Ferment over federal-state power balance. As lawmakers debate revenue-sharing, Reagan to call for welfare reform in State of the Union

The Gramm-Rudman Act may be a monstrous budget-balancing tool. But some say it offers something positive -- a window of opportunity to improve the federal system of government. As President Reagan prepares to deliver the State of the Union message tonight and to submit the 1987 budget to Congress tomorrow, bipartisan voices are emerging in Congress and in the states for a revision of the federal-state system. In essence, proposed reforms would aim at achieving a better trade-off between federal and state functions, above all in the areas of social welfare and health care.

Beneath a growing debate on the issue lie two concerns:

The widening gap between the rich and poor in the United States, with persisting poverty endangering the nation's economic vitality in the decades ahead.

The gutting of programs administered by states and localities if automatic spending cuts are triggered by Gramm-Rudman in fiscal 1987. According to a study released yesterday by the Villers Foundation, state and local governments will face financial chaos if the reductions are made.

Sen. David Durenberger (R) of Minnesota has already introduced a bill on targeted revenue sharing which would provide federal aid to the local governments in greatest need. This differs from the present general revenue-sharing system, in which federal money is distributed among towns and other local jurisdictions, without regard to need, a program due to end in 1987.

Welfare reform is also getting heightened attention. Tomorrow the Advisory Commission on Intergovernmental Relations will hold a hearing in the Senate on the subject. Among the testifiers will be Sen. Daniel J. Evans (R) of Washington, who together with former Gov. Charles S. Robb (D) of Virginia co-chaired a committee last year that looked at the federal system and proposed a series of changes.

One of the Evans-Robb committee's recommendations is that the federal government pay 90 percent of the total cost of Aid to Families with Dependent Children (AFDC) and medicaid. The states, in turn, would boost AFDC benefit levels so that, together with food stamps, the payments would provide 75 percent to 90 percent of poverty-level income. This would represent an enormous change in such poor states as Mississippi.

Reagan himself is sensitive to the charge that his economic policies have benefited the wealthy the most and made the poor even poorer. Even though social security, medicaid, AFDC, and some other programs are excluded from the Gramm-Rudman ax, reductions in other programs -- from urban mass transit to educational assistance -- would fall heavily on the poorer segments of society.

In an effort to counter the image of unfairness, Mr. Reagan is expected to touch on the theme of compassion for families in his speech tonight. White House aides say he will also call for a sweeping revision of the social welfare system, announce a year-long study of federal, state, and local welfare programs aimed at reducing welfare dependency, and propose an expansion of medicare to cover the costs of catastrophic care.

Whether Mr. Reagan would accept the Durenberger revenue-sharing plan is open to question. The President has sought to eliminate as much federal spending as possible, shifting the burden of public services to the states and localities.

In the case of welfare, the President in 1981 drastically reduced federal aid levels in entitlement programs, forcing the states either to cut back the programs or look to themselves and local jurisdictions to keep up the funding.

Under his ``New Federalism'' concept, Reagan also proposed in his first term that the federal government undertake the whole medicaid program, now shared with the states, leaving welfare entirely to the states. But that brought an outcry from Congress and the idea was dropped.

Nonetheless, the so-called ``Reagan revolution'' has significantly transferred power from Washington to the states, a trend the President is eager to continue in his second term. In this context Gramm-Rudman has sparked a new wave of consternation among governors and mayors, who see budget cuts being driven not by economic rationality but by fiscal considerations.

The Evans-Robb task force -- the so-called Committee on Federalism and the National Purpose -- brought together 25 people, including legislators, public officials, business representatives, mayors, and governors, to consider how to make the federal system more effective and humane.

The reason for federalizing AFDC and medicaid is to have uniform benefits nationwide, adjusted for cost-of-living differences in the different localities. ``You want the real benefits to be nationwide, and the disparities are 5 to 1 in both programs,'' says Forest Chisman, executive director of the Project on the Federal Social Role, under whose auspices the committee was formed.

Another committee recommendation is to turn over entirely to the states and localities the responsibility for programs now shared between the federal government and the states, such as community and economic development, transportation, and low-income housing. The logic is that uniformity is not needed in these public services.

``These programs will differ from state to state, and state and local officials are in a better position to determine priorities,'' says Mr. Chisman. ``And if AFDC and medicaid are federalized, the states and localities will save money.''

Senator Durenberger, also a member of the now-disbanded task force, is especially interested in the recommendation on revenue sharing. His bill would in effect ``means-test'' the present revenue-sharing program. Grants would go to the 10 or so states with the greatest needs, and the states would limit the ``safety net'' money to the most depressed areas.

Interest in the Evans-Robb task force proposals appears to be germinating in Congress. Senator Evans is trying to pick up support from the House and Senate leadership, aides say, and will try over the next four to nine months to advance an omnibus legislative package embodying the recommendations.

Meanwhile, the study prepared by the Fiscal Planning Services for the Villers Foundation, the National Council of Senior Citizens, and the Service Employees International Union concludes that, if Gramm-Rudman is triggered for fiscal 1987, federal programs administered by state and local governments will be slashed by more than $10 billion and that $2.4 billion more will be cut from medicare and student financial assistance.

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