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Increased federal aid to states is a long term trend

State Budget Solutions | by Bob Williams, Joe Luppino-Esposito | March 26, 2014

States receiving money from the federal government is unsurprising, but what is shocking is the states’ increased reliance on money from Washington, D.C. in the past decade. State Budget Solutions’ analysis of the latest data shows that, between 2001 and 2012, the percentage of general revenue dollars coming from the federal government increased in 41 states.

In all, states received $5.27 trillion from the federal government since the start of the 21st century. Since 2001, 34 states saw over 30 percent of all their collected general revenue come from the federal government. 

The “stimulus bill” created a federal funding spike from 2009-2011, but the long-term trend of increased dependency on the federal government did not subside following the recession. This overall increase comes despite a change in the data shared by the United States Census Bureau that results in a lower, though more accurate, determination of how much federal revenue is given to states each year.

A state’s traditional political affiliation does not appear to impact response to the promise of funds from D.C. Both typically “red” and “blue” states have increased levels of support that are higher than a decade ago.

California accepted the most federal revenue over the period--$639 billion, though the state also had the highest total general revenue. In terms of percent of general fund revenue, Mississippi was the only state to have more than half of its revenue come from the federal government. The state surpassed the 50 percent mark in both 2007 and 2010. 

Growing reliance on federal funding in state budgets is a dangerous trend.  It threatens the financial stability of all 50 states, as well as the federal government. As federal debt skyrockets, Congress must look for ways to reduce spending. In the many states that count on the federal government for over one-third of their general revenue, every congressional spending reduction proposal puts the state at risk of a serious financial shortfall. 

States must recognize that this funding arrangement also harms fiscal federalism. Federal funding usually comes with strings attached, and that means less chance for local control. When states cannot stand firmly on their own financial footing, they will lose the ability to make the best, locally-based, independent decisions for their residents. 

States need to act as independent and sovereign entities, which they are under the U.S. Constitution.  In order to prepare for the next federal budget crisis, officials need to identify all the federal funds coming into their state and the cost of the mandates attached to the funding. States need to take a risk assessment similar to that done by the state of Utah, and each state legislature can and should develop a prioritized plan of action to act responsibly for their constituents.

 

Methodology

For data from 2001 to 2011, using the Annual Survey of State Government Finances from the United States Census Bureau, State Budget Solutions calculated federal aid to a state by dividing “Intergovernmental Revenue” into “General Revenue.” “General Revenue” includes all tax revenue but excludes utility revenue, liquor store revenue, and investment income from state pension funds. 

For 2012 figures, the Census Bureau included more details regarding “Intergovernmental Revenue,” showing the split between federal and local revenue. In most states, local revenue comprises less than 5 percent of the “Intergovernmental Revenue.” The exceptions are: California (5.71); Nevada (7.29); New Hampshire (9.53); New York (13.16); South Carolina (5.93); Virginia (5.17); and Wyoming (9.31). This attributes to the large swing in their federal revenue levels from 2011 to 2012. The change can also be seen in the 2001 versus 2012 comparison, which shows a decreased percentage of federal support in New Hampshire, New York, South Carolina, and Wyoming.

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