State Finances State Finances in a Changing Economy

CHAPTER SIX STATE FINANCES STATE FINANCES IN A CHANGING ECONOMY By Marcia A. Howard Overview had increased by another SIS billion and budgets had been cut by more than S7.s bil Beginning in New England in fiscal year lion. States entered fiscal year 1992 hoping 1989, I states entered a period that is regard national forecasts predicting the end of the ed as one of the most difficult in the recent recession in the summer of 1991 would be past. One state after another found its revenue correct. growth not keeping pace with the growth rate They were wrong. Rather than rebound as that had been estimated for the fiscal year and forecast. consumer confidence continued to insufficient to meet the expenditures incorpo decline throughout the summer, and once rated into enacted budgets. This development again states were faced with budgets that were was met with some skepticism, however, since out of balance. By the middle of the fiscal the national economy was still growing and year, at least )0 states had developed budget there were no signs of recession. h was nOl un imbalances that would have to be addressed til January 1990, midway through fiscal year before the fiscal year ended. This time, how 1990. that states outside of the New England ever, states also realized their problems ran region began to feel the fisca1 pressure. As the deeper than the recession. Not only were they months wore on, more states joined the ranks collecting fewer revenues than anticipated, orthose whose budgets had fallen out ofbal they also were spending more than budgeted ance. for some programs. In particular, Medicaid Finally, in the summer of 1990. more than and corrections continued to surface as pro a fu ll year after the first signs of fiscal stress grams whose growth was running unchecked in the states, the national economy officially - and too high to be sustained over the long fell into recession. By that time, nearly half term. As a result, the slates' attention turned the states had experienced budget imbalances from short-term survival to long-term struc and had taken the steps necessary to correct tural changes. them. Thx increases enacted in 1990, and scheduled to take effect in fiscal year 1991, to How Did States Get Here? taled more than $10 billion; budget cuts total ed almost $3 billion. By the time the recession What caused the state difficulties that pre hit, states had enacted their fiscal 1991 bud dated the onset of a national recession'! Sever gets, budgets that had not assumed the onset al factors contributed to state fiscal stress of a national recession. It arrived without including spending issues related to health warning. care and corrections. court decisions. chang Fiscal year 1991 started off badly. Almost ing intergovernmental re lationships, and reve from the first day, states began announcing nue and spending patterns from the 19805. they would not be able to meet spending com Health Care and Corrections mitments because of insufficient revenues. For states, the single largest budget prob Although still concentrated in the northeast lem has been the growth of the Medicaid pro- ern United States, budget troubles began to creep into other regions, most notably the Marcia A. Howard is deputy director of the Na· Southeast, portions of the Midwest, and Cali lional Association of State Budget Officers in fornia. By the end of the fISCal year, state taxes Washington, D.C. 346 The Book of the States 1992-93 FISCAL ISSUES gram over the last five years. Medicaid, which spending growth. While some of the increases provides medical care for the poor, is a joint are tied to programs enacted·by the U.S. Con federal/state program mandated by the fed gress during the earl y 1990s, much of the in eral government, run by state government, crease simply results from the rising cost of and fu nded by both. Figure 1 shows a percent health care. And since Medicaid is a federa lly age breakdown of total state expenditures fo r mandated program, states find it difficult to several major categories. cut the program in ways that significantly re By 1970, five years after its enactment, duce costs. For the short term, then, they are Medicaid represented approximately 4 per forced either to raise taxes o r cut other pro cent o f state spending. By 1980 it had grown grams to fund additional Medicaid spending. 109 percent, and by 1990 to 14 percent. 