State Governments Grow Despite Recession

Despite the worst revenue shortfalls in a decade, most state governments continued to grow this year, and many are approving even larger budgets for next year.

"The tendency is all up in most states," says fiscal analyst Nick Jenny of the Rockefeller Institute of Government, a university-affiliated think tank in Albany, NY.

Inflation, population growth, increasing caseloads, and especially rising Medicaid costs, will keep state governments growing this year and beyond, Jenny told Stateline.org.

Fiscally conservatives lawmakers, who watched state governments grow at record rates through the boom times of the1990's, find the current trend frustrating.

"I think the biggest irony for me is we see layoffs in the private sector and people in state government want to be held harmless," says the Republican State Rep. Jamie Van Fossen, chair of the Iowa House Ways and Means Committee.

Iowa employees have largely avoided layoffs so far, despite across the board cuts in state spending. The state has opted instead to offer early retirement to some employees and is forcing others to take unpaid furloughs one day a month.

Van Fossen says he would like to see these short-term fiscal measures supplemented by more long-term structural reforms, such as deeper tax cuts, less social service spending and cuts to Medicaid, which he considers to be the budget's major problem area.

But he doesn't think long-term reforms will come without a fight.

"There's a whole constituency that's built up behind various projects undertaken in the 1990's," Van Fossen says.

State budgets enacted for the 2002 fiscal year, which runs from July 1, 2001 through June 30, 2002 for most states, include spending growth of 2.8 percent, according to the National Association of State Budget Officers (NASBO). This is a far cry from the growth rates of the 1990's, but still, it is growth.

And it is occurring in the midst of tax collections heading the opposite direction.

From July through December last year, total state tax revenue was 2.9 percent less than the same period the year before, a rare year-over-year drop, the Rockefeller Institute's Jenny says. This trend will likely continue through the rest of the fiscal year despite the improving economy.

The battle over taxing and spending and the size of government usually is cast as a battle between Republican and Democrats. But some analysts say the pressure to spend comes from both sides of the aisle, from Democrats and Republicans, from liberals and conservatives.

"Many conservative state lawmakers are just as guilty as their liberal counterparts at supporting spending increases. That could be why you're seeing some reticence on their part to cut," says Chris Atkins, director of the tax and fiscal policy task force of the American Legislative Exchange Council, a national organization representing conservative state lawmakers.

"When you think about how much they've spent over the past ten years, I'm not sure you would even expect them to cut now," he says.

Atkins says state government spending grew 63 percent from1990 through 2000. This increase outpaced inflation and population growth, making it a real and significant increase in the growth of government, he says.

With the growth continuing this year, conservative lawmakers are left wondering what it will take for the growth to stop.

"Unless people really get up in arms, I think that when revenue gets good again we'll do what we did before, doubling the size of government every 10 or 12 years, giving a little back every now and then," Wisconsin Republican State Rep. Frank Lasee says.

Lasee, an eight year veteran of the statehouse and advocate for smaller government, says the only effective control on state government spending would be a constitutional provision limiting growth to account for inflation and population increases and nothing else.

One reason many states have been able to increase spending through this recession is the significant reserve funds they built up during the boom times of the mid-to-late 1990's.

Coming into the recession, state reserves were valued at 7.7 percent of annual expenditures, according to the Center on Budget and Policy Priorities. By contrast, they had reserves of just 4.9 percent of expenditures in 1989, just before the last recession.

As of April, twenty-six states had tapped or proposed to tap these funds. Another eleven states were considering tapping other reserve funds, according to the National Conference of State Legislatures.

Many states are also turning to tobacco settlement money at least seventeen so far, according to NCSL. This huge pot of money, which flows from the settlement of a lawsuit seeking reimbursement of public health costs incurred treating tobacco-related illnesses, was not available during the last recession.

Eight states have enacted tax or fee increases, but these have been small compared to the increases of the early 1990's, when states closed two-thirds of their aggregate deficit through tax increases a total of $36 billion.

Similar tax increases appear unlikely this time around, analysts say.

"There hasn't been much pressure to increase taxes during this recession," says Chris Edwards, director of fiscal policy at the Cato Institute, a libertarian-minded think tank in Washington, DC. "So I'm crossing my fingers that the economy will start growing again and the folks wanting to increase taxes will not have the upper hand."