Thursday, November 3, 2016

How Big Is State Spending - Really?

Many years ago, when I was working for a think tank in North Carolina, I had one of my first experiences with the convoluted world of state government spending. Over a period of six months I worked with another analyst on trying to nail down exactly how much money the state of North Carolina was really spending every year. We had an even greater problem finding out exactly how many people were on state payroll, one way or the other.

You would think that these things are obvious and transparent, and that you could "just ask someone" who would then pull up the right number in an instant. Unfortunately, that is not how it works. 

After my experience in North Carolina I was hired as research director at the South Carolina Policy Council. Inadvertently, I immediately stirred up controversy over state spending: I came in to a meeting with some state legislators with a printout of their total outlays for the last fiscal year, pointing to the total number of $21 billion. My boss gasped, embarrassed at me apparently presenting the wrong number. 

"No, no, it's only $7 billion" was the reaction from everyone else in the room. 

Was I wrong? Of course not. Were they wrong? That depends on how you define state spending. The legislators and my boss only looked at the General Fund, while I included the General Fund, the Federal Funds that a state gets from Uncle Sam, and the Other Funds that are not often mentioned in the context of state spending. 

Of course, if you really want to know how much money your state government spends each year, you have to include all money. When you do, though, the result can be pretty shocking. 

Let us take a look at Wyoming and what money is really going in and out of the state budget. First, though, a clarification as to the Funds mentioned earlier. As a basic, general rule,
  • The General Fund represents the costs of tax-funded government programs;
  • The Federal Funds come from the federal government and are dispersed as per the regulations that Congress attaches to those funds;
  • The Other Funds are programs that are funded directly by dedicated fees and other charges.
This is, again, the basic theory of how government spending is accounted for. The reason why Other Funds have been separated into its own category is that the costs of those programs are supposed to be covered entirely with dedicated fees. For example, the Department of Motor Vehicles (which is not a separate entity here in Wyoming) should be funded entirely by fees for driver licenses and license plates (if those are administered at the state level). 

Over time, the distinctions between General and Other Funds have been blurred. There are programs in the state budget that are funded by both tax revenue and fees. However, legislators have decided to keep the distinction, and unfortunately they have a good reason to do so. It goes back to my experience from South Carolina: if a state lawmaker can point to a number that is only one third of what the state really spends, and convince his constituents that government really is not that big, then it is easier for him to avoid discussions about the size of government. 

I realize that this sounds a bit cynical. It is not meant to be, but the fact of the matter is that our state legislators rarely talk about the actual size of our state government. Any question as to why this is the case ultimately leads back to the point where our legislators make a deliberate decision as to what part of the state's outlays they want to focus on. 

So how can we actually figure out how much the state of Wyoming really spends each year? Before we answer that question, let me mention that I have spend more than ten years analyzing state government spending, and I have at some point during those years looked at each and every one of the 50 state budgets presented by governors (bi-)annually all over the country. There is a huge difference between how the states report their spending, how easily an expert like me can penetrate the numbers - and, most important of all, how easy or difficult it is for a regular voter with no expertise to access budget information. 

To make a long story short, there are a lot of states that do a much better job than Wyoming at reporting their spending in a concise, transparent way that any adult can understand without considerable effort. I am sad to say that when it comes to state spending, we are behind the curve here in the Cowboy State. 

In fairness, though, the standards by which states report their spending vary a great deal, making inter-state comparisons difficult. In order to bridge over this transparency obstacle, we can therefore turn to an impartial, third party where spending figures are collected according to the exact same method for all states. There are two third parties that fulfill this purpose.

The first one is the National Association of State Budget Officers (NASBO). They have a prolific research department that puts out many good reports each year. One of them stands out as particularly useful to anyone who wants to know just how much money their state government spends: their annual State Expenditure Report

Updated in December every year - the latest one is available here - this report explicitly divides state spending into the three Funds discussed earlier. They report total spending as well as spending broken down by K-12 education, higher education, Medicaid and health care, and a few other areas of spending. 

According to the NASBO State Expenditure Report for 2015, the state of Wyoming doled out an estimated $8.8 billion in fiscal year 2015.

That is a far cry above the $2-something billion we often talk about when it comes to the state budget. So where does this number come from? Well, here is how NASBO breaks down our state's expenditures by fund, based on the numbers that the Wyoming State Budget Officer has reported:
  • General Fund $3.3 billion;
  • Federal Funds $2.3 billion;
  • Other Funds $3.2 billion.
In other words, the General Fund is only a minority of all the money that the state spends each year. 

The second third-party source for state spending is the Census Bureau. They collect data on state and local government spending and revenue on an annual basis and publish it in a detailed, easily searchable database. Unfortunately, they are a bit behind with updating their spending data, which is currently only available through 2013. On the revenue side they report tax collections through 2015. With this slight discrepancy in mind, here is some of what the Census Bureau says about Wyoming state spending in 2013:
  • Total, in-state sourced expenditure: $5.83 billion;
  • Direct, general expenditure  (not including capital outlays): $2.85 billion;
  • Federal Funds: $2.09 billion.
The Census database then breaks down spending by function, in a way that is highly useful both for tracking your own state's outlays over time, and for making interstate comparisons. 

Generally, when compared by fiscal year, the NASBO and the Census data come close but rarely match to the dollar. The discrepancy has to do with reporting methods and the timing of the data collection. NASBO makes estimates before the fiscal year is over, then corrects their numbers afterward with follow-up data. The Census Bureau, on the other hand, asks for ex-post facto spending numbers in their annual December surveys. 

The third-party checkpoint for state spending is very important, in part because of the lack of transparency in many states, Wyoming included. The state can report its own spending data to the general public basically in any way it wants to - but when the federal government asks for information they have to be completely accurate.

While it may seem like an overly technical matter to dig through loads of state-spending data, let me add one more little anecdote to show just how important it is to have all facts straight and sound. A while ago I was having a conversation with a former legislator about the size of the state government payroll. I said that there are almost 16,000 people on the state payroll. The former legislator put forward a number that was half as high. 

Who was right? Again, it depends on what definition you apply. The state officially only includes half of its employees because the rest fall under programs that are not part of their core definition of state spending. Taxpayers still pay their salary, but they are not included when the state government counts its employees. However, when the Bureau of Labor Statistics collects data on state employment they report all 16,000 (or 15,700, which is the preliminary number for September 2016). 

Government spending does not have to be that complicated. Perhaps the current fiscal crisis in our state is a good reason for our lawmakers to impose higher standards of transparency on our own government? 

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