City Journal

Stephen G. Craig
A Report Card on State Spending
New York's state and local government expenditures are far higher than any other state's. Where does all that money go?
Summer 1992

New Yorkers pay more of their income in taxes than virtually anyone else, yet the state is facing a serious fiscal crisis. Why? The simple answer is because New York also leads the answer nation in spending. In 1989, for example, Albany spent $2,554 for every man, woman, and child in the state, making it fourth highest in the nation in per capita state spending. Among the largest states, only one spent more per resident than New York: Massachusetts, where a round of severe budget cuts is currently under way. When local spending is included in the equation—a fairer comparison, since much of what local governments spend is dictated by state mandates—New York’s ranking jumps from fourth to first.

In order to understand the problem, two questions must be answered. First, to what extent is New York’s high level of spending driven by policy choices made in Albany, and to what extent by factors beyond the state’s control, such as a higher cost of living or greater levels of need? Second, if New York’s priorities are different from those of other states, what parts of the budget consume an unusually high amount of money? To answer these questions, I have performed a careful study of government spending patterns in the 48 contiguous states. (Owing to their geography, Alaska and Hawaii have unique economic circumstances that would skew any comparison, so I have omitted them from the study.)

The results show that New York’s spending is low in some categories, such as college education; quite high in many categories; and strikingly high—more than double the national average—in the categories that constitute low-income assistance. Welfare and related programs, in fact, account for more than one-third of the total difference in spending between New York and the average state.

Table 1 shows the total state and local per capita expenditures in 1989, the most recent year for which Census Bureau figures are available, for the ten states with the largest total expenditures: California, New York, Texas, Florida, Pennsylvania, Illinois, Ohio, Michigan, New Jersey, and Massachusetts (see page 26). (These are also the ten most populous states, except for Massachusetts, which ranks 13th in population but spends more than North Carolina, which ranks tenth.) The state and local governments of New York spent $5,473 per person in 1989—a figure more than $1,000 higher than that for Massachusetts, which ranked second in per capita spending among the ten states. Table 1 also shows that the figure for the average state (other than New York) was $3,367 per capita. Per capita government expenditures in New York, therefore, were 63 percent higher than in the average state and 54 percent higher than the average of the other large states.

To what extent is this the result of a higher cost of living in New York? Table 1 attempts to answer this question by showing the per capita income for each state, a reflection of its cost of living. At $21,075, New York’s average income is quite high, ranking fourth in the nation, behind Connecticut, New Jersey, and Massachusetts. Even so, it is only 29 percent higher than the nationwide average and 12 percent higher than the average of the other large states. New York’s per capita spending is 26 percent of its per capita income; for the other 47 states, the figure is 21 percent. Thus, even though they make more money, New Yorkers see substantially more of their income go to state and local government than do residents of other states. Cost of living, therefore, does not in itself account for New York’s high government expenditures, which consume a disproportionate share of its citizens’ income.

Table 1 also shows several general components of government spending: salaries and pensions of government employees, capital spending, and debt service. In most of these categories, the results are fairly unsurprising. New York ranks first in the nation for government salaries, spending $1,949 per capita. But this is 63 percent higher than average, precisely the same proportion as for overall spending. That is, New York spends a lot more than most states on government salaries, but disproportionately generous salaries or levels of government employment do not appear to be at the root of New York’s high spending. Rather, they largely reflect the fact that a large government needs a large number of people to administer it.

New York also ranks first for pensions at $253 per capita, or 122 percent more than the average state. This seems quite high. But pension expenditures reflect the rates of government employment in past decades. Thus, states with recent large population growth, such as Texas and Florida, have very low per capita expenditures on pensions ($94 and $65, respectively). New York’s pension expenditures are only 46 percent higher than the average of the six large states with relatively stable populations (Pennsylvania, Illinois, Ohio, Michigan, New Jersey, and Massachusetts). Total government spending in New York is 52 percent higher than in these states, so pension expenditures merely reflect New York’s high overall rate of government spending. (Since pensions are paid out of separate trust funds, they are not included in the overall spending totals.)

New York ranks only ninth in the nation for capital expenditures. While capital spending in New York is moderately higher (by 19 percent) than in the average state, this is a far smaller difference than for overall spending. In fact, governments in the average state spend 12 percent of their budgets on capital projects—one-third more than in New York. Faster-growing states in the South and West must spend more expanding their infrastructure to meet the demands of a burgeoning population. Still, given New York’s overall high expenditures, capital projects are a relatively low priority.

