1.16 State Budgets

How does the budgetary process work at the state level? Profs Greer and Jarman talk you through the process, including why the line item veto is undemocratic, why balanced budget amendments mean we can't have universal healthcare at the state level, why people who oppose Medicaid like block grants, and more!

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• Music: 'Blippy Trance' by Kevin MacLeod

Transcript

Holly Jarman: 0:11

Hello, and welcome to the HMP governance lab podcast. I'm Holly Jarman. And I'm here with Scott Greer. And we're going to be talking to you about the state budgetary process.

Scott Greer: 0:23

And I have learned as somebody who's not very interested in baseball, that if I need to fake it, I just have to say, Good pitching always beats good hitting. And people assume that I know what I'm talking about. Here's the trick for state budgets, say the budgetary process is really a wreck in this state. And everybody will nod and regard you as a source of wisdom. We're going to go through a general understanding of what state budgets look like. And the point is that you can figure out what you need to be looking at when you try to understand a given state. So Holly, how does the general budget process work? How does the process insofar as it's the same across all 50 states tend to operate?

Holly Jarman: 1:04

Right, and I can't stress that enough, it's the same as with any sort of health care program or so on. And you if you know, one state, you only know that state. But luckily, with budgets, at least, there's sort of a general process that you can follow. And we're also going to tell you a bit about how to understand the weird ways in like Vermont, and so on, varies from this general process. So most states fiscal years run from helpfully July to June. So make of that what you will, the executive will propose a budget and submit it to the legislature in January, February. So in that way, it's a bit like the congressional budget process at the national level. After that, the Appropriations Committee in each chamber. If you have two chambers looks at the proposed budget. And then they can do a couple of things, they will likely hold some hearings, to inform them about the process. And they will also engage in the process of markup. So the bill goes to the floor of the lower house first, and then it goes through goes through that process. And then that will repeat in the Senate. And very similar to the legislative process, that there will be a conference committee to reconcile the two versions. And then the budget bill will go to the governor who can do three things, approve the bill, veto the bill or use a line item veto. Scott was a line item veto.

Scott Greer: 2:43

A line item veto is where the governor can veto specific budget lines specific budget language, and in some states specific words, it doesn't exist at the federal level, you pass the budget up or down, the President has to sign the whole thing or not or veto it. And the states by contrast, governors can veto specific parts of it. And a few states such as Wisconsin, there's studies of governors actually crossing out words in order to change the meaning of individual budget resolutions. So in Wisconsin, the governor is actually able to veto individual words of it in order to change the meaning of the budget. So then Wisconsin legislators need to write sentences where they can't figure out a way in which a hostile governor could line item veto enough words to change the meaning.

Holly Jarman: 3:31

That's really concerning to me. I feel like that's not really in, in line with the democratic process. So what are some ways in which we can understand those weird states that vary from the norm? If that is the the general process which sounds a little bit like the legislative process for states, and not too scared, much of a deviation from that? How can we understand these weird ones where we've got a few other things that we have to take into consideration?

Scott Greer: 4:04

So the first and single biggest thing about states is balanced budget rules. 49 states have a balanced budget, the constitutional provision, or some kind of a formal requirement that they balanced the budget. This is why American states basically have good credit ratings when they issue bonds. What you say, if you can't issue debt, why do you have a good credit rating and an active bond market?

Holly Jarman: 4:29

Good question.

Scott Greer: 4:31

Well, the answer is that we pass these things because American states used to be notoriously profligate Michigan, built too many railways in the 19th century and crashed the London and Paris bond markets at one point, we were wild speculative investments and in order to prove our credit worthiness, we passed a basic rule the budgets had to be borrowed except for and the except for is a wild and wooly category, of different forms of expenditure for which states can with different kinds of authorized Issue debt. Most of the time it's for capital expenditure, we're going to issue specific debt, the specific payment mechanism in order to build a specific road. Needless to say, then, if you want to do crazy off budget expenditures, you create these kind of parastatal creatures, like for example, the Illinois Tollway, which is a giant out of control debt issuing public sector creature which has been a lovely piggy bank for Illinois politicians for decades. So I would say it's probably one of the most permanent things in Illinois politics,

Holly Jarman: 5:31

I can tell that you've driven along the Illinois Tollway quite a lot, I can feel your dislike of it

