Commentary: Long-term budget issues plague states

By Dan White

Less than two weeks to go in the fiscal year, and Pennsylvania is still without a new budget. This is usually the time to start complaining about partisan gridlock and assign blame. That's easy to do from afar, but it is much more difficult to sit in Harrisburg and reconcile competing interests. So let's first take stock of how things stand elsewhere in the country.

All but four states begin their new fiscal years in July, and of those, 10 still do not have a budget in place. Is this contagion from gridlock in Pennsylvania and Illinois? No, it's one of many symptoms of a new fiscal reality taking hold among state and local governments nationwide.

State budgets are beginning to look an awful lot like the federal budget, and that's not a good thing. Mandatory state spending on items such as Medicaid and pensions will make up more than 35 percent of total budgets this year. It wasn't always so. In 2000, states spent just 25 percent of their budgets on mandatory items.

The amount of mandatory spending at the state and local levels takes on much greater importance than at the federal level. State budgets are a zero-sum game. Unlike the federal government, states, in principle, cannot borrow for operations. With few exceptions, states don't have the option of putting recurring spending on the credit card for future generations. That means the 10 percent increase in the mandatory share of state spending since 2000 equates to a directly proportionate decrease in discretionary spending.

Discretionary spending, very simply, is the reason most of us care about government spending. Discretionary spending determines whether or not my sons will have 20 or 30 other kids in their classes at school this fall. It determines whether or not I'll hit a pothole on my way home from work. It determines whether or not a police officer will be there to take the accident report after I've hit said pothole.

From Ted Cruz to Bernie Sanders, the overwhelming majority of us agree that government should be spending money on teachers, police, firefighters, and roads. But instead of maximizing our economic productivity by investing more in these items, we're spending less and less due to faster increases in mandatory spending.

Pennsylvania embodies this dynamic to the extreme. The symptoms are hiding in plain sight. In addition to our gridlocked budget process, it was recently pointed out in a national report that the commonwealth spends less money as a share of the total budget on higher education than almost any other state. In fact, not only does Pennsylvania have one of the lowest spending levels on state colleges and universities, but that spending has also continually declined as a share of the total budget.

Since 2003, not coincidentally the last year either of the commonwealth's pension funds was fully funded, higher education spending as a share of the total has fallen by almost half. Is this because policymakers suddenly value higher education less? Is it because policymakers are actively trying to drive up public tuitions and student loan debt?

Of course not. Again, state budgets are a zero-sum game, and there are several budget categories that we do spend much more than the average state on.

Pennsylvania spends more money as a share of the total budget on Medicaid and pensions than almost any other state. Since 2003, Medicaid's share of the total Pennsylvania budget has grown almost 11/2 times. Pension contributions have grown even more quickly. Every new dollar spent on these mandatory programs is a dollar not spent in a classroom, on public safety, or on infrastructure.

It's easy to vilify mandatory programs as unsustainable monsters, but they are extremely important to the common good. Eliminating them would be disastrous for our economy and overall quality of life. That's why the most simplistic and commonly proposed solution to this kind of problem is to raise taxes.

Raising taxes is the right solution when a level shift in funding is required, for example when adding a brand new program to the budget. However, the issue Pennsylvania and other states have is not a level problem; it is a growth problem. The reason Medicaid makes up almost a third of the Pennsylvania general-fund budget is that annual spending growth, as determined by the number of participants in the program and health-care cost inflation, has vastly outpaced tax revenue growth.

Raising taxes will only give us more rope to hang ourselves with. Because spending will still accelerate faster than revenue growth, in short order we'll be right back where we started, only at a higher tax burden on the economy. This is a policy that will not foster long-run economic growth but will instead kick the can down the road.

The only real solution to our budget problems in Pennsylvania and elsewhere is to work to contain or even reverse the pace of mandatory spending growth and allow more room for funding teachers, police, firefighters, and roads. Easier said than done, but we should at least be trying to move in the right direction.

So the next time you're stewing about the mess of our budget process or cursing tuition hikes at the local university, take a deep breath and write your elected representatives.

First, tell your state legislators to get our pension funds on a more sustainable track. This is the budget issue that we as Pennsylvanians have the most power to fix ourselves. Reducing the pace of long-term growth in pension spending makes more room for other important discretionary programs.

Second, tell your U.S. representative and senators to work toward meaningful entitlement reform. This is the trickier of the two; entitlements are not an issue Pennsylvania can solve unilaterally. Until Medicaid can be made more sustainable, states, especially Pennsylvania, will continue to see funding for vital programs like education crowded out.

Third, set realistic expectations. These problems are major, long-term, structural issues that weren't created in a day and won't be solved in a day. That's the real reason for the budget gridlock in so many states, as the solutions to these major problems typically involve major ideological differences. We can't get where we need to be in a day, but if we at least get pointed in the right direction, we'll be on our way.

Dan White is a senior economist at Moody's Analytics in West Chester. @DanWhiteEcon daniel.white@moodys.com