It's Spending, Stupid! or, Why There's No State Budget Quagmire - In the past decade, state budgets increased by 88 percent, which led total state government spending to eclipse $1 trillion in 2001.

by Jason M. Thomas, Staff Economist
Citizens for a Sound Economy

11/20/02

State budgets have rarely, if ever, been in worse condition than they are today. According to the National Association of State Budget Officers (NASBO), the cumulative national deficit for state budgets stands at $40 billion in this fiscal year, with another $40 billion shortfall expected for 2003. Such a glaring disparity between revenues and outlays has led legislatures and governors across the nation to retrench and meet for special sessions to address the problem.

Since nearly every state’s constitution requires a balanced budget, in accordance with one accounting method or another, the states lack the budget flexibility afforded to the federal government. But with capital expenditures kept off balance sheets, “rainy day funds,” and refinancing of debt service obligations, states have significant room to maneuver before real cuts have to be made. Not to mention the states’ ability to return to the politically expedient well of cigarette tax revenue and the settlement money from the 1990s Medicaid class action against the tobacco industry.

Yet, budgetary obfuscation has its limits and during this past year 39 states have cut enacted budgets by a total of $15 billion. This cumulative intra-fiscal year spending reduction more than tripled 1992’s previous record total of $4.5 billion in enacted budget reductions. Most of these cuts have been across-the-board general fund reductions, with schooling and security spending exempted in many states.

The size of these budget cuts have led many commentators, including The New York Times’ Paul Krugman, to advocate for the federal assumption of state deficits so that “necessary services” are not compromised. While good-natured, this proposal would have the same effect as giving candy to a child for sticking a fork into an electrical socket. Today’s record cumulative state budget deficit of 7.8 percent of aggregate general fund revenues did not just happen; it is the product of irresponsible budgeting and overly sanguine revenue forecasts. By rewarding states’ fiscal negligence, the federal government would encourage – and get – more of the same.

In the past decade, state budgets increased by 88 percent, which led total state government spending to eclipse $1 trillion in 2001. During the economic boom of the late 1990s, state spending increased by 35 percent despite the fact that nearly a quarter of total state spending is need-based, which should decrease during a period of prosperity. While welfare (Temporary Aid to Needy Families) spending fell from 4.9 percent of state spending in 1992 to 2.2 percent in 2002, Medicaid increased its share from 17.8 percent to 20.5 percent during that same period.

Elementary and secondary education spending increased by roughly 85 percent during the past decade, as did higher education spending, with little, if any, criteria put in place to determine if the money was well spent. Unimpeachable in public discourse, increased education spending has fed a thriving public employees’ union and done little, if anything, to address the faltering scholastic performance of American youth.

Increased higher education spending has also gone to entrenched interests and established public universities instead of being targeted to needy families and prospective students. Secondary education spending has become an entitlement for upper middle class residents who are able to send their sons and daughters to public universities at a fraction of the actual cost of the education. This has created excess demand for public universities, which has forced states to issue more bonded debt to construct new dormitories and classrooms to house and teach these predominately middle class students.

The struggling economy has provided a welcomed check on extravagant state spending, but in some areas, like Medicaid, spending increases continue unabated. Medicaid spending is expected to increase by 13 percent in 2002, after an 11 percent increase in 2001. While most states have blamed increases in prescription drug spending (18 percent in 2002), the problem is the design of the system itself, which needlessly separates patients from doctors and creates a health care bureaucracy that fights for funding. Some hospitals and clinics win funding, others lose it; some treatments and pharmaceuticals win reimbursement, others do not.

Through it all, the premium is placed not on quality of care and winning the trust and patronage of Medicaid beneficiaries, but on political sponsorship and successful lobbying. As a result, much of the total budget is squandered on resources used to succeed in the political contest and unnecessarily expensive treatments. Patients not only have little choice among caregivers, but absolutely no incentive to be discriminating health care consumers. Millions are lost annually on unnecessary treatments, emergency room visits, and excess capacity.

Until states start addressing these problems in a serious fashion, and stand-up to the demands of the bureaucratic power centers of health care and education, the federal government should not take the cries of state lawmakers seriously. And state voters should remember well when lawmakers increase taxes and sacrifice their take-home pay at the altar of public employee unions.