MISSOURI WATCH: A TRAP AHEAD? UNDERTAIN FUTURE FOR STATE BUDGETS

A long conversation this week with a high-ranking legislator connected with the budget process convinces me that Missouri may be falling into a trap that an economist with the Federal Reserve Bank of St. Louis has just warned about. On the one hand, the legislator speaks enthusiastically about the state's "splendid" financial condition, enabling it to embark on a baker's-dozen list of programs and projects, and on the other hand, the Federal Reserve economist warns that several conditions point to a return of state budgets to the sluggish 1980s.

Take your choice, for there seems to be no in-between. The prevailing mood in Jefferson City is one of unbounded enthusiasm and a budgetary optimism that is reminiscent of similar moods in the nation's capital when a recession seems about to end and a long era of national prosperity appears on the horizon. That the Federal Reserve economist, Kevin L. Kliesen, reports conditions that could affect the present upbeat mood should be of more than a little concern to elected officials in Jefferson City.

Read these words from Kliesen and analyze their meaning to the state and its budgets in the immediate future:

"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. Recall that a substantial portion of a state's revenues comes from the federal government in the form of grants-in-aid or transfers. By increasing their reliance on federal revenues, state and local governments may one day find themselves in a situation in which their expenditure commitments exceed their expected revenues, should the federal government decide to send fewer dollars their way."

Steering clear of partisan politics, Kliesen has not only set the stage for state budgetary problems in the future, he has also described the present relationship between Washington and the states: less funding for programs already in existence. In fact, not only have states been warned that fewer dollars are in the federal pipeline, Missouri's budget experts have already had to substitute state dollars for federal ones in the budget Gov. Mel Carnahan outlined on Jan. 17.

The day of decreasing federal support is not only coming, it has already arrived. The only unknown factor at this moment is how Draconian the initial reductions will be. Missouri currently receives 28.7 cents of every $1 it spends from Washington, and even cock-eyed optimists admit that amount will decrease as Congress moves steadily toward its goal of a balanced budget. Even the Democrat in the White House has adopted the seven-year balance as a policy goal, so there's no longer any goal difference between the two political parties.

The logic attached to these reductions is virtually unassailable. Everybody knows that-states can operate federal programs less expensively than Uncle Sam. That's the conventional wisdom that has led to widespread approval from officials in Jefferson City to the federal-state transfer of administrative oversight. Unfortunately, this argument has one flaw: the transfer is being made with the understanding that states will have the right to reduce expenditures by amending the qualifying rules and regulations.

What this means in the practical sense is that states can raise the existing standards for qualifying, thereby compensating for the smaller federal grants-in-aid. This sets up what some have called a "race to the bottom," which refers to state eagerness to cut food, medical and health programs thus setting up a migration of recipients to more generous states. Since Missouri's Medicaid program is broader than most of its surrounding sister states, economists believe our state could experience a rapid growth in population of persons seeking adequate Medicaid and other social services.

Missouri's participation in Medicaid programs saw a rapid increase in state funding for this program from 1970 to the present moment. From 1970 to 1987, state expenditures for this single program rose from about 4 percent of total spending to more than 10 percent. Seven years later, in 1994, this share had risen to nearly 20 percent. Putting it another way, our state's share of state funds allocated to Medicaid expenditures has increased roughly five-fold in the past 25 years. There is nothing in this statistic that suggests Missouri will be spending less for Medicaid than it now is, and there is everything to suggest that we'll be spending far more of our own state taxes on this program in the future.

What this suggests to any rational observer is that while Missouri will continue to receive a substantial portion of social service program funding from Washington, it is now on a course of spending more of its sales/income tax revenue on programs that were originally designed to be federally operated and funded.

The Federal Reserve Bank's study confirms this trend, noting that Medicaid spending increases by the states have had the negative effect of reducing their overall contributions to both elementary-secondary and higher education. Before states were involved in Medicaid programs, states' share of tax revenue for public education was 18 percent. Today it has decreased to 12 percent.

As a matter of fact, the states' revenue share for every function, with the exception of corrections, has declined in the same downward ratio as has education.

Sixty-three percent of all spending by Missouri's Department of Social Services, the state's largest spending agency, comes from the federal government, with only 22 percent from the general revenue fund and another 15 percent coming from other sources. Since the DSS currently spends $3.7 billion, and this is scheduled to rise to $3.9 billion in the next fiscal period beginning July 1, we are close to having the tail wag the dog. Even a slight decrease in federal checks reaching Jefferson City will create multi million-dollar shortages that could create havoc.

Isn't it time we started listening to the experts?

~Jack Stapleton of Kennett is the editor of the Missouri News and Editorial Service.