Executive Summary
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Social welfare programs strive to improve the well-being of needy and vulnerable
populations. The fact that states spend different amounts on these programs
is well known, but why they do so is less understood, including the extent
to which differences are affected by states' relative fiscal capacity, defined
as their ability to raise revenue through taxation. The federal government
has long played an important role in offsetting state fiscal disparities.
However, recent changes in federal grant programs might have affected poor
and rich states in different ways.
This study was conducted for the Office of the Assistant Secretary for Planning
and Evaluation, U.S. Department of Health and Human Services, by The Lewin
Group and the Nelson A. Rockefeller Institute of Government. It addresses
how a state's fiscal capacity affects its spending on social welfare, how
states differ in their "packaging" of services for low-income populations,
how economic conditions affect state spending on social welfare, and how
the poorest states have adjusted to their relative economic austerity. The
study also looks at factors in addition to fiscal capacity and federal grants
that might influence state spending, including state needs for social welfare
spending, as measured by poverty and unemployment rates and political and
institutional factors, including state budget processes.
For the purpose of this report, we measure fiscal capacity-and thus distinguish
between rich and poor states-using states' real per capita income. By social
welfare spending, we mean per capita state spending on programs intended
to support lower-income households, usually programs that are means tested.
These programs might include cash assistance programs such as Aid to Families
with Dependent Children (AFDC) or cash payments under AFDC's replacement,
Temporary Assistance for Needy Families (TANF); health programs such as Medicaid
and state child health insurance programs (SCHIP); and a wide variety of
non-health service programs providing child care, foster care, low-income
energy assistance, and social services to the physically disabled and programs
funded by the Social Services Block Grant
(SSBG).(1)
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Conducted over 21 months, the study involved two major activities:
Analysis of expenditures across 50 states. Our analysis
examined variation in spending patterns across the 50 states and the District
of Columbia. Our team analyzed 24 years of data on state and local social
welfare spending patterns for four categories of social welfare spending
and a residual category of all other state and local spending. These categories
encompassed cash assistance; Medicaid; non-health social services, such as
child care, child welfare, energy assistance, and services to the aged and
disabled; public hospitals; and all other non-social welfare spending.
We approached the analysis of spending in three ways: (1) employing descriptive
data to analyze trends and patterns, (2) developing and estimating econometric
models of state spending to estimate how differences in states' fiscal capacity
affect spending, and (3) using the results from the descriptive and econometric
analysis to better understand the spending variations we observed between
rich and poor states.
Case studies. We collected and analyzed qualitative and
quantitative data from six states- Arizona, Louisiana, Mississippi, New Mexico,
South Carolina, and West Virginia-selected for their high needs relative
to their fiscal capacities. Findings from the econometric analysis were used
to compare states on their propensities to spend on certain types of social
welfare. Comparisons were drawn between rich states (i.e., states with high
fiscal capacity) and poor states (i.e., states with low fiscal capacity)
and among the six states selected for case studies.
To obtain in-depth information about how state fiscal capacity affects state
spending on social programs, we conducted site visits to case study states.
Four questions guided our interviews:
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How do states with the greatest needs and the least resources make financial
decisions regarding their social welfare programs?
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How do these states respond to short-term financial challenges, such as the
recent state fiscal crises?
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Why do some poor states spend more on social welfare programs than other
poor states? And why did some spend more on certain programs and less on
others?
Our analyses cover spending from 1977 through 2003, though the econometric
study ends in 2000.
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Several important findings emerged from the project:
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Finding #1: States of LESS fiscal capacity spent LESS PER CAPITA
on social welfare programs than states with HIGHER per capita incomes.
Federal grants did not reduce absolute spending differences between rich
and poor states. Average federal grants to the wealthiest states were actually
higher in dollar terms when compared to states with lower fiscal capacity.
However, because state own-source spending was much lower in poor states,
federal intergovernmental grants constituted a larger share of the social
welfare budgets of poor states than of rich states.
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Finding #2: State fiscal capacity bore a stronger relationship to
spending on non-health social welfare programs than on health-related
programs. Between 1977 to 2000, differences between rich and poor
states were greatest for spending on cash assistance and non-health social
services (such as child care, child welfare, energy assistance, transportation
assistance, and programs for the homeless). Differences between rich and
poor states were smaller for health-related programs, such as per capita
spending on Medicaid and payments to public hospitals.
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Finding #3A: Between 1977 and 2000, state spending on social welfare
changed in major ways. Even after controlling for the higher levels
of inflation found in health services, spending on Medicaid greatly increased
throughout this period, most rapidly in the late 1980s and early 1990s. Spending
on non-health social services rose gradually throughout this period. Average
state spending on cash assistance rose in the late 1980s and early 1990s
but fell dramatically after the mid-1990s.