New York spends 55 percent more per capita than the average state on debt service, reflecting the overall high rate of government borrowing. Debt expense, however, ought to reflect the rate of capital expenditure: A state should borrow money only to build large infrastructure projects that cannot be funded as part of the current budget. New York’s debt expenses are 62 percent of its capital expenditures; for the average state, the figure is only 48 percent. This discrepancy suggests that New York has been willing to incur excessive debt given the limited infrastructure improvements it has initiated.

Breakdown of Services

Table 2 shows levels of state and local spending on a variety of particular services: highways, police, fire protection, jails, parks and recreation, and the “other” category. These six categories comprise most specific areas of government spending, except education and low-income assistance, which are considered in more detail below.

What do these numbers tell us? For police, fire protection, and parks, the difference between New York and the average state is fairly close to the 63 percent aggregate figure (for police and fire, somewhat higher; for parks, somewhat lower). New York’s generally high levels of government spending, then, are reflected in these areas but not disproportionately affected by them.

Three categories stand out in Table 2, however: highways, jails, and “other.” New York’s governments actually spend 8 percent less per capita on highways than those of the average state. Twenty-five states spend more than New York does. Since most highway construction and maintenance falls under the category of capital expenditures, this reflects the low priority New York gives to its infrastructure generally.

New York’s expenditures on jails and prisons, at $162 per capita, are 138 percent higher than those of the average state. One possible reason for this is that New York has seen a high rate of construction prison in recent years, as have many other states. New York’s Wicks Law, however, increases the cost of building prisons and other public facilities in the state. (See “Politics and the Wicks Law,” page 55.) The cost of operating prisons in New York might also be higher than elsewhere, in part because of state judicial rulings that establish prisoners’ rights not recognized in other states.

The “other” category includes all types of spending not elsewhere classified (see table notes). New York’s “other” expenditures are $345 per capita, or 150 percent higher than the average state, and second only to New Jersey. Since the services covered by this category are not specified, we cannot draw any conclusions from the numbers, except that New York has seen fit to offer a variety of government services that most other states do not view as necessary.

Skimping on Schools

One area in which New York’s government expenditures are not particularly high is education. As Table 3 shows, New York spends only $231 per capita on college education, compared with $288 per capita in the average state (see page 30). New York ranks only 35th in the nation in its per capita expenditures on public universities. This is quite anomalous: If New York spent the same 63 percent above average in this category as it does on all services combined, its higher-education expenditure would be $469 per capita. Of course, the expenditures could be low simply because many students choose to attend private or out-of-state colleges.

These options are less freely available for those who have not yet reached college. It is more disturbing, therefore, that expenditures on elementary and secondary education are also not particularly high in New York. The per capita expenditure is $1,030, the second highest in the country and 43 percent higher than the average state. But this is somewhat lower than the 63 percent difference in total spending. When we examine spending on a per student rather than per capita basis, New York only ranks sixth in the nation, and its spending is just 37 percent more than average.

Of course, spending more money does not ensure better education. Many low-spending school districts do a fine job of teaching children. Since school spending in New York State is disproportionately low compared with other government expenditures, however, it is reasonable to conclude that New York’s state and local officials have made public education a relatively low priority. One indication of this, also shown in Table 3, is the high proportion of New York’s schoolchildren attending private school 21 percent, or nearly twice the figure for the average state. In only two other states have more parents opted to keep their children out of the public schools.

Welfare

Thus far, we have seen that New York spends considerably more than the average state in most areas of the budget, and somewhat less in a few areas, but not enough to account for the huge difference in total spending. Only in jails and “other” expenditures have New York’s spending levels turned out to be far higher than the average state’s—and only by a combined total of $301 per capita, a fraction of the $2,106 difference in total expenditures.

What else, then, accounts for New York’s extraordinarily high spending? Aid to the poor is responsible for a large portion. Table 4 shows expenditures in four categories of low-income assistance: welfare (including Medicaid, Aid to Families with Dependent Children [AFDC], and other means-tested benefits), housing (including community development), public hospitals (most of whose clients are poor), and other health programs.

New York spends $795 per capita on welfare, the most in the nation. That is 143 percent more than the $327 spent by the average state, and $186 more than the second-ranking state, Massachusetts, spends. In housing, New York ranks second only to Massachusetts and spends $131 per capita, 167 percent more than the average state. New York’s spending on hospitals is $355 per capita, also more than double the average state’s expenditure. And on health services, which include clinics, immunization programs, and public health agencies other than hospitals, New York ranks fourth, spending $120 per capita, or 58 percent more than the average state.

