Winners and Losers in State Budgets

In a sign of just how bleak state fiscal prospects have become, some analysts consider K-12 education a winner in the state budget game despite the fact that fourteen states have already cut spending in the sector this year.

“A winner, on a relative scale, has got to be K-12 education,” said Scott Pattison, executive director of the National Association of State Budget Officers.

Pattison spoke Wednesday (02/05) at the Outlook in the States 2003 conference hosted by Governing magazine. He said education is a winner, because even though it has been cut by more than a dozen states, it has fared better than most other state programs.

K-12 education funding is considered by many the sacred cow of state politics.

“Education is something that states do their very best to protect in an economic downturn,” said Corina Eckl, fiscal affairs director at the National Conference of State Legislatures, a nonpartisan association for state lawmakers. “In view of the popular and political support that K-12 education enjoys, the fact that states are even cutting it is an indicator of the severity of these fiscal problems.”

The K-12 component of education funding accounts for more than one third of total state spending, meaning lawmakers looking for savings during an economic downturn must turn their eyes to it eventually.

“With the budget gaps we’re experiencing, invariably you have to go to K-12 or you’re hitting every other portion of your budget with disproportionately large cuts,” said Eckl.

NCSL reported Wednesday that the states cutting K-12 education in fiscal year 2003, which ends June 30 for most states, include: Arizona, California, Colorado, Connecticut, Hawaii, Indiana, Maryland, Montana (proposed), Nebraska, North Carolina, Ohio, Oregon, Utah and Virginia.

Though deficit figures differ greatly from state to state, the aggregate of all state budget deficits is roughly $26 billion in fiscal year 2003 and is expected to be more than $68.5 billion in fiscal year 2004, according to NCSL.

In this environment, nothing is sacrosanct. As a result, sorting out winners from losers is an exercise in relativity, where everyone loses in absolute terms, but some programs fare better than others upon comparison.

“We’re looking at a four-year cumulative budget gap in the states of something in excess of $180 billion, rapidly growing to $200 billion. That’s where the discussion about winners and losers starts, because virtually every state program is a loser. So the question becomes, the relative winners and losers in this fiscal environment,” said Eckl.

The protection enjoyed by K-12 education does not extend to state funding of colleges and universities, which comprises almost 13 percent of state spending. Twenty-six states cut higher education funding in fiscal year 2002 and 20 states cut it in fiscal year 2003. And these cuts went much deeper than state slices into K-12.

Higher education is a ripe target for state budget scalpels because universities can simply turn around and pass the cuts on to students and their parents in the form of higher tuition and fees, meaning the quality of education may stay consistent, even though the distribution of its costs does not. It’s often viewed as more of the painless cuts.

One area where budget cuts are not at all painless is Medicaid, a joint state and federal program that provides health coverage to the poor. People who lose Medicaid coverage often have nowhere else to turn.

Sixteen states made cuts to Medicaid in fiscal year 2003, according to NCSL.

Ray Scheppach, executive director of the National Governors Association, said Wednesday that these and other expected state Medicaid cuts could force 1 million women and children off the rolls.

Medicaid is a particularly vexing problem for state governments, who have watched the program’s costs skyrocket in recent years. During the 1990’s, states loosened enrollment requirements to enable them to cover more and more people who would otherwise not have health insurance. But now, with medical costs exploding nationally, many states are finding that they can no longer afford the program as currently constituted.

Robert Bittenbender, former budget director for the state of Pennsylvania, likens the Medicaid program to PacMan, a popular 1980’s arcade game: “It will eat you alive. And you can’t get away from it.”

Smokers also seem to be big losers in the state budget crisis. Twenty-one states raided tobacco settlement funds this year, reports NCSL. In many cases, these funds had been targeted for smoking prevention programs. Smokers in many states are also paying higher taxes to keep their habits going. States raised cigarette taxes last year to the tune of roughly $3 billion, according to NCSL.

“I think it’s safe to say that if you’re a smoker, you might consider yourself a loser in this environment, because you’re paying heftier cigarette taxes,” said Eckl.

With all these spending cuts and tax increases, one might hope that states would be close to having their budget woes licked. But what we’ve seen so far may only be the beginning of a very rough period for state governments.

“With the magnitude of the problems as they are and as they are forecast for the coming year, we still have a lot of spending reductions in front of us,” said Eckl.