Revised February 6, 2003

IS THE STATE FISCAL CRISIS REAL?
by Nicholas Johnson

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In a pair of January 15, 2003 stories in USA Today, reporter Dennis Cauchon expresses doubt about the severity of the fiscal crisis in the states by asserting that state and local governments are expanding, not contracting. He seeks to disprove predictions that states must cut spending or raise taxes in order to balance their budgets, even though those predictions have been issued by numerous elected officials of both parties in nearly every state as well as by a wide range of independent, nonpartisan analysts and experts.

These stories include a number of errors in reporting and analysis. It is these inaccuracies that allow the newspaper to reach conclusions so at odds with the assessment of nearly everyone else who has studied the issue. For example:

Some 38 states — three out of four states — either cut spending in 2002, are projected to cut spending in 2003, or both. The USA Today story uses the NASBO data (unadjusted for inflation) in a table accompanying the story, but does not acknowledge these figures in the story itself.

"The budget proposes total state spending in 2003-04 of $89.2 billion (excluding expenditures of federal funds and bond funds). This represents a decrease of 5.7 percent [from the current year]. General Fund spending is projected to fall from $75.5 billion in the current year to $62.8 billion in the budget year."(1)

Cauchon similarly writes that, even with budget cuts, spending in Minnesota will rise. Again, this is untrue. Spending in the current two-year budget period in Minnesota totals $27.1 billion; funds available to spend in the upcoming budget period that begins July 1 total $26.9 billion — a more than $200 million decline.(2)

To avoid cutting services, states must have enough revenue to cover inflation in the cost of providing services as well as population growth. For instance, in the area of health care, state governments — like private firms — face constantly rising costs due to higher drug prices and other factors. In fact, Medicaid cost growth at present is relatively modest compared to the cost of health insurance in the private sector; per capita premiums for employer-based health care in 2002 rose 12.7 percent, compared with 7 percent growth in the cost of Medicaid for the comparable population of non-elderly adults and children.(3) Moreover, the number of children and senior citizens that qualify for state-subsidized care is rising. Similarly, enrollment in elementary and secondary schools is rising at a rate of roughly 300,000 children per year, meaning that schools must hire more teachers to keep student-teacher ratios stable. Thus even if a state spends the same number of dollars in one year as in the previous year, the services that it provides likely must be scaled back.

Although many states are laying off workers, states have not shed nearly as many jobs since the beginning of the recession as the private sector has, but that in part is because states did not add nearly as many jobs as the private sector did during the economic expansion. Over the past ten years, a period that covers both expansion and recession, state government employment has fallen from 4.1 percent of all salaried workers in the economy to 3.8 percent. Note that this stability is good for the economy, because it helps to maintain consumer spending and thus prevent private-sector employment from declining even more than it otherwise would.

The true severity of the present budget crisis may best be understood by the extent to which it is forcing elected officials with reputations for cutting taxes — both Republicans and Democrats — to propose tax increases. Although it is early in the budget season, 17 governors of both political parties all have called for increases in taxes in their states, indicating that such tax increases are necessary to avoid even more devastating reductions in public services. It is not credible to suggest, as USA Today does, that these elected officials — many of whom built their public identities in part around lower taxes — would propose unnecessary tax increases.


End Notes:

1. The decline in general fund spending reflects, in part, a shifting of $8 billion in state responsibilities to local governments, along with $8 billion in new tax revenue to pay for them. Even if that $8 billion is counted in the general fund amount for the coming year, however, the budget still reflects a $5 billion cut. Legislative Analyst's Office, 2003-04: Overview of the Governor's Budget, January 14, 2003.

2. Minnesota Department of Finance, November 2002 Economic Forecast.

3. Leighton Ku and Matthew Broaddus, Why Are States' Medicaid Expenditures Rising? January 13, 2003 ( /cms/index.cfm?fa=view&id=1409).

4. See Leighton Ku et al, Proposed State Medicaid Cuts Would Jeopardize Health Insurance Coverage For One Million People, /archiveSite/12-23-02health.htm.

5. This point, and the one that follows, are discussed more fully in Elizabeth C. McNichol and Kevin Carey, Did States Overspend in the 1990s? at /archiveSite/10-15-02sfp.pdf.