The total of these four categories is $1,401 for every man, woman, and child in New York, or a staggering $25.1 billion in total. The average state spends $621 per capita, significantly less than half of what New York spends. The second-highest-spending state, Massachusetts, spends a total of $1,129, or nearly 20 percent less than New York. Moreover, as noted earlier, Massachusetts is mired in a fiscal crisis of its own and is in the midst of serious budget cuts. The overall difference in spending between New York and the average state is $2,106. The four categories of low-income assistance account for $780, or more than 37 percent, of this difference.

What if spending levels on welfare, housing, hospitals, and health followed the pattern of other spending and were 63 percent higher than average? In that case, the total of these categories would be only $1,012, a reduction of nearly $400 per capita ($7 billion total).

One might object that welfare programs such as AFDC and Medicaid are the creations of the Federal Government, not the states. But states have considerable discretion as to which programs they will participate in. Moreover, the Federal Government establishes only the minimum permissible standards for eligibility and the size of welfare grants; states generally are free to widen eligibility or provide more benefits.

A more troubling difficulty in comparing welfare expenditures is the influence of demographic and economic factors that are beyond the control of the individual states. A state’s welfare expenditures could be expected to vary, for example, depending on the amount of federal aid it receives and the poverty rate of its population. Accounting for differences in such factors requires a detailed statistical study. I have performed such a study for the welfare category (but not for housing, hospitals, and health), using a technique known as regression analysis. In brief, regression analysis examines data over a period of years (in this case from 1966 to 1985) to determine which factors account for how much of the change in a variable (in this case welfare spending). My analysis, shown in Table 5, adjusts for a wide variety of different factors:

* Federal aid, both to states and to households: This includes both welfare aid (AFDC, Medicaid, and Food Stamps) and nonwelfare aid.

* Demographic factors: total population; the prevalence of female-headed households; the proportion of high school graduates, college graduates, urban dwellers, and senior citizens.

* Economic factors: statewide per capita income, poverty rate, and unemployment rate; the percentage of the work force in manufacturing industries; a state-specific cost-of-living index; the welfare expenditures of neighboring states.

The regression analysis, which also takes into account changes in federal policy over the years, tells us what portion of each state’s welfare expenditures can be attributed to the combination of these factors. This figure is shown in Table 5 under the heading “Typical Expenditure.” This is the amount the average state would spend if it had the same characteristics as the state under consideration.

Table 5 also shows the “State-Specific Expenditure” that is, the portion of welfare spending attributable to factors other than those considered in the regression. Since the regression adjusted for such a wide variety of possible influences, the state-specific amount is almost entirely due to policy decisions made at the state (or local) level. For some states, a negative number is shown; this means the state spends less than would a typical state with similar characteristics. Because the regression measures each state’s deviation from the mean, the average state-specific expenditure is zero.

New York not only has the highest overall welfare spending in the country; it also has the highest state-specific portion. The difference between New York and the average state—even after adjusting for demographic and economic factors—is $152 per capita. To put it another way: Out of New York’s $14.3 billion total annual welfare budget, $2.7 billion is purely discretionary, the result of lawmakers in New York deciding to offer benefits more generous than those in the average state. If the other low-income assistance categories housing, hospitals, and health were taken into account, it is likely that this number would be substantially higher. Even given its demographic and economic peculiarities, New York could substantially cut its spending on low-income expenditures and be no less generous than the average state.

Conclusion

These numbers offer only a description of New York’s budget priorities; reasonable people may differ on whether the state’s current priorities are proper or how they should be changed. But two conclusions seem inescapable.

The first is that New York’s spending priorities are shortsighted. This is evident in the comparison between two pairs of spending areas: capital and debt, and education and welfare. The state’s easy willingness to borrow money and its comparatively stingy capital expenditures burden future New Yorkers with a huge debt and few benefits to show for it. The combination of high welfare spending and low education spending suggests that New York’s policymakers are responding to social problems with stopgap measures rather than serious efforts to break the cycle of dependency that afflicts the poor and burdens the taxpayer. Education and capital spending both represent investments in the state’s future; in New York, unfortunately, the burdens of the past and the expediency of the present seem to dictate the government’s priorities.

Yet there is also good news: New York remains one of the wealthiest states in the country. Because its residents make more money than most Americans, state and local governments in the Empire State have more funds at their disposal than their counterparts in any other state. If this money were spent wisely, New Yorkers could enjoy a level of essential government services unparalleled in the United States. Alternatively, the state’s taxes could be cut substantially. Either option would make New York a more attractive place to live and work—and brighten the state’s prospects as the twenty-first century approaches.

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