From Foresight, Vol. 8, No.4
published 2002
We use constant dollars, real growth, and per capita dollars to illustrate spending trends that account for inflation and population changes.
Constant dollars are calculated by using the Consumer Price Index (CPI) as reported by the Bureau of Labor Statistics, to remove the effects of inflation from spending trends. For more information, refer to http://www.bls.gov/cpi/home.htm.
Real growth represents growth in real or constant dollars.
Per capita dollars are dollars adjusted for the size of the population. Per capita spending represents the amount expended for every child, woman, and man in the base population.
The $713 million state budget shortfall this biennium has led many to suggest the time has come to modernize Kentucky’s tax system. Indeed, the Subcommittee on Tax Policy Issues of the Interim Joint Committee on Appropriations and Revenue heard a significant amount of testimony last year supporting the idea of changing Kentucky’s tax system. In addition, the Kentucky Long-Term Policy Research Center released a report in November 2001, Financing State and Local Government, that examined Kentucky’s system of state and local taxation and identified many areas that are ripe for modernization.
Taxes provide about half (53 percent in 1999) of the general revenue that finances state and local government spending. The balance of funds come from federal transfers (23 percent), charges such as tuition (13 percent), and miscellaneous revenue realized from sources such as the lottery (11 percent).
However, many believe government has a spending problem, not a revenue problem. While we cannot resolve what is essentially a political issue here, we can shed light on the topic by examining state and local government spending. Tax modernization needs to be discussed and evaluated in the context of government spending—revenue and expenditures are two sides of the same coin.
A recent report by the American Legislative Exchange Council (ALEC) notes that nationally state and local spending “rose sharply in the 10 years between the last recession and the current period of economic sluggishness.”(1) In fact, the role and size of state and local government has expanded at least over the last 20 years, both in the United States and Kentucky. In constant 2002 dollars, government spending was over 80 percent higher in 1999 compared to 1977; this is true for both Kentucky and the United States.(2) Some of the spending growth is due to population growth, but, even after accounting for population growth, government spending has increased. Figure 1 illustrates the gradual increase in per capita state and local spending in constant 2002 dollars from 1977 to 1999. This figure also shows how per capita government spending has been consistently lower in Kentucky compared to the U.S. average.(3) Kentucky ranks 43rd nationally in per capita spending.
Figure 1: Per Capita State and Local Spending, 1977 to 1999
Another way to analyze government spending is to examine it as a percentage of total personal income. We have already noted that from 1977 to 1999 real growth in state and local spending in Kentucky and the United States was over 80 percent. Over the same time period, real growth in personal income was 73 percent for the United States and 54 percent for Kentucky. Consequently, government spending, in both Kentucky and the United States, has been increasing faster than personal income. Figure 2 illustrates that Kentucky’s state and local government spending has increased from about 18 percent of total personal income in the late 1970s to just over 22 percent in 1999.
The preceding discussion begs the question: where does government spend this money? Table 1 shows the distribution of Kentucky’s state and local spending in nine broad categories.(4) There are several interesting comparisons between the distributions of the late 1970s and the late 1990s. For example, most of the money is spent on education. However, despite the increases in education funding in Kentucky for primary and secondary education as well as postsecondary education, less of the total government dollar was spent on education in the late 1990s compared to the late 1970s (this is also true for the United States). The category showing the largest increase during this period is Social Insurance & Income Maintenance. This category includes, among other things, Medicaid expenditures, which increased substantially during the 1990s.
Table 1: Distribution of Kentucky State and Local Government Expenditures, 1977-79 and 1997-99
Another interesting category is governmental administration, which is essentially the bureaucracy. Governmental administration remained at just under 8 percent of total state and local spending over the 20-year period examined (see Table 1)—compared to about 10 percent for the U.S. average. On a per capita basis, Kentucky spends less than the U.S. average on administration, but Kentucky’s governmental administration spending has been increasing since the late 1970s (see Figure 3). Until the mid-1990s Kentucky spent about $300 per capita for state and local governmental administration (in constant 2002 dollars), but it increased to more than $400 by the late 1990s.
Figure 3: State and Local Per Capita Spending for Governmental Administration
When we dig below the surface to reveal where the money is spent, we find that the top 10 subcategories accounted for 75 percent of Kentucky’s total state and local spending in 1999.(5) They are: elementary and secondary education; public welfare (which includes Medicaid); higher education; highways; interest on general debt; employee retirement; hospitals; health; corrections (i.e., jails and prisons); and police protection (see Figure 4).
