Don’t Feel Sorry For States: They Caused Their Deficits

State budgets have rarely, if ever, been in worse condition than they are today.

According to the National Association of State Budget Officers, the total deficit for state budgets nationwide 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, the states lack the budget flexibility afforded to the federal government.

But with capital spending kept off balance sheets, “rainy day funds” and refinancing of debt service obligations, states have lots of 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 revenues 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 spending reduction more than tripled 1992’s previous record $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.

Federal Bailout?

The size of these budget cuts has led many commentators, including Paul Krugman of The New York Times, to advocate the federal assumption of state deficits so “necessary services” aren’t compromised.

While good-natured, this 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% of aggregate general fund revenues did not just happen. It’s 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%, which led total state government spending to eclipse $1 trillion in 2001.

During the economic boom of the late 1990s, state spending grew 35% even though nearly a quarter of total state spending is need-based, which should fall during a period of prosperity. While welfare (Temporary Aid toNeedy Families) spending fell from 4.9% of state spending in 1992 to 2.2% in 2002, Medicaid’s share rose from 17.8% to 20.5% during that same period.

Elementary and secondary education spending grew roughly 85% during the past decade, as did higher education spending, with few, if any, criteria put in place to determine if the money was well spent.

Unimpeachable in public discourse, higher 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. Higher education spending has become an entitlement for the upper middle class, 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 build new dormitories and classrooms to house and teach these mostly 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 rise by 13% in 2002 after an 11% increase in 2001.

Health Care Nightmare

While most states have blamed increases in prescription drug spending (18% in 2002), the problem is the system itself. It needlessly separates patients from doctors by erecting a dependent health care bureaucracy. Some hospitals and clinics win funding, others lose it; some treatments and drugs win Medicaid 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 lobbying.

As a result, much of the Medicaid budget is squandered on the political funding contest and the inefficient allocation of resources.

Patients not only have little choice among caregivers, but also absolutely no incentive to be discriminating health care consumers. Millions are lost each year 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 hike taxes and sacrifice their take-home pay at the altar of public employee unions.

Jason M. Thomas is a staff economist with the nonpartisan Citizens for a Sound Economy.

Today’s record cumulative state budget deficit . . . didn’t just happen; it is the product of irresponsible budgeting and overly sanguine revenue forecasts.

LOAD-DATE: December 27, 2002