2 It is Over the longer term, they hope to work with now the second largest state spending pro the federal government to address the under gram, having surpassed higher education in lying problems in both Medicaid and health fiscal year 1990. Its average growth in both fis care in general. cal years 1990 and 1991 was 20 perceD!, the The spending problem in corrections is highest of any state program.) Medicaid is somewhat differeD!. Here, state spending is expected to grow from a $71 billion program driven not so much by federal action or rising (state and federal shares in 1990) to a SI83 bil costs as by decisions made by the individual lion program by 1995. states and their citizens about how crime Figure 1 Total State E"pendilure5, Fiscal Year 1991 Higher Education Cash Assistance E & S Ed ucation 4.9% 22.4% 13.6% 3.6% Transportation 10.2% All Others 33.4% Sotll'Cr. NationaL Auociation or State Budl~ Ofrocen States cannot reasonably expect to fu nd should be punished. T he increase in drug growth of this magnitude while providing related cri mes and stiffer penalties for those other services and without raising taxes. With committing crimes have resulted in more peo the limited revenue growth of the last few ple being sent to prison for longer periods of years, some states have found that Medicaid time. The associated costs are significant. increases absorb the additional revenue they Like Medicaid, corrections over the last few generate from one year to the next. Over the years has grown fas ter than overall stale long term, this growth is unsustainable. spending. In fiscal year 1990, corrections grew However, states are li mited in what they can by 19 percent, and in fiscal year 1991, by 14 do to remedy the problems in Medicaid percent.· As stale budget problems escalated The Council of State Governments 347 FISCAL ISSUES in fiscal 1990 and 1991, some states, such as have tended to add to the states' costs in pro Illinois and Michigan, were unable to open viding public services. newly constructed prisons because they did Intergovernmental Relationships not have sufficient funds to operate them. Yet, Intergovernmental relationships include public sentiment on this issue has been clear: state/ federal relations and state/ local rela longer sentences, less generous (or no) parole, tions. Throughout the 1980s, the federal gov and higher sentencing rates are consistently ernment scaled-back its role in both state and favored by taxpayers and voters. These prefer local affairs. While states had never been ma ences also are very expensive: incarcerating a jor recipients of federal grants-in-aid, local single prisoner can cost as much as $30,000 governments had, and they sorely felt the per year in a maximum security facility. withdrawal of federal support. Court Decisions General Revenue Sharing, the major feder In areas ranging from corrections to edu al program that provided discretionary grants cation and from Medicaid to taxes, courts to states., was eliminated in 1981. With the dis have handed down decisions resulting in in appearance of revenue sharing, federal grants creased state expenditures or decreased state to states became disproportionately com revenues. prised of grants to individuals (such as Med • In corrections, state after state has icaid and Aid to Families with Dependent been put under court order to relieve Children). In 1960, payments to individuals overcrowding or improve prison condi represented 35 percent of the total federal tions. Well over half of the states are un grants to states and by 1980, this share had der court order to reduce crowding, a grown to only 36 percent. By 1990, however, factor that explains part of the explosion it had skyrocketed to 60 percent, reflecting the in corrections spending. elimination of revenue sharing, the slow • In education, states increasingly are growth of other grant programs, and the in being told by state courts that the creasing cost of Medicaid.' Thus, states have mechanisms they use to fund elementary had to adjust to decreasing federal contribu and secondary education are inequitable. tions to state programs, and a primary shift To address these inequalities, states have in those contributions from discretionary tended to increase overall spending on grants to entitlements. education. Among the states responding Along with reductions in its discretionary to such court decisions in recent years are aid to state governments, the federal govern Kentucky, Tennessee and Texas. ment imposed new costs on the slates in the • One of the methods states have used form of federal mandates. In the late 1980s, to address rising costs in Medicaid is to mandates became one of the most costly ad reduce their reimbursement rates to doc diuons to state budgets as the federal govern tors, hospitals and nursing homes. ment retained its desire to enact new policies, Courts have consistently ruled against but lacked the resources to fund them. In this practice, forcing states to maintain or stead, Congress and the Administration pass increase the reimbursement rates. ed the costs of policy initiatives on to state • In the area of tax policy, courts have governments in the form of mandated pro forced states to change their taxation of grams.

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