Figure 4: Kentucky’s Top-10 State and Local Spending Subcategories, 1999
In constant 2002 dollars, elementary and secondary education spending was about 68 percent higher and postsecondary education spending was around 65 percent higher in 1999 compared to 1977 (see Figure 5). By comparison, total state and local expenditures were up nearly 84 percent. While education accounts for the largest portion of state and local spending, its rate of increase during this period was below average—which is why education’s share of total government expenditures was less in the late 1990s compared to the late 1970s (see Table 1).
Figure 5: Kentucky’s State and Local Education Expenditures, 1977 to 1999
Elementary and Secondary. How does Kentucky compare with other states on elementary and secondary education spending? We chose three states whose students are ranked in the top 10 on recent National Assessment of Educational Progress (NAEP) tests.(6) Kansas, Maine, and Minnesota were top 10 states for fourth and eighth grade reading in 1998 as well as fourth and eighth grade math in 2000. And, as illustrated in Figure 6, Kentucky’s elementary and secondary education spending on a per capita basis has been consistently below these three high-performing states since (at least) 1977.(7) Of course, spending is only one of many factors affecting student performance.
Figure 6: Comparative State and Local Elementary and Secondary Education Spending
Postsecondary. By contrast, a very different picture emerges when examining appropriations for higher education. These data show the total state effort for higher education, including tax appropriations for universities, colleges, community colleges, and state higher education agencies.(8) Our comparison states are Illinois, Maryland, and Virginia. These states’ higher education systems are given high grades by national organizations and are viewed by the Kentucky Council on Postsecondary Education as worthy of emulation.(9) Yet, as illustrated in Figure 7, there is little difference among these states when comparing per capita higher education appropriations back to 1971. This suggests that something other than money, or perhaps differences in how the money is spent, most likely accounts for the relative success of Illinois, Maryland, and Virginia.
Figure 7: Comparative per Capita State Higher Education Appropriations
Among the top 10 subcategories examined here, public welfare was one of the fastest growing from 1977 to 1999—177 percent real growth in constant 2002 dollars (see Figure 8). Medicaid, the principal program for providing health and long-term care coverage to low-income individuals, is included in this category and is the major catalyst for the growth. In fact, as illustrated in Figure 8, without Medicaid this category shows virtually no real growth.(10) Future Medicaid spending is projected by the Congressional Budget Office to be around 8 percent to 9 percent annually,(11) a much higher rate than the economy or government budgets are likely to grow. Consequently, Medicaid will consume an even greater portion of state budgets in the future, a disturbing prospect given that (FY) 2000 Medicaid expenditures as a percent of total state expenditures were 19.5 percent nationally and 24.3 percent in Kentucky.(12) Real growth in spending on health, which includes public health administration and health departments, was about 150 percent, well above the real growth of total expenditures. Finally, at around 58 percent, real growth in spending for hospitals was less than the real growth in total expenditures.
Figure 8: State and Local Expenditures on Health, Hospitals, and Public Welfare
In constant 2002 dollars, spending on corrections—prisons and jails—was about 280 percent higher in 1999 compared to 1977 (see Figure 9), which is one of the highest growth rates for all governmental activities. Nationally, state spending on corrections trails only education, Medicaid, and transportation.(13) Spending on police increased about 40 percent.
Figure 9: State and Local Expenditures for Corrections and Police
Yet, despite these increases, a recent report by the U.S. Department of Justice ranks Kentucky 39th with respect to per capita state and local “justice system” expenditures in 1999.(14) At $303, Kentucky’s per capita justice system expenditures in 1999 were much lower than the $442 average for all state and local governments.(15)
In constant 2002 dollars, Kentucky state and local government spending on highways was not much higher in 1999 than it was in 1977. Figure 10 shows a huge increase from 1977 to 1980, but since then, spending on highways has more or less kept pace with inflation and therefore shown no real growth.
Figure 10: State and Local Expenditures on Highways
Spending on employee retirement has accelerated rapidly, especially since 1994, with the first wave of early Baby Boomer retirees. In constant 2002 dollars, spending was 300 percent higher in 1999 than it was in 1977 (see Figure 11). And interest on the general debt, which accounted for 7 percent of total state and local government spending in 1999, increased by 167 percent.
Figure 11: State and Local Expenditures on Debt Interest and Employee Retirement
By most measures, Kentucky state and local government spending is lower than the U.S. average. Nonetheless, it has increased over the years—especially during the 1990s. An increased financial commitment to education, surging Medicaid expenditures, escalating corrections costs, rising interest payments on debt, and employee retirement costs have all fueled increased government spending.
