Budget Agreement Continues to Drive Overall Increase in Defense Dollars to States

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Budget Agreement Continues to Drive Overall Increase in Defense Dollars to States
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The U.S. government spends defense dollars in every state through purchases of military equipment, wages for service members and civilians, pension payments, health care services, and grants to states. In fiscal year 2020—the most recent year for which data is available—the federal government spent $678 billion on defense in the states and the District of Columbia, or $2,058 per capita.

On a state-by-state basis, per capita defense spending ranged from $549 in Oregon to $8,358 in Virginia. The District of Columbia received the highest amount in the country per person at $10,996. (See Figure 1.) 

In large part because the Bipartisan Budget Act of 2019 included increases to previously legislated spending caps, federal expenditures on national defense increased by $45.7 billion from fiscal 2019 to  fiscal 2020, or $132 per capita nationwide. The act raised spending limits for both defense and nondefense spending in fiscal years 2020 and 2021, but those additional dollars are not distributed evenly across the states. The differences can be attributed generally to the types of funds received.  

Defense spending distributed differently across five major categories

The federal government spends money on national defense in every state. According to the National Conference of State Legislatures, defense dollars serve as a major economic driver for many communities. For example, active duty and civilian employees spend military wages within their local economies, pensions provide reliable funding for retirees, and contracts can provide funding for the development and construction of weapons systems.

Defense spending falls into five major categories: contracts, salaries and wages, retirement benefits, nonretirement benefits, and grants (see below for more information on each). Because each state’s level and mix of defense spending is unique, the effect of federal budget changes varies by state. 

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Note: Defense spending is defined as Department of Defense expenditures on salaries and wages for military personnel as well as retirement and nonretirement benefits (e.g., military pensions and health care services, respectively) and obligations for contracts for purchases of goods and services, such as weapons systems and information technology consulting, and grants to states and local governments.

Sources: Pew calculations using data from the U.S. Department of Commerce, Bureau of Economic Analysis, Annual State Personal Income and Employment, “Personal Current Transfer Receipts (SA35),” accessed December 2021; USASpending.gov, accessed December 2021; U.S. Department of Defense, Office of Local Defense Community Cooperation (formerly the Office of Economic Adjustment), “Defense Spending by State, Fiscal Year 2020” (2021); U.S. Census Bureau, “Annual Estimates of the Resident Population for the United States” (December 2021); U.S. Department of Defense, Office of the Actuary, “Statistical Report on the Military Retirement System, Fiscal Year 2020” (2021)

Contracts for purchases of goods and services, such as military equipment, information technology, and operations and maintenance programs, accounted for 65% of all federal defense spending in the states. This was the largest category in 38 states and the District of Columbia; for 16 states it made up nearly two-thirds of total defense spending.

Salaries and wages for active-duty military, civilian, reserve, and National Guard personnel made up 23% of total spending and was the largest category in 12 states. Every state except one, Mississippi, saw an increase in salaries and wages from fiscal 2019 to fiscal 2020.

Retirement benefits, payments to individuals for military pensions, accounted for 9% of spending in the states. Retirement spending saw the least growth of any category, with 33 states seeing an increase of 2% or less.

Nonretirement benefits, which are payments for health care provided through the military’s Tricare Management Program, accounted for 2% of spending. These benefits accounted for a high of 8% of total federal defense spending in Idaho, and a low of 0.1% in the District of Columbia.

Grants, which include funding to state and local governments for programs such as National Guard activities and medical research and development, as well as basic and applied scientific research, accounted for 1% of spending. Among all states, Vermont received the largest proportion of its funds from grants at 7%. Of each spending type, states saw the largest increases in grant spending, with 10 of them experiencing more than a 50% jump in per capita spending in this category from fiscal 2019 to fiscal 2020.

Each state received a unique mix of funding from each of these categories in fiscal 2020. (See Figure 3.)