Scott Greer: 5:36

in your voice, apart from the horrors of driving on it's unstoppable. And its long term goal is to pave the entire state because that's how you keep it going. In other words, by forcing Illinois to put large road projects off the budget in order to fit the balanced budget rule, Illinois has created this weird independent Empire which is issued tons of debt. You see a lot of examples of this underfunding pensions as another way states do it within the actual state budget, then there's some kind of a balanced budget rule in all 49 states plus Vermont behaves like it has one because it's Fremont. So then they make a projection and they pass a budget based on the assumption that they will get X amount in tax and spend X amount in spending of various kinds. They then look at their tax revenue halfway through fiscal year. And if it turns out, they're not getting enough tax revenue relative to their expenditures, they'll have to pass a budget repair bill which cuts spending in some way. And if they have additional expenditure, then they can have a little Christmas and handout presence, or occasionally put it in a rainy day fund. So the result of this is states are procyclical, when times are good when the economy is booming. States have more money, even if they don't raise taxes, and they build more stuff. And they employ more people. And generally they give extra fuel to the economy, right when it's doing great. Then in the opposite direction, when the economy goes bad state tax revenues drop, and they start cutting services and laying off public employees and stopping construction projects. So when times are good, states make them better. And when times are bad, states make them worse. This is pretty much the opposite of what normal economic theory would say a government should be doing. So your state government is trying to drive up inflation when the economy is booming, and your state government is trying to right raise unemployment when the economy is in bad shape.

Holly Jarman: 7:40

And that has really important consequences. Right now, if we think about what's happening with the COVID pandemic, economically, following that pattern through the economy is doing poorly. And states are doing poorly. And so the fiscal health of the US is a really serious concern right now.

Scott Greer: 7:58

This is why states can't run universal health care. Because by and large, any model for universal health care on the state level depends on state level taxes. And like clockwork, you create an expansion scheme, you insure a bunch of people during good times. And then in bad times, state tax revenues go down, down down, the number of people who need health insurance goes up, up up and the program collapses. We've seen this movie literally dozens of times.

Holly Jarman: 8:29

What about block grants, then do they follow some of the same logic?

Scott Greer: 8:34

A block grant is a technique for the federal government to give money to a state in order to do something. And traditionally, what it does is it leaves the state on the hook for something that the federal government gently under finances, because if you understand the federal budgeting process, block grants aren't automatic. Take the example of Medicaid and CHIP. Medicaid is mandatory spending, you write the rules of eligibility that gives you the number of people who receive Medicaid, and then you multiply that by what they spend. And that's the Medicaid budget. By contrast, chip is a block grant, the federal government decides in its own wisdom, how much money will be given to states to ensure their children. And the states can do what they like within that block grant. So if the federal government under funds chip relative to the number of children, the states have to decide whether they just want to have a poor program or whether they want to chip in their own money. Whereas with Medicaid, the number of people eligible for Medicaid is the main driver of the amount of money spent on Medicaid. Medicaid is therefore a much more politically secure program, because it's insulated from the comings and goings of state recessions and business cycles.

Holly Jarman: 9:49

And so one of the strategies again, that people have put forward who don't really like Medicaid and similar programs is to actually institute a block grant.

Scott Greer: 9:58

If you want to cut it, block, grant it Huh. And in theory states have more ingenue opportunity to be innovative in developing novel solutions. In practice, there aren't that many solutions that you can do within mandatory spending. But the block grant allows you all sorts of ways to cut the program without getting caught.

Holly Jarman: 10:22

So, balance budget amendments, and their consequences are one way in which there's that states can vary from the general budget process that we discussed. What are some other things that we have to think about?

Scott Greer: 10:34

everything to do with time in state politics matters a lot. There's a lot of state legislators that barely meet, that only show up in the Capitol for a few weeks, every couple of years. And they can be called into special session. But basically, a state like Wyoming has a two week frenzy of budgeting and legislation, and then they all go back to whatever else they're doing with their lives. By contrast, some states have professional legislators that are pretty much constantly in session, whether in full session like Michigan or committee work like Florida. This feeds through because one, how much attention does any given budget item get? And to what is the state's budget cycle one year or two years. And that matters, because in an odd numbered year, in a bunch of states, the budget is made, and then there's nothing to do in the election year. The other thing I want to point out is unusual voting rules. What are some of those?