Our analysis illustrates the complexity, unpredictability, and breadth of government spending. For example, research has shown that higher levels of primary and secondary education spending can buy smaller classes and more qualified teachers—both of which are associated with higher student achievement. The academic performance of Kentucky’s students compared to higher performing states could be partially explained by spending differences.
However, in the higher education realm, Kentucky has exerted about the same financial effort over the years as other states but not achieved the same results. This suggests that how the money is spent is just as important as how much is spent and indicates a complex relationship between spending and outcomes.
We also found a disturbing element of unpredictability in state and local government spending, since much of the spending is driven by forces outside the direct control of state and local decisionmakers. For example, as economic conditions worsen and crime rates spike, so do corrections spending. Moreover, as prescription drug costs escalate, so does Medicaid spending. And we have not yet felt the full ramifications for state and local finances that will result from the September 11th terrorist attacks. Finally, the sheer breadth of state and local government spending—everything from building roads to paying professors—implies an enduring focus on revenue adequacy and spending priorities.
* Mr. Childress is the Executive Director of the Kentucky Long-Term Policy Research Center. Return to text.
1. American Legislative Exchange Council, Crisis in State Spending: A Guide for State Legislators, Jan. 2002, 24 Jan. 2002 http://www.alec.org/meSWFiles/pdf/TaxCrisis.pdf. Return to text.
2. The U.S. data include all 50 states, the District of Columbia, and all local governments across the country (i.e., counties, cities, school districts, special districts, and townships). Our data are from the U.S. Census Bureau at: http://www.census.gov/govs/www/estimate.html. Return to text.
3. We explored whether the spending differences between Kentucky and the United States could be explained by cost-of-living differences. Some of the difference, but not all, can be explained by Kentucky’s lower cost of living. Kentucky’s per capita state and local government spending increases from $5,586 to $5,912 when we adjust for cost-of-living differences, which is still well below the U.S. average of $6,460. Return to text.
4. Detailed descriptions of what is included in these categories can be found at: http://www.census.gov/govs/www/classexpdef.html. Return to text.
5. These 10 categories accounted for approximately 71 percent of total state and local spending in the United States. Return to text.
6. The National Assessment of Educational Progress (NAEP) is a nationally representative assessment of what America’s students know in various subject areas, including reading, mathematics, science, writing, U.S. history, civics, geography, and the arts. For more information refer to: http://nces.ed.gov/nationsreportcard/about/. Return to text.
7. We find the same pattern when comparing per pupil spending. Return to text.
8. For a variety of accounting purposes, personnel at the Council on Postsecondary Education advised us that it is best to use the Grapevine database, not Census Bureau figures, when comparing higher education funding. These data are available at: http://www.coe.ilstu.edu/grapevine/Information.htm. Return to text.
9. National Center for Public Policy and Higher Education, Measuring Up 2000: The State-by-State Report Card for Higher Education, 30 Nov. 2000, 17 Jan. 2002 http://measuringup2000.highereducation.org. Return to text.
10. The line in Figure 9 labeled Public Welfare (excl. Medicaid) is actually total public welfare minus vendor payments for medical care (74). This category is defined as “Payments under public welfare programs made directly to private vendors (i.e., individuals or nongovernmental organizations furnishing goods and services) for medical assistance and hospital or health care, including Medicaid (Title XIX), on behalf of low-income or other medically-needy persons unable to purchase such care.” Return to text.
11. The Kaiser Commission on Medicaid and the Uninsured, “The Role of Medicaid in State Budgets” Policy Brief Oct. 2001, 19 Feb. 2002 http://www.kff.org/content/2001/4024/4024.pdf. Return to text.
12. National Association of State Budget Officers (NASBO), 2000 State Expenditure Report, Summer 2001, 21 Feb. 2002, http://www.nasbo.org/Publications/PDFs/00exprpt.pdf 58. Return to text.
13. 2000 State Expenditure Report, 5. Return to text.
14. The “justice system” includes corrections, police protection, and the judicial system. See Sidra Lea Gifford, “Justice Expenditure and Employment in the United States, 1999,” Bureau of Justice Statistics, U.S. Department of Justice, 8 Feb. 2002, 21 Feb. 2002 http://www.ojp.usdoj.gov/bjs/pub/pdf/jeeus99.pdf. Return to text.
15. Gifford, 5. Return to text.