2/17/2017 The Fiscal Performance of Seventh District States in the 2000s | Midwest Economy

MidwestEconomy

FISCALPOLICY,SEVENTHDISTRICT,STATELOCALGOVERNRNENT

The Fiscal Performance of Seventh District States

in the 2000s
FEBRUARY6,2017|THOMASHAASL|THOMASWALSTRUM|LEAVEACOMMENT

InarecentChicagoFedLetter,ThomWalstrumexaminedthefiscalperformanceofIlli
noissstateandlocalgovernmentsbeginninginthelate1980s.Hisanalysisshowedthat
sinceatleastthelate1980s,Illinoissgovernments(asawhole)haveconsistentlyruna
budgetdeficit.Hisanalysisalsorevealedthatthedegreeofoverspending(oralternative
ly,undertaxing)byIllinoiswasgreaterthanthatoftheaverageU.S.stateandthat
growingpensionliabilitieshavecontributedsignificantlytoIllinoissbudgetdeficit.

Inthisblogpost,weexpandtheanalysistotheotherstatesintheSeventhFederalRe
serveDistrict.[1]Specifically,wedocumenttheexpenditureandrevenuepatternsof
Districtstatessincetheearly2000sandcomparethemtothoseofthetypicalU.S.state.
[2]WealsoexaminetheeffectoftheGreatRecessiononthefiscalperformanceofDis
trictstatesbecauseitplaysanoutsizedroleintheoverallfiscalperformanceofcertain
statesovertheperiodweexamine.

AsintheFedLetter,wecombinetheexpenditureandrevenuedataforstateandlocal
governmentsbecausestatesdifferinwhichactivitiestheyfundatthestateorlocallevel.
Also,asintheFedLetter,toaccountfordifferencesinthesizesofstateseconomies,we
reportexpenditurefiguresaspercentagesofgrossstateproduct(GSP)andrevenues.[3]

Ouranalysisyieldsanumberofinterestingresults.First,wefindthatthesizeofstate
andlocalgovernments(intermsofspendingasapercentageofGSP)variesquiteabit
amongDistrictstates.Second,wefindthatthefiscalperformanceofstateandlocalgov
ernments(intermsofspendingasapercentageofrevenues)alsovariesquiteabit.And
finally,wefindthatthoughtheGreatRecessionhadalargenegativeimpactonthefiscal
performancesofallDistrictstates,IllinoisandWisconsinwereespeciallyaffected,pri
marilybecausethevalueoftheirpensionsystemsassetsdeclinedsharply.

WefirstlookatthesizeofstateandlocalgovernmentsinDistrictstatesintermsof
spendingasapercentageofGSP.Figure1showstotalgovernmentexpendituresasa
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percentageofGSPfortheaverageU.S.stateandforSeventhDistrictstatesduringfiscal
years(FY)200213.Indianaisconsistentlythelowestspenderduringthisspan,anditis
wellbelowtheU.S.average.IowaandIllinoisarealsobelowthenationalaveragefor
mostofthisperiod,thoughtheycatchuptoitbyFY2012.Incontrast,Wisconsins
spendingisroughlythesameasthetypicalU.S.state.Michigantrackedthenationalav
eragecloselyuntilFY2007,buthasbeenconsistentlyaboveaveragesincethen.Figure1
alsoshowsarampupinspendingacrossallstatesinFY201011.Thisisthelargelythe
resultofstatesspendingfederalfundsreceivedthroughtheAmericanRecoveryand
ReinvestmentAct.

Table1summarizesfigure1bytakingtheaverageofthepercentagesoverFY200213.
Italsoshowsabreakdownofaveragespendingbycategory.Wenowdiscusstheunique
featuresofeachstatesspending(asapercentageofGSP).