Holly Jarman: 11:30

Yes, so a couple of states, including Michigan is one require a supermajority to pass some appropriations, which, if you think about it is is a bit concerning. And so Michigan actually requires this when appropriating public money for local or private purposes. And so I think this is intended to be a check on corruption essentially, and sort of pork distribution, we use that phrase, and we talk about pork when we're talking about, you know, sending money to a particular almost selfish purpose that serves the representative. So you might be building a bridge or funding a local project. And so there's there can be a tendency for the budget process to result in pork distribution. So distribution of that money in ways that benefits the representatives from district. And so I think these voting rules are intended to be with a supermajority are intended to be protection against some of that mismanagement of public money. But also, I think they can cause problems because a supermajority is hard to come by in some cases. And so it's definitely a measure that's on the side of people who are not keen to see big boring or big public spending.

Scott Greer: 12:52

And on the other side in Michigan, pretty much the whole state wildlife Parks and Recreation apparatus has dedicated funding sources, recreation, passports, hunting licenses, fishing licenses, and because reasons revenue from oil, gas and mineral exploitation, and this is written into the Constitution, so the State Department of Natural Resources doesn't really get appropriations through the budgetary process. Its budget is the sum of hunting and fishing licenses and little park, entry fees and so forth. And that's deliberate because the people who like that world not only manage to insulate the DNR, from whatever else is going on in Michigan politics, they also make it extraordinarily responsive to the people who pay those different fees, namely, the mining industry, hunters, fishermen, and recreational users who get the little passport thing on their car. So it's clever, if you like Michigan State Parks to be expansive, and managed to the benefit of essentially hunting hunters and minors, above all.

Holly Jarman: 13:56

But I hope that example gives you the idea that you have to really be specific in understanding the context within a state. And quite often, advocates and lobbyists will specialize in states or a number of states within a region, because they really have a grip on some of this stuff, which really is sort of almost unwritten rules. But understanding how these kinds of things work. And what the local context is, is, is really the key to doing advocacy around the budgetary process.

Scott Greer: 14:27

And it's why finding a really skilled advocate within the legislature or the executive is important, because learning this stuff is not easy. Now, what are the practical consequences of all this weirdness?

Holly Jarman: 14:41

Well, basically, state officials have to balance their operating budget. And so really, what that means is most of the actions so tax deposits and appropriations and so on will take place via the state's general fund. And so Keeping an eye on the general fund and understanding what money is coming out of there. And what it's paying for is kind of important when you're trying to read budgets. And so the non general funds are by definition tied to specific goals. And they either derive from federal source sources or from state appropriations. The non general funds make up the majority of the state's budget.

Scott Greer: 15:25

So if there's some takeaways, one of them is clearly states are not going to give you universal health care, because they're pro cyclical. And they might make you promises at the top of the economic cycle, but they won't keep them at the bottom. If you're going to do universal health care, you've got to have the federal government's ability to issue debt in order to carry the health care system across a trough in an economic cycle, just like unemployment insurance is run by states, but every single recession, the states go into debt on unemployment insurance, and need the federal government to issue them an emergency loan backed by its credit power.

Holly Jarman: 16:00

And that's so important in the environment in which we find ourselves today, we have to understand the pandemic and the economic responses to the pandemic. Not in terms of what individual states are doing, but what states and the federal government are doing collectively in because they're all tied into this system together. And they're all the states are dependent on the federal government for so much of what they do. And so we see often in the news, the the response of states being portrayed as the primary response of the United States. But economically, they're tied together in these webs of spending, which are really important for some of the things that we're seeing in terms of the pandemic, and social and health policy.

Scott Greer: 16:50

And the other thing is, it's not just that states are part of a complex system, but also that states are in themselves complex. If you go to a michigan state legislator, and you want to make detailed DNR policy, they're going to point out that they don't have that many policy tools because they can't grill the DNR administrator about getting in spending of the DNR budget. So you want to find your champions, find your advocates find your expertise, and we hope that this podcast has given you some sense of where you start looking and what you start looking for.

Holly Jarman: 17:33

This has been a podcast of the HMP governance app. If you're interested in our research, come and find us at HMP governance app.org or follow us on Twitter at HMP Gov