A Bad Year for State Independence

Last week I explained that when states depend on the federal government for part of their revenue, it

makes it hard for states to effectively exercise their constitutional independence.

A quick review of preliminary data over state spending this year, suggests that state independence has been eroded even more. According to the latest state expenditure report from the National Association of State Budget Officers, federal funding of state expenditures increased from $642 billion in 2019 to an estimated $732 billion this year.* Dependency on federal funds increased from 30.6 percent to 32.4 percent.

These numbers do not sound dramatic, but they are part of a troubling ramp-up in state government spending – driven by the federal government. In 2020, states spent a total of $2.26 trillion, almost eight percent more than in 2019. This was the largest increase in at least ten years, and was preceded by a 4/6-percent rise in 2019.

The estimated increase for 2020 was the result primarily of a rise in federal funding, but it was also driven by Other Funds. This is the less-often recognized part of state government funding that is almost always left out of the media reporting on state spending. It gets worse: I have encountered state legislators who are not aware that Other Funds exist, and those who do tend to have only a vague idea of what it is there for.

As the old Romans said, ignorance is not an excuse for bad decisions, but it can help explain rampant spending in some states. Overall, Other Funds account for 26 percent of total state outlays, but in many states it is much higher than that. Here are the top ten:

Table 1

Other Funds share of total
 West Virginia 51.5%
 Wyoming 50.1%
 Oregon 47.6%
 Arkansas 44.7%
 Colorado 44.1%
 North Dakota 41.9%
 Nebraska 41.6%
 Wisconsin 41.6%
 Virginia 40.4%
 Michigan 40.0%
Source of raw data: NASBO

Wyoming is a classic example of a state that uses Other Funds to obscure the real size of government. Half of the state’s almost 15,000 employees are documented under so-called 900-series items in the budget, which essentially overlap with Other Funds spending. Furthermore, with half of state spending running through Other Funds, Governor Bland Oatmeal can then give a teary-eyed press conference, holding in his right hand a list of drastic reductions in General Fund spending. Nobody will pay attention to what his other hand is up to.

The growth of Other Funds makes it harder for voters and taxpayers to hold their elected officials accountable. This is even more true with the increase in federal funding, and it is quite frankly worrisome to see how ten states get more than 40 cents of every dollar they spend from Congress:

Table 2

Federal Funds Share
 Kentucky 43.7%
 Michigan 43.7%
 Mississippi 43.5%
 Louisiana 42.5%
 New Hampshire 42.4%
 Arizona 41.4%
 New Mexico 41.1%
 Indiana 40.7%
 Montana 40.3%
 Rhode Island 40.1%
Source of raw data: NASBO

A total of 20 states get more in federal money than they get in General Fund revenue. Table 3 reports the number of dollars a state is estimated to receive in federal funds in 2020, for every $1 in their General Fund:

Table 3

 Michigan 2.73
 Arkansas 1.82
 New Hampshire 1.78
 Mississippi 1.65
 Louisiana 1.59
 Arizona 1.51
 Kentucky 1.50
 Montana 1.44
 Vermont 1.38
 Oklahoma 1.35
 West Virginia 1.24
 New Mexico 1.23
 Rhode Island 1.22
 Nevada 1.18
 Alabama 1.14
 Oregon 1.13
 Maine 1.09
 South Dakota 1.08
 Missouri 1.04
 South Carolina 1.04
Source of raw data: NASBO

To get a more detailed picture of what is happening to state fiscal independence, we need to dig deeper into the NASBO report. They break down spending by education, Medicaid, welfare, transportation and other categories. More is coming. Stay tuned!

And don’t forget to click the Follow button up on the right, so you get all the updates on this blog as they happen.

*) In my previous article I reported Federal Funds for 2019 at $731 billion. This is not an inaccuracy, but is attributable to statistical periodization: the numbers reported by the federal government are based on the federal fiscal year, while the numbers from the states, as reported by NASBO, are based on state fiscal years. For the most part, the two do not overlap. There is also a matter of when, calendar-wise, the states actually receive the funds.