Paging DOGE: Study Finds 28% Spike In Corruption When Feds Shower Local Governments In Cash

Federal grants are a crucial funding source for local governments, growing from $135 billion in 1990 to an astounding $1.2 trillion in 2022. However, a new study reveals that sudden surges of federal money – so-called “windfalls” - increase local corruption by up to 28%. This research underscores the urgent need for stringent oversight mechanisms, particularly at the federal level, to ensure these funds serve their intended purpose rather than lining the pockets of corrupt officials.

Federal Windfalls: A Breeding Ground for Corruption

The study reveals that local governments experiencing sudden increases in federal grants witness a 28% rise in corruption-related charges. This trend is not surprising given that rapid financial expansion often outpaces the development of adequate oversight structures. 

Examples abound of public officials exploiting these funds for personal gain. One such case involved the mayor and accountant of Stonecrest, Georgia – Jason Lary, who pleaded guilty in 2022 to defrauding local churches, businesses and nonprofit organizations out of hundreds of thousands of dollars – out of a $6.2 million federal grant for COVID-19 relief.

In October of 2021, the DOJ seized roughly $480,000 of fraud proceeds from Lary – who was sentenced to nearly five years in prison.

The principal-agent problem exacerbates this issue. While the federal government provides funds with the expectation that local governments will use them appropriately, local officials—acting as agents—sometimes operate contrary to these expectations, exploiting gaps in oversight and enforcement.

The Role of Federal Oversight Agencies

Given the lack of oversight at the local level, federal oversight agencies, like the Department of Government Efficiency (DOGE), are vital in curbing these abuses. According to the study, federal oversight of ‘windfall’ grants rely on ‘Single Audits’ – the impact of which is “surprisingly limited and mixed. According to a 2021 study (Brumley et al.), when Single Audits do find corruption, there is usually no subsequent reduction in federal grant awards.

State oversight mechanisms offer some deterrence, particularly when state auditors hold Certified Fraud Examiner (CFE) credentials. However, their effectiveness is inconsistent across jurisdictions. While states with more fraud auditors experience lower corruption levels, the overall impact is relatively weak compared to federal intervention.

Federal Windfalls Enable More than Just Grant Fraud
Extra federal money doesn’t just lead to fraud in grant programs it spills over into other types of financial crime. More cash = more opportunities for mismanagement. (6/8)

— Kyle Welch (@Prof__Welch) February 19, 2025

At the local level, the situation is even more dire. The study highlights that poor audit outcomes—such as material weaknesses, questioned costs, and audit findings—exacerbate corruption. Local governments with a history of financial mismanagement are particularly vulnerable when receiving windfall grants, as they lack the necessary controls to prevent misuse.

Not All Audits Are Created Equal
Some audit findings (like questioned costs) exacerbate corruption risks, while others (like modified opinions) do nothing. What we measure and act on matters. (7/8)

— Kyle Welch (@Prof__Welch) February 19, 2025

The Power of the Press: An Unofficial Watchdog

In addition to formal oversight mechanisms, a strong local press plays a crucial role in exposing corruption. The study demonstrates that local corruption spikes when newspapers shut down. This finding aligns with broader research showing that the media acts as an informal check on government misconduct by increasing transparency and public accountability. Unfortunately, the decline of local journalism in recent years has weakened this crucial line of defense.

Policy Implications and Recommendations

To combat the corruption linked to federal windfalls, policymakers must strengthen oversight at multiple levels:

1. Enhance Federal Oversight: Agencies like DOGE should increase their scrutiny of windfall grants, particularly in municipalities with a history of financial mismanagement.

2. Mandate Independent Federal Audits: Rather than relying on local and state audits, federal agencies should conduct independent, randomized audits to deter misconduct.

3. Strengthen State Fraud Detection: States should require their auditors to hold CFE credentials and allocate more resources to fraud detection.

4. Support Local Journalism: Given its deterrent effect, federal and state governments should explore initiatives to sustain local investigative journalism.

Until then, politicians gonna politician…