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Overspent

from the magazine

Overspent

Some states consistently live beyond their means. Winter 2019
Economy, finance, and budgets

Since 2003, ten states, like impulse buyers wandering through a mall on Black Friday, have repeatedly run deficits, spending more than they generate in taxes, fees, and federal grants, and “pushing off to future taxpayers some past costs for operating government and providing services,” notes Pew Research in a new study. Working from states’ comprehensive annual financial reports, which give a more accurate picture of spending than government budgets, the nonpartisan Pew found that the worst offender was New Jersey, which took in just 91.3 percent of what it spent in the last 15 years. Not far behind were Illinois, Connecticut, Massachusetts, Kentucky, Maryland, New York, California, and Delaware—all in the red for 2003–17, using a combination of debt and deferred payments to live beyond their means.

By contrast, some states managed to live well within their limits, providing themselves a healthy cash cushion. Oil-rich Alaska had the biggest plus-margin over the last 15 years, spending just 72 percent of the money that state government collected. That’s one reason Alaska leads all states in money socked away. Other states that took in considerably more than they spent included North Dakota, Wyoming, Utah, Montana, Idaho, and Texas.

One trait that virtually all the overspenders have in common is a high degree of public-sector unionization. Nine of the ten states that spend more than they took in have union rates well above the national average for the public sector, and six of those—New York, Connecticut, New Jersey, California, Massachusetts, and Illinois—rank in the top ten in percentage of unionized workers within government. States that consistently lived well within their means—such as Wyoming, Utah, Idaho, and Texas—have among the lowest rates of public-sector unionization.

Many states will overspend after a recession, especially one as deep as the 2008 downturn, which resulted in sharp declines in government revenues. Only one state—Montana—managed to avoid running a deficit in any of the last 15 years. But the spendthrift states consistently spent too much, through good times and bad. New Jersey and Illinois, for instance, ran deficits for all 15 years dating back to 2003. Connecticut overspent for 12 years, New York for ten, and California for eight.

Three of those profligate states—Massachusetts, California, and New York—overspent even as they saw economic growth, as measured by personal-income gains, that exceeded the national average during this period. The economy rarely generated enough money to satisfy their politicians’ cravings. Nor did the trend toward overspending decline as the economy picked up. In 2017, the eighth year of positive economic growth since the 2008–09 recession, 14 states spent more than they took in.

One major problem is that state and local pension systems have kept taking on debt even during the recovery, forcing states to devote more of their budgets to retirement costs. State pension systems were, on average, 87 percent funded before the 2008 crash—but despite the stock-market recovery, by 2017, they were only 70 percent funded. Over that period, states have doubled the money they put annually into their pension systems, but it hasn’t been sufficient. Not surprisingly, the states that regularly run real deficits have some of the worst pension woes in America. New Jersey, Connecticut, Illinois, and Kentucky, for example, have the lowest-funded state pension systems, while California faces the biggest overall pension debt among the states.

“Like families, states can withstand periodic deficits without endangering their fiscal health over the long run,” Pew noted. But the sustained overspending by so many states is a warning sign of trouble ahead. Spending beyond their means has become a new normal for too many state governments.

Photo: matejmo/iStock

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