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Finding #3B: These trends varied greatly between rich and poor
states. Medicaid grew substantially for all states, but the growth
was strongest among those of low fiscal capacity. The correlation between
state fiscal capacity and per capita spending on Medicaid declined
over time, as per capita spending by poor states climbed to levels only exceeded
by the wealthiest states, while Medicaid spending in wealthier states grew
slowly or stalled during the late 1990s. Wealthier states reduced their
cash assistance spending during the middle and late 1990s, while
poor states on average showed little change in their per capita spending
on cash assistance throughout the last two and a half decades. By contrast,
differences grew between rich and poor states in their spending
on non-health social service programs, as growth in spending on
these non-health services lagged behind in the poorest states.
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Finding #3C: These changes produced major shifts in the composition
of social welfare budgets in rich and poor states. States of all
fiscal capacity have greatly increased the proportion of their spending devoted
to Medicaid while reducing the proportion spent on cash assistance. Poor
states, unlike rich states, also reduced the proportion of their budgets
spent on non-health services. The packages of benefits offered by poor states
have thus changed markedly in recent years, toward health care and away from
non-health services.
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Finding #4: Econometric analyses found that different factors influenced
different social programs. Spending on cash assistance
was increased by federal grants, unemployment, and greater population density.
Medicaid spending was increased by fiscal capacity, grants, and
unemployment. However, the effects of federal grants were particularly strong
for Medicaid spending, and population density had an effect opposite
to its impact on cash assistance, with higher levels of spending found in
comparatively rural states. Finally, non-health social services was
most affected by overall state income. It was strongly and consistently related
to state fiscal capacity and federal grants for non-social-welfare
programs.
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Finding #5A: The econometric models were most successful in explaining
spending differences and changes among wealthy states; the models fared less
well in accounting for spending in poor states Most of the
variables-including fiscal capacity, unemployment, and federal grants-showed
relatively strong effects among the wealthier states. In poorer states, fiscal
capacity, unemployment, and federal grants showed little or no effects. One
important exception was Medicaid. Spending on Medicaid was significantly
and strongly affected by federal grant dollars in poor states.
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Finding #5B: There were substantial differences among poor states
in their long-run propensities to spend on programs (as captured in the "state
effects" of the econometric model). In particular, there were different
propensities for spending on cash assistance and health-related programs
(Medicaid and public hospitals). Some poor states (mostly rural
southern states) spent very little on cash assistance but relatively more
on health-related programs, while other poor states (mostly in the West)
had larger cash assistance programs and spent less on Medicaid. This trade-off
between health and cash assistance programs was not found among wealthier
states. Wealthier states were, in general, less likely than poor states to
display negative correlations between their long-run propensities to spend
on different program functions. Thus, poor states showed greater specialization
and variation in their spending "packages" when compared to wealthier states.
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Finding #6: Case studies of six states of low fiscal capacity and
high social needs indicated that the basic trends in spending found among
poor states before 2000 continued after that year. Spending on Medicaid
grew in most of the poor states despite fiscal downturns. Large cut-backs
in Medicaid eligibility and basic services were uncommon; in fact, some major
program expansions occurred. Nor did cash assistance spending decline-in
fact, some increases were found in spending on TANF cash assistance. Major
cuts were most often imposed on non-health social services and administrative
expenses, especially staffing.
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Finding #7: The case studies visits also revealed that, at least
among poor states, spending in different program areas were typically determined
by different political and administrative processes. Spending on
cash assistance programs were most affected by the interaction between caseload
levels and the rules and benefit levels determined (and not often revised)
by state legislatures. Choices affecting cash assistance spending seemed
to be more influenced by the ideological views of elected officials. By contrast,
Medicaid policies and expenditures were, especially in the rural southern
states, strongly affected by the active political involvement of service
providers, federal match rates, and federal mandates. Together, these factors
have helped to sustain Medicaid spending in poor states despite recent fiscal
pressures to cut expenditures. Finally, non-health social services were typically
of low political salience and administrators were often given significant
discretion over how to allocate funds across different services. State resources,
increasing program flexibility (partly attributable to the TANF block grant),
and executive priorities seemed more important in determining how much was
spent on these non-health services and which services were funded and which
were not.
One intriguing implication of this last finding is that price effects-determined
largely by federal matching rates-might vary depending on other factors or
characteristics of the states. When a program has strong and active
constituencies that support greater spending, such as Medicaid, an attractive
match rate might suffice to expand spending during boom times and prevent
major cutbacks during recessions. If, however, a program enjoys no such strong
political advocates, even the same federal match rate might fail to prevent
major cuts in services during fiscal downturns.
By connecting econometric estimation with intensive analyses of particular
states, this study discerned the different processes affecting different
types of social welfare spending and how those processes interacted with
state fiscal capacity and other state characteristics. The result is a deeper
and more discriminating understanding of the enormous changes in the level
and composition of state social welfare expenditures, and their complex relations
to fiscal capacity, in the American states.
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(1) Because we are interested in the effects of
state fiscal capacity on social welfare spending, we consider only spending
that goes through the budgets of state and local governments, not direct
expenditures by the federal government. Thus, we do not analyze the federal
Earned Income Tax Credit (EITC), the Food Stamp Program (FSP), or, with some
exceptions, Supplemental Security Income (SSI).
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