is, in many ways, the ideal test case for this issue, in that the nature and effects of environmental problems know no political boundaries, and are thus truly public in nature. Public opinion research consistently shows that Ameri- cans are concerned about environmental quality, and that they are in favor of national policy to both clean and protect the environment. Yet if the responsibility for the success of national policy goals is decentralized to a series of political units that may or may not possess the institutional capacity to meet these goals, then our ability to achieve national policy goals may be limited.

Finally, the inclusion of the private sector in certain areas of public policy may mean a loss of sovereignty for government. If the private sector is given decision making authority in water quality as a result of a policy instrument designed to remove program authority from the national government, the net result is that New Federalism removes authority from the national government and gives it not to the states, but to the private sector. Thus New Federalism may result in a transfer of sovereignty from the national government to the private sector. In this sense, states do not become the “new heroes’’ (Rabe 1997, 32) of American federalism, but rather the conduit for the privatization of an administrative structure.

While it is beyond the scope of this paper to determine whether such a process is an intended or an unintended consequence of the policy, the issue remains that state governments do not necessarily enjoy greater autonomy or programmatic control as a result of New Federalism. Further research is needed to delve more fully into this issue, and to determine whether

Was Reazan Federalism Good for Business? 33 7

similar patterns may be detected in other policies enacted under New Federalism initiatives.

NOTES ‘The term “Clean Water SRF Program” is used here to distinguish the

water quality-oriented loan program (the original national SRF program and the subject of this paper) from the Drinking Water SRF (DWSRF) program initiated by Congress in 1996. Although similar in concept and operation to the CWSRF, the DWSRF addresses needs directly related to drinking water needs. Early analyses indicate that although the programs address functionally different water needs, states appear to be employing the CWSRF administrative structures in the operation of the DWSRF program.

*The Safe Drinking Water Act of 1996 established a revolving loan fund program to fund drinking water needs. As of this writing, fewer than half of the states have received their initial capitalization grant for this new program.

3This is further evidenced by the passage of legislation during the 104th Congress banning the use of unfunded mandates. Kelly (1994) has detailed the costs to state governments of such mandates.

4The author is indebted to an anonymous reviewer of this paper for this argument.

5Data from the 1991 study are used with the kind permission of the Co-Principal Investigators (Gerald W. Johnson and John G. Heilman). The study was conducted under a grant from the U.S. Geological Survey, Department of the Interior.

6There is an ongoing debate over the use of measures of association and statistical inference. Since not all states provided data, the analyses are technically based on a sample of states (although not truly a probabilistic sample). One should thus exercise caution when interpreting these values.

’The meanings attached to these categories are:

political resources - political support in the legislature, the governor’s office, and among citizens and interest groups organizational resources - includes protocols and relationships with relevant agencies in the state, as well as more mundane factors such as adequate office space

338 Southeastern Political Review VoL 27 No. 2

managerial resources - program authority (both statutory and regulatory); management personnel with experience in water quality programs

budgetary resources - adequate funds to administer the program. This includes funds for personnel costs, office equipment and sup- plies, and travel funds. The national legislation allows up to 4 1/2 percent of the capitalization grant to be used for administrative costs, but most state coordinators indicate this amount falls well sort of the necessary funds. Some states have charged loan origination fees to help offset this shortfall.

financial personnel -expertise to administer the financial aspects of the program, including design and operation of the financial system (often very complex in leveraged programs), tracking of loan repayments, account maintenance, bond issuance, and determining loan eligibility of applicant communities

environmental personnel - expertise to address the technical requirements of the proposed projects, to monitor construction of facilities, and to evaluate the environmental implications of proposed projects. Because these functions are very similar to the state’s role under the previous construction grants program, very few states indicate deficiencies in this area.

8Political resources are also analytically interesting, although only five states indicated their political resources were initially insufficient. This issue is addressed further later in the analysis.

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Funds Insuflcient to Meet Wastewater Needs. RCED-92-35. Wash- ington, DC: GAO.

Heilman, John G., and Gerald W. Johnson. 1991. State Revolving Loan Funds: Analysis of Institutional Arrangements and Distributive Con- sequences. Final Report Submitted to the U.S. Geological Survey, Department of the Interior. Auburn University, AL.

Was Reazan Federalism Good for Business? 339

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