Why the States Are Broke

Bloated governments, budget gaps, and Parkinson's laws

John Hood from the October 2003 issue

(Page 3 of 3)

3. "The matters most debated in a deliberative body tend to be the minor ones where everybody understands the issues."

Whenever you hear state lawmakers waxing eloquently about how they are "cutting spending to the bone" by shuttering state aquariums, turning down the thermostat in state buildings, or sending state employees to fewer out-of-town conferences, you can see one of Parkinson's lesser-known laws in force. It is easy for politicians, the news media, and the general public to sink their teeth into these sorts of savings. You can gain of lot of rhetorical mileage out of anecdotes that involve relatively small amounts of money and evoke emotional reactions. Just a paragraph ago, I did it myself.

Still, bureaucrats misusing state vehicles to visit girlfriends and construction offices peddling contracts to pay off political contributors aren't the cause of growing governments and rising taxes. It's a good thing to find savings wherever you can, and certainly government-run attractions such as museums and historic sites should be generating their own fee income if the public is as enamored with them as their hand-wringing champions claim. But the real causes of burgeoning state governments are large, sprawling, lobby-infused programs, such as Medicaid and public universities, that too few lawmakers fully comprehend or are willing to take on.

Medicaid, the joint state-federal health care program for the disabled and the poor, is eating up an ever-increasing share of state general fund money. Expenditures grew by an average of 12.5 percent in 2002 alone, representing tens of billions of dollars in new spending. (Washington is paying 57 percent, while the states pick up 43 percent.) There is no shortage of sound explanations for why Medicaid is such a mess. Basically free to its beneficiaries, the program offers more benefits than the average private health plan does and thus encourages wasteful consumption of care. And as both Congress and the states expanded eligibility and the benefits package of Medicaid in the 1980s and 1990s, it became increasingly attractive for low-income persons, sometimes far above the federal poverty line, to adjust their finances (or at least what they reported their finances to be), drop their private coverage, and sign up for free health care.

Expansion has been particularly costly in health care for the disabled and elderly portions of the caseload, where much of the growth and a whopping three-quarters of the annual cost can be found. There is a fast-growing industry of lawyers and financial advisers specializing in ways for middle-class families to get their parents or other relatives qualified for Medicaid. The program now pays for two-thirds of all nursing home residents, nearly half of all births in many states, and the health care expenses of about a quarter of all children under the age of 5, with no real evidence that the health care outcomes are significantly better or that Medicaid expansion has had the net effect of reducing the ranks of the uninsured.

Even these facts do not fully capture the insidious impact of Medicaid and similar shared-responsibility programs on state budgets. Because Washington matches states more than dollar-for-dollar for Medicaid expenses, state policy makers have strong incentives not to pursue even obvious opportunities for savings. If they adjust benefits, tighten eligibility, rein in reimbursements, or just try to police fraud and waste better, they keep only a fraction of each dollar "saved," but they get all the public opprobrium. And this assumes the political actor has a deep knowledge of the program and its wacky finances in the first place. "The information deficit is huge," says Michael Greve, a scholar at the American Enterprise Institute. "Medicaid is intentionally and deliberately complicated. And when something goes wrong, [lawmakers] don't have anyone local to yell at. State officials point to D.C. and say, 'They did it.'"

Research by Greve and his colleagues shows clearly that recent Medicaid growth doesn't reflect the "we couldn't help it" line peddled by politicians and their handlers. States such as Florida and Arizona that attract high proportions of retirees "should be a basket case" when it comes to Medicaid inflation, Greve says, but the reality is that they have controlled costs better than most. Moreover, Medicaid spending has grown rapidly during boom years, not simply during recessions, when people lose their jobs and work-based health insurance.

In a further illustration of Parkinson's law that "expenditure rises to meet income," Greve and his colleagues also found that one of the strongest predictors of Medicaid growth in the 1990s was growth in state revenue collections. If state politicians saw money coming in, a combination of gullibility and moral hazard led them to spend much of it on the Medicaid monster.

Why the Laws Are Bronze

Not every state is in desperate fiscal shape and ravenous for higher taxes. Not every Republican governor spouting limited-government rhetoric turns out to be phony; some, such as Florida's Jeb Bush, Montana's Judy Martz, and Colorado's Bill Owens, really have controlled spending and held steady or even reduced their tax rates during the recent downturn. And the performance of both governors and legislatures in some states is proof that Parkinson's laws aren't forged in cast iron. They're made of wrought iron, or perhaps even bronze, and thus do have some room to give.

One fiscal strategy that sounds like a gimmick -- push-ing candidates to take a no-new-tax pledge, a core mission of the group Americans for Tax Reform -- has turned out to be surprisingly useful. Lingering pressure from their campaign stances has encouraged not only Illinois' Blagojevich but also new Democratic governors in Michigan, Oklahoma, Kansas, Virginia, and Arizona to resist hikes in broad-based taxes. When Republican lawmakers in particular vote to raise taxes after previously promising not to, the political blowback can be fierce. In North Carolina this year, the Democratic minority in the House allied with dissident Republicans to organize the chamber and, later, to pass the third major tax increase in as many years. Already some of the freshman Republicans in the coalition who betrayed their no-tax pledge are reconsidering their position as the folks back home find out and as potential primary challengers emerge.

On an institutional level, tax or expenditure limitations (TELs) have been valuable tools in the fiscal restraint arsenal. But not all TELs are created equal. A 2001 Cato Institute study found that measures placed into state constitutions or law by citizen referendum and requirements that taxes and spending rise no faster than inflation plus population growth have had large and beneficial effects on state budgets. But when legislatures pass mild revenue or expenditure caps, easy to evade and largely unenforceable in the breach, the result can be more spending from lawmakers who think they're behind political cover.

Setting up political or institutional counterweights to the public choice dynamics that drive government growth in state capitals can yield some fascinating and hopeful outcomes, especially when accompanied by serious attempts to organize taxpayer lobbies, free market think tanks, and alternative media conduits for political information. For the first time in decades, for example, governors and legislators under fiscal pressure are rethinking their slavish devotion to pouring massive funds into state university systems. Colorado, with both a political tailwind and a strong TEL, is considering a voucher system for higher education to replace its current set of institutions and subsidies. College administrators themselves are proposing more-limited privatization measures for state systems in Massachusetts, South Carolina, and Wisconsin. On the Medicaid front, Florida and a handful of other states are experimenting with a defined-contribution approach that gives patients more financial incentives to shop wisely and more choices about where and what to buy. The early results look encouraging.

No reforms or political victories, however promising, can repeal the basic laws of government finance. Politicians will continue to tax. They will continue to spend. And they will continue to spin, holding endless conferences and issuing countless reports to justify their actions. Parkinson got that one exactly right when he reportedly told a lecture audience: "Government's handling of a difficult matter by appointing a commission...is just like a person going to the toilet. There is a sitting, a report, and then the matter is dropped."