Report

Changes in federal aid to state and local governments, as proposed in the Bush administration FY2002 budget

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The Bush administration’s first budget not only proposes large tax cuts, it also provides a new set of spending priorities both in terms of the level and the composition of spending. For instance, the Bush proposal includes a 7.6% reduction in overall domestic discretionary spending-the non-defense programs funded through annual appropriations-in fiscal year 2011, compared to inflation-adjusted per capita spending this year (Chow and Mishel 2001). This 7.6% “cut” in domestic spending does not take into account the likely increase in defense spending, further business and other tax cuts, and the continuation of several tax credits and payments to farmers that will leave even less room for domestic spending (see Greenstein 2001).

This report analyzes the effect of the Bush administration’s budget proposal on federal discretionary grant-in-aid programs provided to state and local governments. These programs are projected to be cut by 6.9% in FY2002 and by 11.2% in FY2011. Spending reductions in FY2002, relative to current services (as measured by the baseline), range from 5.2% in Arizona and 5.6% in Colorado to 12.2% in Michigan and 15.7% in Arkansas (all data are available online at http://epinet.org/datazone/0501/).

More specifically, this report provides data on proposed changes in budget authority (hereafter referred to as “spending”) of federal aid to state and local governments relative to a baseline for fiscal years 2002 and 2011. It covers 192 programs in the category of discretionary spending with a total cost of $122 billion in FY2001. This spending represents about 87% of total discretionary federal spending that takes the form of aid to state and local governments; it also represents about 38% of all federal non-defense discretionary spending and roughly 10% of total spending by state and local governments. The data include grants to Puerto Rico, the District of Columbia, the Virgin Islands, and U.S. Territories (for ease of exposition, we refer to all of these as states).

The programs included in this analysis do not include grants for payments to individuals, as are made, for example, under Medicaid. They do include federal aid to governments for the administration of entitlement programs, such as the Food Stamp program.

We make two comparisons: baseline spending in 2002 and 2011 to projected Bush budget spending for those years. We rely on the Federal Funds Information for States (FFIS) estimates of the Bush budget’s spending by program and state in FY2002. We use a baseline that is derived from inflation adjustments employed by the Congressional Budget Office, and from Census data on projected population growth. In other words, our baseline assumes a constant-dollar per capita level of spending. Baseline calculations prescribed by budget law are limited to the inflation adjustment. See the methodology appendix for more details.

The starting point in the analysis is the computation of the changes in spending by function and specific programs (we list only the largest programs). Table 1 presents these results for the nation as a whole. In FY2002, spending on federal discretionary grant-in-aid programs to state and local governments will be $9.3 billion below the baseline, a 6.9% reduction. By FY2011, these programs will be $20 billion below the baseline, an 11.2% reduction. The largest reductions in FY2002 are in the Justice (37.6%), Income Security (16.5%), Environmental (13.1%), and Agriculture (14.6%) programs. The spending reductions in each of these functions grows further by FY2011.

Table 2 presents the extent of cuts and increases on a state-by-state basis. The results vary by state because states receive varying degrees of funding in particular programs. The four states with the highest FY2002 cuts in percentage terms are Arkansas, Michigan, Florida, and Oklahoma; all of their cuts exceed 11%. On the other end, Arizona, Colorado, and Minnesota have the smallest cuts, of 6.1% or less.

Compared to a baseline that we assume to grow with population, the cuts increase over time. In some cases, state rankings change by FY2011 because the composition of aid they receive differs; also, CBO inflation adjustments are not identical for all functions.

As noted above, these programs are only one component of total federal domestic spending. Increased budget authority in “direct spending” programs more than offsets the cuts elaborated here, if only marginally. Nevertheless, grants to state and local governments are an important dimension of federal policy and an important source of revenue to grantees. Changes in federal aid can have sizeable repercussions at the state level, in terms of changes in services, state and local taxes, or both.

Another purpose for these data is to detail the composition of federal aid-the general object of different spending initiatives. Attitudes toward “government spending” in the abstract and specific public purposes in particular (such as education, environment, Medicare, and Medicaid) often differ. Table 1 shows cuts by basic program area. Some programs are “zeroed out” in the president’s budget, and new ones have been proposed. The net cut for FY2002 of $9.3 billion obscures the gross cuts of $15.7 billion, offset by $6.5 billion in increases. Likewise, the net cut for FY2011 constitutes $27.7 billion in program reductions and $7.8 billion in increases.

