Spending on Social Welfare Programs in Rich and Poor States. Final Report.. 2. Changes Over Time

07/01/2004

Averages over time cannot show changes in the relationships between state fiscal capacity and spending on social welfare programs. Yet those relationships changed enormously between 1977 and 2000. To see these developments, we traced changes in average spending levels in each of these quartiles and for each category of social welfare spending.

Exhibit III-5 compares trends in spending for cash assistance, Medicaid, and non-health social services, with spending levels adjusted for inflation using the GDP price deflator. Per capita spending on cash assistance was lowest in the poorest quartile of states throughout the 24-year period, as shown in the graph at the top of Exhibit III-5. However, states with different fiscal capacities began to converge in their spending on cash assistance in the mid-1990s. This convergence came about as cash assistance spending in richer states (i.e., states in Quartiles 1, 2, and 3) declined, while states in Quartile 4 saw virtually no change in their already low spending levels. State fiscal capacity thus became less correlated with spending on cash assistance programs at the end of the 1990s when compared to the early 1990s and especially the late 1970s.

The 1990s also produced major changes in state spending on Medicaid, as depicted in the graph in the middle of Exhibit III-5. At the beginning of the decade, Medicaid payments grew rapidly for states in all quartiles, though the greatest growth occurred among poor states. By 2000, per capita spending in Quartile 4 was about 10 percent higher than per capita spending in Quartiles 2 and 3. The relationship between state fiscal capacity and spending on Medicaid thus declined in strength. Like the trends for cash assistance, spending levels of rich and poor states converged. But unlike cash assistance, spending on medical assistance programs saw an upward convergence as previous low spenders joined high spenders, not a downward convergence as high spending states came down to the level of low spending states.

Per capita spending on non-health social services showed no such convergence, as illustrated in the graph at the bottom of Exhibit III-5. Instead, it revealed growing differences between states of different fiscal capacities. The poorest states showed the lowest per capita spending throughout, since 1980. Yet the real separation occurred in the 1990s. Although spending on other social welfare grew in all states during the 1990s, the wealthier states in the top three quartiles showed rapid growth in such spending from 1997 through 2000 at the same time states in the poorest quartile increased their spending much more slowly. Non-health social services include expenditures for child welfare, child care, energy assistance, and many other social services, as well as the costs to public agencies of administering such programs, cash assistance, and Medicaid.

The strong growth in Medicaid spending might result in part from higher levels of inflation for health services. To gauge the importance of health-specific inflation rates, Exhibit III-6 shows trends in spending for medical assistance using the CPI for health care. With this inflationary adjustment, average per capita spending on Medicaid still rose, though less strongly, as illustrated in the graph at the top of Exhibit III-6. Spending on public hospitals actually declined over this period for the three wealthier quartiles, as depicted in the graph at the bottom of Exhibit III-6. However, the poorest quartile showed a slight increase in per capita expenditures. Thus, as was the case for Medicaid, the poorest states increased their spending on health-related functions more than wealthier states did in the 1990s.

Exhibit III-5.
Changes in Average Per Capita Spending on Different Social Welfare Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Cash Assistance Adjusted with GDP Price Deflator over Time by Income Quartile
Changes in Average Per Capita Spending on Different Social Welfare Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Cash Assistance Adjusted with GDP Price Deflator over Time by Income Quartile
Changes in Average Per Capita Spending on Different Social Welfare Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Non-health Social Services Adjusted with GDP Price Deflator over Time by Income Quartile
Changes in Average Per Capita Spending on Different Social Welfare Functions, by State Fiscal Capacity, 1977-2000

Exhibit III-6.
Changes in Average Per Capita Spending on Health-Related Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Public Hospitals Adjusted with CPI Medical Index over Time by Income Quartile
Changes in Average Per Capita Spending on Health-Related Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Public Hospitals Adjusted with CPI Medical Index over Time by Income Quartile
Changes in Average Per Capita Spending on Health-Related Functions, by State Fiscal Capacity, 1977-2000

These increasingly complex relationships between state fiscal capacity and various forms of social welfare spending were not found in trends and patterns for non-social welfare spending, as indicated in Exhibit III-7. Throughout the 24-year period, spending per capita outside the social welfare area was greatest in the richest states and lowest in the poorest states, and growth in spending after adjusting for inflation showed none of the dramatic short-run changes found in cash assistance and Medicaid.

Exhibit III-7.
Changes in Average Per Capita Spending on Non-social Welfare Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Non Social Welfare Adjusted with GDP Price Deflator Over Time by Income Quartile
Changes in Average Per Capita Spending on Non-social Welfare Functions, by State Fiscal Capacity, 1977-2000

Finally, states have changed how they spend their social welfare dollars as well as the way they fund those functions. Exhibit III-8 indicates the percentage of social welfare spending supported from state and local governments' own-source revenues rather than federal grants. Over the entire period, states in all quartiles showed a long-run decline in their reliance on own-source revenues. But the declines were greatest among the wealthier states, which, at any point, relied less on federal grants and more on their own-source revenues than did poor states. Thus, some convergence occurred, especially in the 1990s, as poor states in Quartile 4 slightly increased their proportionate use of own-source revenues, while the richer states decreased their reliance on such sources and increased their dependence on federal dollars.

Exhibit III-8.
Percentage of Total Social Welfare Spending From State and Local Sources, by Fiscal Capacity Quartile (public hospital spending not included)

Percent of Spending From State/Local Sources over Total Social Welfare Spending By Income Quartile
Percentage of Total Social Welfare Spending From State and Local Sources, by Fiscal Capacity Quartile (public hospital spending not included)

These many changes combined to produce major realignments in a relatively brief period in the spending profiles of rich and poor states. Exhibit III-9 shows evidence of these shifts by tracking the percentage of total public welfare spending in different program functions in the wealthiest and the poorest quartiles (Quartiles 1 and 4). Medicaid absorbed a much larger share of the budgets of both rich and poor states. Cash assistance spending fell in all states, though most precipitously in rich states, thereby reducing differences between rich and poor states between 1980 and 2000.

Non-health social services declined slightly as a component of overall social welfare spending in all states. But the biggest change with respect to this category of mostly non-health social services was the growing disparity between rich and poor states. Although poor states spent slightly more on such services as a percentage of their total social welfare budgets in 1990, by 2000, they had spent a much smaller percentage of their budget on these non-health social services. In just 2 decades, the components of state social welfare budgets changed in fundamental ways. They moved away from cash assistance and toward health services, and poor and rich states became increasingly different in the role of non-health social services in their total social service budgets.

These findings reinforce the need to estimate different econometric models for different types of social welfare spending, because each type shows distinct dynamics. They also pose a challenge: the relationship between state fiscal capacity and spending on different public goods seems to be mutable, suggesting a need to dig deeper after the econometric analysis and determine what dynamics are accounted for by the models and what changes are not. Finally, the trends show that poor states in particular have seen a radical transformation in the package of social welfare functions they support, a development that argues for special attention to their social welfare budgets and the factors affecting them.

Exhibit III-9.
Changes in Percentage of Total Social Welfare Spending for Three Major Functions, Comparing Rich and Poor States, 1980, 1990, and 2000

Rich states (Q1) are those in the 1st or highest quartile on fiscal capacity; poor states (Q4) are those in the 4th or lowest quartile
Changes in Percentage of Total Social Welfare Spending for Three Major Functions, Comparing Rich and Poor States, 1980, 1990, and 2000

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