State and Local Expenditures
State and Local Spending
State and local governments spent $2.8 trillion on direct general government in fiscal year 2015.1 States spent $1.3 trillion, and local governments, such as cities, townships, counties, school districts, and special districts, spent $1.5 trillion.2
Local governments spent more than states because localities administer programs with funds transferred from state governments. States transferred over $500 billion to local governments in 2015. A portion of state funding may come indirectly from the federal government in the form of pass-through grants.
Most state and local government spending falls into one of six categories: elementary and secondary education, public welfare, higher education, health and hospitals, police and corrections, and highways and roads.
- What do state and local governments spend money on?
- How does state spending differ from local spending?
- How have state and local expenditures changed over time?
- How and why does spending differ across states?
State and local governments spend most of their resources on education, health, and social service programs. In 2015, about one-third of state and local spending went toward elementary and secondary education (22 percent) and higher education (10 percent).3 States finance higher education not only through public revenues but also through student tuition and fees: 30 percent of higher education dollars come from tuition and other charges. Research has shown that in recent years, declining state financing for public universities has driven tuition increases.
Just under another one-third of expenditures went toward public welfare (21 percent) and health and hospitals (9 percent). Public welfare includes spending on means-tested programs, such as Medicaid, Temporary Assistance for Needy Families, Supplemental Security Income, and others.4
Medicaid constitutes a large, and growing, portion of state spending. The National Association of State Budget Officers (NASBO) estimates that in 2015, Medicaid alone accounted for over one-fourth of total state spending.5 If considering general funds only, K–12 education still constitutes the largest portion of state spending.
Although much of Medicaid spending is accounted for under the public welfare category, public hospital expenditures also include Medicaid funds.6
Police and corrections, combined, were 6 percent of state and local spending in 2015, and highway and road spending was 6 percent. The remainder of state and local spending (26 percent) went toward other functions, such as general administration (4 percent), interest on debt (4 percent), sanitation (3 percent), housing and community development (2 percent), local fire protection (2 percent), parks and recreation, natural resources services, air transportation, public buildings (each 1 percent), and other miscellaneous expenses not elsewhere classified.
States and local governments provide different mixes of services, which are reflected in their direct general expenditures.
States spend more than local governments on public welfare programs. In 2015, 42 percent of states’ direct general expenditures went toward public welfare, the largest source of state direct spending, while local governments spent only 4 percent. That difference stems mostly from Medicaid, a program jointly funded by states and the federal government and administered by states.
States also spent more directly than local governments on higher education: that category comprised 18 percent of state direct expenditures versus only 3 percent of local direct expenditures.
On the other hand, local governments spent far more on elementary and secondary education than states in 2015: 40 percent of direct local government spending versus 0.5 percent of direct state spending went to that category. Much of that local spending, however, came from state funds. In total, states provided over $340 billion, including pass-through federal funds, to local governments and school districts in 2015, constituting over half of all local spending on elementary and secondary education
States do vary in spending, however, and exceptions exist. In Hawaii, for example, the state administers K–12 education directly, so most elementary and secondary education spending is counted at the state level. And, over time, lawsuits in many states over the equitable distribution of education resources across districts have caused states to pick up more of the tab for K–12 education.7
Corrections are more of a state responsibility; local governments spend more on police. States dedicated 4 percent of their direct general expenditures to corrections (e.g., spending on prisons and rehabilitation programs) in 2015, while local governments dedicated only 2 percent. Local governments put 6 percent of their direct spending toward police, while states allocated only 1 percent of their direct general spending to this function.
Direct state and local spending on general government increased from approximately $1.1 billion in 1977 (in inflation-adjusted 2015 dollars) to $2.8 billion in 2015—a 170 percent increase over 38 years. Similarly, per capita expenditures increased from about $4,900 a person to $8,800 a person, an increase of 82 percent.
Although spending in all major categories has increased over the period, spending on specific programs as a percentage of general spending has varied. Outlays for elementary and secondary education, for example, fell from 26 percent of state and local general spending in 1977 to 22 percent in 2015. Public welfare expenditures, on the other hand, increased from 13 percent of state and local general spending in 1977 to 21 percent in 2015. Medicaid is responsible for most of the increase in public welfare spending.8
Rising health care costs combined with an aging population will likely be a growing source of pressure on state budgets going forward. However, federal reforms to Medicaid could substantially alter state spending.
Spending on other categories has remained more stable as a percentage of general expenditures. For example, since 1977, spending on higher education fluctuated between 8 and 10 percent of general spending, spending on health and hospitals between 8 and 9 percent, and spending on highways and roads between 6 and 9 percent. Police protection and corrections spending has fluctuated between 5 and 7 percent of direct general expenditures since 1977.
On average, state and local governments spent approximately $8,900 per capita in 2015. However, state and local government spending varies widely across states for many reasons.
Alaska had the highest per capita spending in 2015 (at nearly $20,000 per person), followed by Wyoming ($14,309) and New York ($13,033). As is typical, the District of Columbia’s per capita spending exceeded most states’ at just over $18,500 per person (because it functions more like a city than a state). Idaho had the lowest per capita spending at just over $6,400 per person.
Differences in spending arise from variations in geography, demographics, history, and other external factors. They can also arise from state policy choices, such as generosity of service levels, eligibility rules for social services, or tax policy. For K–12 education spending, for example, New York has one of the highest per capita spending rates even though it has relatively few school-age children and a bigger share of kids in private school than most states.9 Its high K–12 spending is in part because it has more teachers, higher salaries on the payroll, and declining student populations.10 On the other hand, although Idaho has many school-age children to educate and a high rate of attendance in public schools, it employs fewer teachers and has lower payroll costs than other states, leading to low per capita K–12 spending.11
States may spend more or less than one would expect based on national averages and need as measured by demographics and costs. These differences may be because of revenue capacity as well as state policy choices and limited federal funds. For example, Idaho spent the least per capita of any state overall in 2012. However, Idaho’s level of need, or what it would spend if it matched national averages adjusted for demographics and costs, exceeds its capacity to bring in revenues even after accounting for transfers from the federal government.
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