Budget methodology
The tables in this report show budget authority relative to a baseline for fiscal years 2002 and 2011. The amounts represent aid to state and local governments that are classified as “discretionary spending.” As noted above, they do not include grants for payments to individuals, but they do include federal aid to governments for the administration of entitlement programs like Medicaid.

Budget authority is spending authorized in annual legislation by Congress. It often does not correspond to actual spending-i.e., “outlays”-in a given time period. Furthermore, spending authorized in a given year is often “spent out” over an extended period, particularly if it is meant to finance capital facilities that take time to build.

The estimates for 2011 are based on official estimates for current fiscal year 2001 and proposed spending in the Bush Administration budget for FY2002. The source for these data in FY2002 is Federal Funds Information for States, a joint subscription service of the National Governors’ Association and the National Conference of State Legislatures (its web site address is http://www.ffis.org). The primary mission of FFIS is to track and report on the impact of federal budget and policy decisions on state budgets and programs. The role of FFIS in this report was limited to supplying the raw data, so any errors or policy implications are the responsibility of the Economic Policy Institute.

FFIS uses historic information on grant allocations to estimate how the national totals for grants-in-aid in budget proposals will be distributed to the 50 states, the District of Columbia
, the Virgin Islands, U.S. Territories, and Puerto Rico. FFIS obtains its raw data from federal agencies and federal publications.

Proposed budget documents do not include specific proposals for FY2011 on a program level. We obtained these by the following method.

To estimate baseline program levels for 2011, we use aggregate spending levels in 2001 and 2011 published by the Congressional Budget Office (CBO) for “functions,” i.e., categories of programs. CBO’s projections of baseline levels for functions are intended to reflect nothing more than an adjustment for inflation. We adjust the baseline level to reflect U.S. population growth as well, using Census Bureau projections. This increases the baseline in accordance with population growth of 8.6% by 2011. Hence, the baseline levels reported in current dollars reflect an assumption of constant dollars per capita for each program. In other words, we estimate the current dollar level for 2011 required to maintain constant purchasing power per capita in the reference year. We do not use state population levels because projected changes in state population could affect the distribution of specific programs by state, and FFIS does not make projections of this type.

To project levels of spending implied by the Bush budget for FY2002, we use CBO estimates of Bush functional spending in 2011. We make two comparisons. We compare baseline spending in 2011 to projected Bush budget spending, and Bush budget spending in FY2002 to a baseline for FY2002.

FFIS tracks 232 programs, many of which are entitlement programs. The entitlement programs are not included in our report, since our method for estimating a baseline level is inappropriate for them. Total estimated spending in FY2001 for the remaining 192 discretionary programs is about $122 billion, or almost 87% of discretionary federal aid (budget authority) to state and local governments. These programs represent about 38% of all federal non-defense discretionary spending and roughly 10% of total spending by state and local governments.

A number of the FFIS programs are often considered under broader designations. In some cases we report these in more consolidated form. Therefore, some of the items in our tables will have multiple codes in the Catalog of Federal Domestic Assistance or in Consolidated Federal Funds Information for States.

The reader will notice that many percentage-cut amounts recur for different programs. This happens because we apply uniform adjustment factors to programs by function. Hence, the levels and percentages of program cuts should be understood as averages for all programs within the function to which they belong.

All data reported here may be reproduced and circulated for any purpose. We do request that any such use cite the Economic Policy Institute and Federal Funds Information for States.

May 2001

This research relied on the excellent efforts of Danielle Gao and Abe Cambier. Max Sawicky provided excellent and much-needed substantive input. I heartily thank them all.

References

Chow, Barbara, and Larry Mishel. 2001. Tax Cuts and Consequences: Bush Budget Plan Will Require Steep Reductions in Real Spending Over Next Decade. Briefing Paper. Washington D.C.: Economic Policy Institute.

Greenstein, Robert. 2001. Following the Money: The Administration’s Budget Priorities. Washington, D.C.: Center on Budget and Policy Priorities.

See more work by Lawrence Mishel