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
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:
- How do states with the greatest needs and the least resources make financial decisions regarding their social welfare programs?
- How do these states respond to short-term financial challenges, such as the recent state fiscal crises?
- 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.
What We Found
Several important findings emerged from the project:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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).