The High Cost of Free Money

Bringing federal funds to Idaho is more expensive than you might have thought.

I’m sure you’ve heard the refrain before: that federal tax dollars are essentially free money. Unlike our state’s General Fund, which consists of taxes directly assessed on Idaho citizens and businesses, federal money seems like a giant pot of gold, just waiting for someone to take it.

During the campaign for Medicaid Expansion in 2018, proponents argued that not only should Idaho take as much federal money as it could, but that if it didn’t, some other state would benefit from our federal taxes. As Sen. Christy Zito recently put it, “Federal money is addictive. Many see it as free. Others believe it is simply their taxes coming back to the state.” However, she warned that “The cost was far greater than the dollars offered.”

First, federal money is still money, believe it or not. It is drawn not only from federal taxes, but also from the hidden tax of inflation caused by government debt and expansion of the money supply. In fiscal year 2026, 37% of Idaho’s budget consists of federal dollars.

Free money is expensive in other ways as well. While reading about Senate Bill 1206 last week, I noticed something interesting in its neighbor. Senate Bill 1207 contained various appropriations for the Idaho Department of Health & Welfare (DHW). Included in the bill were requirements for several reports, including one on the “administrative burden” of applying for federal grants:

The Department of Health and Welfare shall provide a report on the administrative burden of applying for, implementing, and administering federal grants, including the paperwork burden and time to comply with federal requirements. The report shall be submitted to the Joint Finance-Appropriations Committee and the Budget and Policy Analysis Division of the Legislative Services Office no later than August 1, 2025.

DHW submitted its report on exactly August 1, and its findings were striking. You can read and download the full report here:

Administrative Burden Of Federal Grants

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According to the report, processes related to applying for and complying with federal grants required nearly 19,000 pages of documentation, not including invoices, planning documents, and memos. DHW received 100 federal grants totaling $3.8 billion in fiscal year 2023. Of these 100 grants, 84 included reporting requirements. Fifty-five required annual reports, 13 quarterly reports, and 32 had specialized requirements, including daily reporting. Twenty-nine grants involved in-person federal reviews.

By accepting these grants, Idaho not only invited federal oversight into every nook and cranny of state government, it also reshaped its mission toward federal priorities. FY2023 fell during the Biden administration—is it any wonder that Idaho’s DHW at that time sometimes resembled the circus that was the Democratic White House?

Sixty of the grants required the DHW director to sign an agreement with the federal government, while 23 required such an agreement from the governor. All 100 grants had federal laws or regulations tied to them, but only 16 allowed DHW to apply for waivers. Not only did this cede a great deal of policymaking authority away from Idaho and toward the federal government, it also centralized what authority remained in the executive branch rather than the Legislature.

Of the 16 grants eligible for waivers, DHW received eight. That means 92% of federal grants in FY2023 came on a “take it or leave it” basis. Once accepted, leaving is rarely practical.

Of the $3.8 billion in federal grants, approximately $175 million was passed through to separate entities, such as public health districts, colleges and universities, hospitals and other healthcare providers, school districts, Indian tribes, cities, and counties. Even when federal dollars pass through to third parties, DHW remains responsible for compliance, reporting, and enforcement.

The report explains that applying for and complying with reporting requirements for these 100 grants required 1,137.1 full-time employees and more than two million man-hours, representing 38% of all DHW full-time staff. Personnel costs at DHW in FY2023 (the same year referenced in the report) totaled just over $268 million, which—according to some rough back-of-the-napkin math—means around $95 million was spent applying for and complying with federal grants. That figure reflects an average across all DHW employees; if personnel working on grants are higher-paid than average, the true cost would be higher.

On average, that works out to the equivalent of more than eleven full-time employees to administer each federal grant. Twenty of the grants required a total of 900 hours of mandatory training for DHW staff, while 24 required the formation of advisory committees, one of which met 84 times in FY2023.

Taken together, this suggests that roughly one out of every three DHW employees is primarily tasked with managing federal grants rather than directly delivering services to the people of Idaho. Every federal dollar delivered to our state requires a substantial prior investment of time and labor.

One could argue that getting $3.8 billion in exchange for $95 million is a good deal, but it certainly undercuts the claim that this money is “free,” not to mention the regulatory compliance our state must undertake to qualify for these grants—regulations that can and often do run contrary to Idaho values. And, once again, the money is still our tax dollars in the end.

One other section of the report deserves some attention. Of the 100 grants in FY2023, 92 were capped while eight were open-ended. However, those eight accounted for 86% of the federal dollars expended by DHW. Open-ended grants have no limit. For example, under Medicaid Expansion the federal government reimburses Idaho for 90% of benefit costs—whatever those costs may be.

The Federal Medical Assistance Percentage (FMAP) for traditional Medicaid is based on numerous factors, including per-capita income. Idaho’s FMAP in FY2026 is 66.91%, down from more than 70% just three years ago. One of the primary selling points of Medicaid Expansion was the 90% FMAP, though the federal government could change that rate at any time.

It is easy for politicians to fall in love with open-ended federal grants, since they can argue they are simply leveraging a small amount of state money to obtain large amounts of federal funding. Yet these systems tie our hands. Increased enrollment and rising healthcare costs not only bring in more federal funds, they also drive automatic increases in our state budget.

These open-ended grants can also leave Idaho holding the bag should the federal government change its policies.

Open-ended grants have been a significant factor in driving spending increases over the past two decades. In FY2005, they accounted for $871 million. By FY2023, that figure had grown to $3.2 billion. A plurality of all federal spending in Idaho since FY2005 has flowed through DHW, with the lone exception of FY2010, when it accounted for 49%.

Fourteen grants, totaling $81 million, required a Maintenance of Effort (MOE). MOE requirements obligate Idaho to maintain specified levels of spending or eligibility in order to continue receiving federal funds. These requirements can create ratchet effects in state spending, locking in higher commitments once agreed to, even if federal funding later declines.

Putting this all together, DHW’s own data shows that federal funding is not merely a simple transfer of money to Idaho, but a complex process that carries substantial and lasting obligations. In FY2023 alone, administering federal grants required more than 1,100 full-time employees, roughly $95 million in personnel costs, tens of thousands of pages of documentation, ongoing federal reporting and in-person reviews, and nearly $700 million in required state and local matching funds, along with additional maintenance-of-effort commitments.

Because most federal dollars flow through a small number of open-ended programs, particularly Medicaid, increases in enrollment, utilization, or federal requirements automatically expand Idaho’s long-term fiscal and administrative responsibilities. Whatever one’s view of these programs, it is clear there is no such thing as “free money.”

The Joint Finance-Appropriations Committee and the Legislature should take a serious look at Idaho’s growing reliance on federal funds when they convene in Boise next week. The cost of free money might well be more than we can afford.