Cato Policy Analysis No. 152 May 23, 1991

Policy Analysis

State Spending Splurge:
The Real Story Behind the Fiscal Crisis in State Government

Stephen Moore is director of fiscal policy studies at the Cato Institute.


Executive Summary

For most of the last decade, while the federal government wallowed in red ink, America's state governments were being widely praised as both paragons of fiscal responsibility and innovative laboratories of democracy. Thanks to the surging national economy, the 1980s were years when most states were able to please special-interest groups and taxpayers: while vastly expanding their budgets for existing agencies and launching popular and expensive state-funded programs in new policy areas, state lawmakers still managed to meet the bottom-line requirement of a balanced budget each year.(1)

It is only now in the 1990s that the tab for that spending spree is finally coming due. With as many as 35 states facing substantial budget deficits in 1991 or 1992,(2) the bud- get outlook in state capitals may be more gloomy today than at any time since the depression.(3) Aggregate state budget reserves have dwindled to an anemic 1.5 percent of expenditures--their lowest level in memory and less than one-third of the 5 percent reserve level considered fiscally prudent. The New York Times recently summarized the current plight of state governments as "a fiscal calamity."(4)

The budget deterioration is most acute in the states east of the Mississippi River, particularly in the northeastern region, but recently it has surfaced in southern and some western states as well. California, Connecticut, Florida, Massachusetts, Michigan, New Jersey, New York, Rhode Island, Texas, and Virginia each must erase deficit spending of $1 billion or more this year. New York governor Mario Cuomo and California governor Pete Wilson face the biggest challenges: both must close a staggering two-year budget shortfall of $6 billion to $10 billion. "We're broke to the marrow of our bones," conceded Cuomo when he introduced his budget early in 1991.(5)

The root cause of the budget crisis has been almost universally misdiagnosed by state lawmakers, economic analysts, and the media. Most blame the crisis on a variety of economic, political, and fiscal factors all beyond the states' direct control. Those factors include (1) a nation- al economic recession that has drained the states of revenues, (2) citizen resistance in the 1980s to new state taxes, (3) steep declines in federal aid during the 1980s, (4) new spending mandated by Washington, and (5) court-imposed spending requirements for education and corrections.

Although each of those factors may be partially responsible for the record red ink in the states, they are of minor significance compared with the primary culprit: a decade of runaway state government expenditures. According to official Bureau of the Census data, state spending between 1982 and 1989 grew at an annual rate of 8.5 percent, or roughly twice the inflation rate.(6) Double-digit annual percentage expenditure growth became the norm for state-funded programs, such as education, health care, welfare, and corrections. The number of state public employees grew by more than one-half million in the 1980s and now has reached an all-time high of roughly 150 employees per 10,000 residents.(7)

Even in the midst of the current budget crisis the spending binge continues. In 1990 the states increased spending on primary education by 10 percent, on higher education by 9.5 percent, on corrections by 17 percent, and on Medicaid by 18 percent.(8)

If anything, the aggregate state spending trends tell only a portion of the story. They do not explain the differing fiscal fortunes of the states. They do not explain, for example, why Massachusetts and New York are nearly in- solvent today while Montana and Oregon are enjoying healthy surpluses.

Close examination of the fiscal behavior of the individual states during the 1980s reveals that the villain is again uncontrolled expenditures. With few exceptions the states with the most severe deficits today are those that saw their economies and tax revenues grow rapidly over the past decade but allowed spending to grow even faster. For the nation as a whole, state spending increased by a total of 104 percent between 1980 and 1989. However, in some states the increase was dramatically greater than that: in California, which has a $6 billion deficit in 1991, it increased 119 percent; in Connecticut, which has a deficit estimated at from $600 million to $1 billion, it increased 174 percent; in Florida, which has a deficit of from $700 million to $1 billion, it increased 169 percent; in Massachusetts, which has a $1.1 billion deficit, it increased 134 percent; and in Virginia, which has a $1.7 billion deficit, it increased 119 percent. In the nearly bankrupt states of the northeastern region as a whole, state spending increased 129 percent.

The Democrats in state government are no more responsible for the spending binge than are the Republicans. On balance the fiscal condition of states run by GOP governors and state legislatures is only marginally healthier than that of states controlled by the Democrats. The spending build-up clearly has been a bipartisan effort.

Although the amount of state taxes paid per person almost doubled, from $658 to $1,150, between 1980 and 1989, governors and legislators are demanding more revenues to cover their deficits. In 1990 they enacted $11 billion in new taxes, making it the single worst year for state tax- payers ever, according to the National Association of State Budget Officers.(9) Now, with state deficits continuing to mount, almost two-thirds of the legislatures are again pressing taxpayers for more funds in 1991 and 1992. Only a handful of new-breed, fiscally conservative governors--including Lawton Chiles of Florida, John Engler of Michigan, William Weld of Massachusetts, and Douglas Wilder of Virginia--have resisted the relentless crusade for new taxes and instead are cutting spending.(10)

Notwithstanding the efforts of such governors, a distressingly familiar fiscal pattern has taken shape in the halls of state governments over the course of the past decade. Tax receipts and spending rose sharply during the economic expansion, and now mountainous deficits have arrived during the current recession. That situation has prompted resistance to spending restraint and persistent calls for tax increases by powerful special-interest groups--teachers' unions, government employees, government contractors, hospitals, welfare providers, and the like--to balance the budget without service disruptions. Meanwhile, state taxpayers continue to get squeezed.

In short, the fiscal policies of state governments in the 1990s have come to closely resemble those of Washington. William Weld's observation that the Massachusetts legislature lost its capacity to "just say no" to special interests could easily describe the culture of spending that now prevails in almost all of the state capitals, to say nothing of Washington. State lawmakers should recognize from the experience of the federal government that they are sliding down a slippery slope leading to fiscal disaster, not fiscal balance.

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