- Report Published -
|Review of State Spending: June 2002 Update|
|Joint Legislative Audit and Review Commission|
|The 2001 General Assembly adopted two measures directing JLARC to review expenditure growth and related matters. House Joint Resolution 773 and House Bill 2865 (adding § 30-58.3 to the Code of Virginia) require JLARC to develop an annual report on State spending growth. Specifically, these mandates require JLARC to identify the largest and fastest growing functions and programs in the State budget. |
This report is the second in JLARC’s series on State spending. The first report, issued as Interim Report: Review of State Spending (House Document 30 (2002)), reviewed spending and budget growth from FY 1981 through FY 2000. This report updates the analysis of budget and spending growth through FY 2001. A separate report on other aspects of the study mandate will be provided this fall.
Growth in State Spending, 1981-2001
State government spending in Virginia grew by $18.5 billion between FY 1981 and FY 2001. Adjusting for both the effects of inflation and for population growth, this represented a 2.3 percent annual average increase. Growth was concentrated in the traditional core services of State government. Over half the total increase was accounted for by only five agencies (out of 144). At a more detailed level of growth, seven programs contributed nearly half the total increase (out of 195). A variety of factors including inflation, a growing population and economy, and recent State initiatives account for most of the increase. This level of budget and spending growth allowed Virginia to maintain relatively stable levels of spending on the major functional areas of government. This spending growth also placed Virginia in the mid-30s among the 50 states in 15 of the 21 years covered in this review, in terms of per capita, inflation-adjusted spending.
Unadjusted for inflation, total State spending increased by 314 percent between FY 1981 and FY 2001. Expenditures, which include the spending of bond proceeds, actually increased slightly faster than State appropriations, which increased 308 percent over the period. These increases reflect an annual average increase of 7.4 and 7.3 percent, respectively. Spending growth displays a clear and persistent upward trend even when adjusted for inflation (Figure 1). Over the 21-year period, spending increased 105 percent when adjusted for inflation and put on a per- capita basis.
(See hard copy for Chart.)
The two largest functional areas of State government, in terms of dollars spent, are education and individual and family services. These two broad functional areas accounted for the majority of State spending in the base year (64 percent of spending in FY 1981), and they also accounted for the majority of spending growth (58 percent) between FY 1981 and FY 2001. Education spending grew by $5.7 billion, 31 percent of the $18.5 billion total increase. The individual and family services function grew by $5.0 billion, 27 percent of the increase. As noted in Figure 2, other increases in the broad functions of government included:
• transportation increased $2.2 billion,
• general government increased $1.9 billion,
• administration of justice increased $1.8 billion,
• enterprises increased $1.0 billion, and
• resource and economic development increased $0.6 billion.
Program-level increases drove these broad functional level increases.
At the program level, a more detailed level of the State budget which accounts for resources directed at specific objectives, budget growth was concentrated in the fundamental State government activities of education, health care, and transportation. This was due in part to the large sizes of these core programs.
The five highest-growth programs accounted for 47 percent of the total budget increase since FY 1983. The medical assistance services (Medicaid) program grew the most, up $2.5 billion, accounting for 14.6 percent of total bud- get growth. Medical costs increased rapidly during most of the study period. The number two program was financial assistance for public education (standards of quality), up $1.9 billion. This program represents the largest component of education funding to localities, and its growth accounted for 11.1 percent of total budget growth over the period. The third largest increase was for educational and general programs (which includes core college and university functions). Growing almost $1.6 billion, this program accounted for over nine percent of total budget growth.
Highway systems acquisition and construction was the number four growth program at $1.1 billion or 6.8 percent of total growth. Financial assistance for special State revenue sharing rounded out the top five growth programs. This program budgets the sales tax portion of State support for local school divisions and grew by $861 million, or 5.1 percent of total growth.
Among the high-growth agencies, the pattern is similar to that at the program level. The five highest growth agencies were the Department of Education, up $3.3 billion; the Department of Medical Assistance Services, up $2.6 billion; the Department of Transportation, up $1.9 billion; the University of Virginia, up $0.9 billion; and the Department of Social Services, up almost $0.9 billion.