IllinoisstotalspendingwasbelowtheU.S.averagelargelybecauseoflowerexpendi
turesoneducationservicesandsocialservices(andincomemaintenance).Thatsaid,
IllinoisspentmorethanthetypicalU.S.stateonitsinsurancetrustandpensionliabili
tyincreases,bothofwhicharecompensationforgovernmentworkers,includingthose
providingeducationandsocialservices.
IndianastotalspendingwasbelowtheU.S.averagebecauseoflowerspendingon
mostcategories,thoughitspentaparticularlylowamountonpensionliabilityincreas
escomparedwithotherstates.

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Iowastotalspendingwasbelowthenationalaverage(inspiteofaboveaverage
spendingoneducationandsocialservices)becauseofbelowaveragespendingonits
insurancetrustandpensionliabilitygrowth.
MichigansspendingwasabovetheU.S.averagelargelybecauseofhigherspending
oneducationservicesanditsinsurancetrust.
WisconsinsspendingwasquiteclosetotheU.S.averagecomparedwiththetypical
state,Wisconsinspentmoreoneducationservicesanditsinsurancetrust,butlesson
pensionliabilitygrowth.

NextwelookateachDistrictstatesfiscalperformance,whichwedefineastotalexpen
dituresasapercentageoftotalrevenues.Weinterpretlowerpercentagesasbetterper
formance.Itisimportanttonoteherethatfiscalperformanceisindependentofthe
overallsizeofastatesgovernments,becauseallthatmattersisthatthegovernments
haveenoughrevenuestocovertheirexpenses.Whilesmallgovernmentsgenerallydo
notrequirethelevelofrevenuesthatlargegovernmentsdo,smallgovernmentscould
stillperformworsethantheirlargecounterpartsiftheirrevenuesarenothighenough.
Figure2showsthetimetrendsforexpendituresasapercentageofrevenuesforeach
DistrictstateandthetypicalU.S.state.Twofeaturesofthefigurestickout:First,with
theexceptionofIllinois,DistrictstatesarequiteclosetotheU.S.averageintermsof
spendingasapercentageofrevenues.Second,whilemoststatesgovernmentswere
hurtbytheGreatRecession(FY200809),IllinoissandWisconsinswerehitparticularly
hard,whileIndianaswasnothitthatbad.

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Thefirstrowoftable2summarizesfigure2bytakingtheaverageofthepercentages
overFY200213.IllinoisandWisconsinspentmoreoutoftheirrevenuesthanthetypical
U.S.stateduringthisperiod,whileIndiana,Iowa,andMichiganspentless.Because
FY2009wassuchananomalyonaccountoftheGreatRecession,wealsocalculatethe
averagesexcludingit(secondrow).ThischangesthestoryquiteabitforWisconsingov
ernments,whichthenperformbetterthantheU.S.average.(Withthisadjustment,
MichigangovernmentsperformslightlyworsethantheU.S.average.)

Table2alsoshowsthepercentageoftotalrevenuesthateachspendingcategoryrepre
sents(calculatedexcludingFY2009).Examiningexpendituresintermsofrevenue,asop
posedtoGSP,tellsadifferentstoryforseveralstates.

IllinoisstotalexpenditurespercentageiswellabovetheU.S.average.Spendingout
ofrevenuesoneducationisabovethatofthetypicalU.S.state,thoughitremainsbe
lowthatoftheotherDistrictstates.Illinoisalsospendsmorethanthenationalaver
ageonpublicsafety,environmentandhousing,interestongeneralgovernmentdebt,
itsinsurancetrust,andpensionliabilitygrowth.
IndianastotalexpenditurespercentageisbelowtheU.S.average.Itspendslessthan
thenationalaverageontransportation,utilities,itsinsurancetrust,andpensionliabili
tygrowth.
IowastotalexpenditurespercentageisnotonlybelowtheU.S.averagebutalsothe
lowestamongDistrictstates.Notably,itsspendingonpublicsafety,utilities,itsinsur
ancetrust,andpensionliabilitygrowthislowerrelativetothenationalaverage.
MichiganstotalexpenditurespercentageisslightlyabovetheU.S.average.Itseduca
tionspendingisthehighestamongDistrictstatesandmarkedlyhigherthanthatof
thetypicalU.S.state.Butitsspendingontransportation,utilities,andpensionliability
growthislowerthanthenationalaverage.

