States Slow Down Spending Growth, Report Shows

By Jillian Bandes | July 7, 2008 | 8:24 PM EDT

( - A new report says that after years of increased spending, states are spending less than usual in fiscal 2008, and that next year their spending will decrease. Lobbyists for the states view the development as dire, but lower-tax advocates find it heartening.

This is a "significant weakening in state finances," according to the report, issued by the National Association of State Budget Officers (NASBO) and the National Governors Association (NGA).

But Chris Edwards, an economist at the Cato Institute, a libertarian group, said the report is nothing to worry about.

"If you look at the actual data, it shows that spending growth is slowing down a bit," he said. "But we've had this explosive spending growth in the past few years, so all things considered, there's been sort of a moderate adjustment in states' budgets, which is fine."

Compared with the average annual increase of 6.7 percent in state spending per year, such spending increased only 1.1 percent this year, and it is expected to decrease 2.4 percent in 2009. States fiscal years typically run from July until June.

Additionally, 20 states have received less tax revenue than they originally expected. Thirteen of those 20 states have been forced to cut their budgets.

But Edwards noted that those cuts have totaled just 0.06 percent of total state spending. Most coverage of the report has ignored that point, he said.

"When the report gets translated into the mainstream liberal media, it seems like states are having to throw people into the streets and cut children off ... but I don't think that's the case," he said. "It's okay that states tighten their belts when the economy slows, because that's what American families have to do as well."

When expenditures exceed tax revenues, states do not have the option of simply accumulating debt like the federal government does because of higher interest rates and closer political scrutiny. Additionally, 49 out of 50 states have balanced budget amendments, meaning that they are legally obligated to spend as much as they take in each year. The federal government is under no such obligation.

"Unlike the federal government, which can just print money or run a deficit ... [the states] just have to deal with it," said Scott Pattison, executive director of NASBO. "You could use reserves, you could do some debt -- again it's not the same type of debt the federal government could use -- you could cut spending, or you could cut people that are eligible for Medicaid, but you have to do something."

Pattison said Florida and California were two states that were hardest hit by the budget cuts. But Florida, which had to make the largest cut of any state, cut $1.5 billion dollars, or 2 percent of the $70 billion dollar budget. And Florida's budget has grown by 7.5 percent a year on average since 2001.

Ray Scheppach, executive director of the NGA, said that rising health care costs, education expenses, and other services are the reasons that state budgets typically grow. Medicaid spending is 22 percent of total state spending, the single largest expense. K-12 education is also costly, and an area that most lawmakers do not want to cut.

At least health care spending could be reined in, Edwards said. Every time a state pays for more health care through Medicaid, they get twice the return on their investment, because the federal government matches the funds, he said, adding that it creates an incentive to spend more.

"Medicaid growth is growing very quickly because they themselves have structured the system for that result," he said. "It's completely in their control to cut and reform their Medicaid budgets."

Edwards said that should be done by capping the amount of federal funds distributed for Medicare, instead of allowing states to receive unlimited matching amounts.

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