The broad general government function had the highest growth rate after adjusting for inflation and population growth, with real growth of 184 percent over the 21-year period (Table 1). Two key factors in this rapid growth were the initiation of the personal property tax relief program late in the period, and increased debt service payments.
The broad governmental function with the second-highest growth, after controlling for inflation and population growth was administration of justice, with 131 percent growth between FY 1981 and FY 2001 (Table 1). Much of this growth was due to the expanding State prison population, (from 8,363 in 1981 to 33,103 in 2001 – a 296 percent increase), increased employment in the Department of Corrections as new prisons opened during the period, and increased State payments to localities for the State’s share of the costs of jail operations and additional deputy sheriffs.
A key aspect of Table 1 is the ranking of both the education and individual and family services functions at fifth and sixth, respectively, in terms of percent change in per capita, inflation-adjusted dollars. Despite the fact that these two functions had the largest dollar growth over the period, they show less real inflation-adjusted per capita growth over the long term than the average statewide rate of 2.3 percent annually. This is due partly to the relatively large base each function had in FY 1981, so a relatively large dollar increase may calculate as a smaller percentage increase.
Late in the 21-year period of this review, when the largest dollar increases were occurring in the overall budget from year to year, new dollars coming into the State budget were more likely to be spent on general government and transportation, and less likely to be spent on education or individual and family services. This suggests that Virginia’s long-term spending priorities, which had been relatively stable, may be shifting.
Factors Accounting for Growth
Several underlying factors account for much of this budget growth. These factors include:
• population and economic growth,
• other demographic changes,
• increases in service populations,
• Virginia-based initiatives, and
• federal mandates and incentive programs.
Budget and spending growth should be adjusted for inflation because prices have more than doubled since FY 1981. A market basket of goods and services purchased by the State would have cost twice as much in FY 2001 as in FY 1981. Virginia’s population also grew 32 percent over the 21-year period. The economy, as measured by total personal income, grew by 282 percent. A larger population and economy require more schools, roads, and other State-funded services. More subtle demographic changes can also drive spending increases in specific programs. For example, Virginia’s older population (over 65) grew at 1½ times the rate of increase in the overall population. An aging population tends to increase the demand for a variety of health and related services, such as Medicaid payments to nursing homes.
Changes in the populations served by State programs and agencies also influence budget growth. Most of the State’s major service populations have grown since FY 1981. Elementary and secondary school enrollment, for example, increased ten percent during this period; enrollment in institutions of higher education increased 25 percent; the population served by Medicaid went up 131 percent; and the State inmate population increased 262 percent. Each of these service populations represents additional needs for State funding.
Several new initiatives also led to increased State spending. The most important new initiative during this period, in terms of its impact on spending, was personal property tax relief, costing over $500 million in FY 2001. Although outside the timeframe of this review, $819 million is budgeted for this initiative in FY 2003. Other initiatives include increased funding for the “599” program, annual deposits to the revenue stabilization fund, and numerous smaller initiatives that combined represent hundreds of millions of dollars in new annual spending.
Finally, Virginia spends billions of dollars to meet the matching requirements of numerous federal grant programs. By far the largest is the Medicaid program at over $1.5 billion annually. These federal mandates and incentive programs provide large funding sources for programs the State might not otherwise be able to offer, yet participation still requires substantial State commitments.
Though spending has increased since FY 1981, when compared to other states over this period, Virginia’s funding priorities have been relatively stable. In per-capita, inflation-adjusted terms, Virginia ranked in the mid-30s, in comparison to all 50 states, except during and after the recession of the early 1990s, when Virginia spending slipped to the mid-40s (Figure 3).
Virginia has also had relatively stable levels of spending on the major functional areas of government. When ranked against other states in per capita, inflation-adjusted spending, Virginia has ranked relatively high in state spending on public safety and highways, near the middle in education, and near the bottom in social services and natural resource spending. This consistent pattern indicates that Virginia’s spending growth has served to maintain the State’s relative position over time.