This chapter examines the impact of the first enactments of Ronald Reagan's New Federalism: budget cuts and state block grants. It focuses on the State of Texas and its largest city, Houston. The Texas response was undoubtedly different from that of other states and localities primarily because of the Texas governments' initially lower levels of dependency on federal funds. Like many other states, Texas experienced a roller-coaster ride with the federal aid system between 1981 and 1983. Texas is one of ten states guaranteed to receive proportionally more federal matching funds under a special provision in the new law for which Senator Lloyd Bentsen fought vigorously. In spite of a signficiant restoration of 1981 Medicaid cuts, Texas officials took several steps to economize their operation of the state's federally funded health service programs for the indigent. Houston's city council responded to the actual and projected wastewater revenue shortfalls by raising severe rates and selling and passing an "alternative financing ordinance.".