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WisconsinstotalexpenditurespercentageisbelowtheU.S.average.Whileitsexpen
dituresforeducation,publicsafety,anditsinsurancetrustareaboveaverage,itsex
pendituresforpensionliabilitygrowtharebelowaverage.

Table2showsthatIllinoisandWisconsinwerehithardestbytheGreatRecession.After
excludingFY2009,Illinoissspendingasapercentageofrevenuedecreases6percentage
pointsandWisconsinsdecreases11percentagepoints.Thesedecreasesaremuchlarger
thanthoseforotherDistrictstatesandthetypicalU.S.state,whichrangefrom1to4
percentagepoints.Whatisbehindthesubstantialdifferencesinfiscalperformancesin
FY2009?Wefoundthatthesourcewasnotchangesinexpenditures,butchangesinrev
enues.Table3showsrevenuesasapercentageofGSPforthetypicalU.S.stateand
statesintheSeventhDistrict.ThefirstrowistheaveragevalueduringFY200213ex
cludingFY2009,thesecondrowisthevalueforonlyFY2009,andthethirdrowisthe
differencebetweenthetwo.AllstateshadlowerthannormalrevenuesinFY2009,but
IllinoisandWisconsinfaredparticularlypoorly.Tounderstandwhy,wecalculatedthe
differencebetweenFY2009valuesandtheaveragevaluesoftheotherfiscalyearsforall
revenuecategories.GeneralrevenueswereactuallyhigherinFY2009forthetypicalU.S.
stateandallDistrictstates.Thesourceoftherevenuedeclineswasstatesinsurance
trusts.Moststatessawthevalueoftheassetsintheirinsurancetrustsfallduringthe
GreatRecession,andsuchdeclinesaretreatedasnegativerevenuesintheU.S.Cen
sussaccountingframework.TheinsurancetrustfundsforIllinoisandWisconsinfared
particularlybadlyinFY2009,whichiswhytheirexpenditurestorevenuesratioswereso
highovertheperiodFY200213(seethefirstrowoftable2).Thatonebadyearmadea
hugedifferenceinWisconsinsoverallfiscalperformanceovertheperiodFY200213.

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OurexplorationofthesizeandperformanceofDistrictstategovernmentsrevealsasur
prisingnumberofdifferencesamongthem.Therearestateswithrelativelysmallgov
ernmentsthatperformpoorly(Illinois)andwell(Indiana)andstateswithrelativelylarge
governmentsthatperformpoorly(Wisconsin)andwell(Michigan).Somestateswerehit
muchharderthanothersduringtheGreatRecession(compareWisconsinandIndiana),
andWisconsinsterribleperformanceinFY2009shiftedthestatefrombeingagoodfiscal
performertobeingabadoneoverourstudyperiod(FY200213).Themostimportant
reasonforthedifferencesinfiscalperformanceacrossstatesisdifferencesinpension
systemmanagement.Illinoiswouldbecloserinperformancetothenationalaverageif
itspensionspendingmatchedthenationalaverage,andWisconsinwouldbebetterthan
averageifitspensionsystemsassetshadntlostsomuchvalueduringtheGreat
Recession.

[1]TheSeventhFederalReserveDistrict(whichisservedbytheChicagoFed)comprises
allofIowaandmostofIllinois,Indiana,Michigan,andWisconsin.Inthisblogpost,we
analyzetheentiretyofeachstatethatfallswithintheDistrict.

[2]UnlikefortheanalysisofjustIllinois,wearelimitedtotheperiodafter1999because
wedonothavepensionsystemdataforotherstatesbefore2000.

[3]Formoredetailsonthemethodology,seetheFedLetter.Notethatdataonpension
liabilitiesfortheSeventhDistrictstates,excludingthoseforIllinois,comefromthe
BoardofGovernorsoftheFederalReserveSystem.

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