ECONOMIST PREDICTS FUTURE FISCAL CRISIS IN STATE

JEFFERSON CITY -- Although most Missouri officials have warmly endorsed an expected transfer of federal welfare and medical assistance programs to the state, an economist with the Federal Reserve Bank of St. Louis warns future revenue problems in Jefferson City could create fiscal storm clouds.

The money meteorologist, Federal Reserve economist Kevin L. Kliesen, said a national business and industrial downturn would not only increase applications for more unemployment insurance and general welfare payments, but would serve to reduce the state's ability to meet added revenue demands.

Kliesen said revenue increases experienced the past couple of years in the state are a departure from an earlier decade-long period of marginal growth in Missouri's principal funding accounts.

"Despite most states' relatively robust fiscal health, recent trends in the composition of spending and revenues suggest a potential long-term problem, one that has been building for quite some time and that largely reflects trends in federal spending," Kliesen warned. "Recall that a substantial portion of a state's revenues comes from the federal government in the form of grants-in-aid or transfers," which indicates states are relying less on their own general revenue funds and more and more on federal appropriations.

Starting in 1987, federal policymakers reversed a decade-long trend of fewer dollars transferred to state and local governments. After doling out 9.6 percent of its total expenditures in grants-in-aid to states and local governments in 1987, Washington increased its contributions to 12.8 percent in 1994, the highest percentage since 1980.

Noting the growing reliance of Missouri and many of its sister states on federal funds to meet rapidly growing expenditures for Medicaid programs, Kliesen said that between 1970 and 1987 expenditures for this single program rose from about 4 percent of state spending to more than 10 percent. Seven years later, in 1994, the share had risen to nearly 20 percent.

Putting it another way, Missouri's share of state funds allocated to Medicaid expenditures has increased roughly fivefold in the past 25 years. Such spending increases have had the effect of reducing the percentage of state revenue going to many other programs funded by Missouri.

In Missouri's current fiscal year, 40.5 percent of its spending will be funded by general revenue, 30.9 percent will come from excise taxes including the state gasoline levy, and 28.6 percent will come from the federal government in the form of direct payments and grants-in-aid.

The state's largest spending agency is the Department of Social Services, which this year will have an outlay of $3.7 billion for a wide spectrum of services. The department is scheduled to receive nearly 30 percent of total state spending in the fiscal year ending next June 30, but this percentage will increase even more as Washington proceeds with its planned fiscal devolution.

Sixty-three percent of all spending by the DSS now comes directly from Washington, while 22 percent comes from the state's general revenue fund. Another 15 percent comes in other forms and from other sources.

Of the 16 state departments, nine currently receive more dollars from the federal government than from Missouri's general revenue account: Highways and Transportation; Natural Resources; Economic Development; Insurance, Labor and Industrial Relations; Public Safety; Mental Health; Social Services; Health; and the Office of the Adjutant General and Missouri National Guard. In addition, Washington furnishes more funding for statewide office and facility leasing than does the general revenue fund.

Kliesen said, "Prudent reforms by federal, state and local policymakers to rein in double-digit spending increases for mandatory social programs, combined with sound macroeconomic policies that promote strong growth, is a recipe for continued financial health at all levels."

The Fed economist warned that failure to heed the advice could precipitate serious financial problems in state capitols around the nation.