Have States Limited Their Fiscal Flexibility by Putting Too Much Spending on Autopilot?

Sep 2, 2019

By Tracy Gordon, GFRC External Advisory Board Member and Senior Fellow, Urban-Brookings Tax Policy Center

Although it may still feel like summer, September is the start of budget season in many states. With the ink barely dry on some FY2020 budgets, governors, finance directors, agency heads, and their staffs will be looking for bold new ideas to include in their FY2021 spending plans.

There’s only one problem: a substantial share of state spending is already committed before the speeches, legislative hearings, and political wrangling even begin.

Some observers have estimated that as much as 70 percent of a state’s spending is off limits in any given year because of various constitutional and statutory formulas, federal grant requirements, and court rulings. But no one has systematically evaluated whether these claims are true until now.

In a new report, Megan Randall, Gene Steuerle, Aravind Boddupalli, and I developed the first comprehensive measures of state budget commitments in six states (California, Florida, Illinois, New York, Texas, and Virginia) from 2000 to 2015. We consulted with experts in these states and combed through numerous state documents in addition to well-known public data sets to answer how much spending is out of current governors’ and legislators’ control.

We found anywhere from 25 to 90 percent of budgets may be predetermined depending on the state. For example, at the high end of our estimates, 86 percent of California’s spending was potentially restricted in 2015. At the low end, only 40 percent of California spending was restricted in that year.

Why such a big range? At the low end, all states treat debt service and Medicaid as restricted. But many treat federal program rules, state revenue earmarks, and court cases as more flexible. And the ability to manage caseloads and costs varies over time.

Then there’s politics. A consistent theme in our interviews was “everything is flexible, especially in a crisis.” But, even if the law technically allows it, elected officials may be reluctant to change the rules, reduce built-in program growth, or raise taxes. (Our report also considered, but did not quantify, tax breaks and other revenue restrictions such as tax and expenditure limits.)

Something’s got to give. Our results suggest poverty assistance, higher education, and other relatively non-protected budget categories get squeezed. State leaders may also opt not to undertake new options or initiatives, such as expanding pre-K education.

Why are state budget restrictions a concern? Considered in isolation, each tax or spending restriction may have some merit because they lock in important commitments and provide some planning certainty. But taken together, they insulate preexisting priorities against policies designed to address new challenges. And, state budget restrictions may beget more restrictions, as advocates push to lock in more programs.

Elected officials can help break this cycle. They can start with more disclosure. Public budgets should show by program the cost of maintaining existing services given projected caseload and price increases. Although state budget officials routinely assemble the information they need for such current services budgets, few prepare multiyear projections and make them public. Budgets should then present new policy alternatives against this baseline.

There’s a saying that budgets are too important to be left to accountants. This is especially true in government, where budgets help create transparency about the collection and use of public resources. Government budgets are strategic planning documents, communication devices, and ultimately statements about values.

Voters need much more information to understand how much flexibility state governments have to meet short-and long-term priorities, plan for the future, and, most importantly, respond to new challenges and opportunities.