Mix of defense dollars in states meant some types of spending grew more than others

In August 2019 Congress passed the Bipartisan Budget Act of 2019, which increased discretionary defense and nondefense spending caps for fiscal years 2020 and 2021 by $90 billion and $78 billion, respectively. This boost was larger than under prior budget agreements, with actual spending growing by $46 billion between fiscal years 2019 and 2020, or $132 per capita nationwide. (See Figure 3.)

Although the budget deal did not specify where additional funding should go, it went primarily to contracts in fiscal 2020, which translated into a $102 per capita increase nationally. The second-largest increase went to salaries and wages, which went up $21 per capita nationwide. That was followed by a $3 per capita increase in grants and a $2 per capita increase in retirement and nonretirement. Defense spending for grants increased only $3 per capita, but total spending in that category saw the largest relative increase overall at 16%.

Because the year-over-year changes in spending categories ranged from significant to negligible, states experienced varying impacts based on the mix of funding they received—including some states, such as Delaware and Maine, that saw overall decreases. Although Congress appropriated more for defense overall, specific policy decisions played a role in determining the different ways those funds were spent.

The biggest year-over-year changes were in contract spending, meaning that states receiving a relatively larger share of funds from contracts saw the biggest fluctuations. Although grants have historically made up a smaller share of funding for states, they grew uncharacteristically in fiscal 2020 compared with other recent years, with some states seeing significant changes. For example, Maine saw a 336% increase in grant spending per capita, or $64 more per person than in the prior year. North Dakota, meanwhile, had a 292% jump in grant spending per capita, which made up more than half of its total increase per capita.

Policy decisions around how defense dollars are spent resulted in variations in the increases and decreases that states saw by spending category:

Contract spending saw an 8% increase from fiscal 2019 to fiscal 2020. Louisiana experienced the greatest increase at 72%, while Wyoming saw the largest decline, dropping 60%. In Louisiana, Textron—the largest contractor in the state—received $274 million more in contract funds in fiscal 2020 than in 2019. In Wyoming, the two companies receiving the largest amount of funds in fiscal 2019, Fluor Corp. and Ames Construction, collectively received $100 million less in defense contract funds in fiscal 2020 over 2019.

Salaries and wages increased 5% between fiscal 2019 and fiscal 2020. Oregon saw the largest increase at 24%; Mississippi, meanwhile, was the only state to see a decrease with a 2% decline.

Retirement benefits saw the smallest overall increase, with a 1% boost overall nationwide. This ranged from a 3% increase in Vermont to a 7% decline in Washington.

Nonretirement benefits increased 4% increase in fiscal 2020 from fiscal 2019. The changes ranged from a 17% increase in the District of Columbia to an 7% decrease in Vermont.

Grants saw the greatest increase of any category, with a 16% jump in fiscal 2020 over fiscal 2019. The range of change was wide, with a 337% jump in Maine and a 52% drop in Delaware.

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Notes: Defense spending is defined as Department of Defense expenditures on salaries and wages for military personnel as well as retirement and nonretirement benefits (e.g., military pensions and health care services, respectively) and obligations for contracts for purchases of goods and services, such as weapons systems and information technology consulting, and grants to states and local governments.

Sources: Pew calculations using data from the U.S. Department of Commerce, Bureau of Economic Analysis, Annual State Personal Income and Employment, “Personal Current Transfer Receipts (SA35),” accessed April 2021; USASpending.gov, accessed April 2021; U.S. Department of Defense, Office of Local Defense Community Cooperation (formerly the Office of Economic Adjustment), “Defense Spending by State, Fiscal Year 2019” (2021); U.S. Census Bureau, “Annual Estimates of the Resident Population for the United States” (April 2021); U.S. Department of Defense, Office of the Actuary, “Statistical Report on the Military Retirement System, Fiscal Year 2019” (2021)

Rebecca Thiess is a manager and Laura Pontari is a senior associate with The Pew Charitable Trusts’ fiscal federalism initiative.

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