States Balance Their Budgets Only With Bonanzas of Federal Funding

Democratic presidential candidate Michael S. Dukakis, governor of Massachusetts, likes to boast that he’s balanced his state budget nine times. In a recent debate he snapped at fellow candidate Gary Hart, “You’ve never been a chief executive who had to balance a budget like I have. You’ve never voted for a balanced budget in your life.”

That’s true. As a senator, Hart voted for the federal subsidies allowing Dukakis to create the illusion that he had balanced the Massachusetts budget--something, in the honest sense, Dukakis has never done at all.

Those governors and mayors who huff and puff about how the federal government is ruining the economy with deficit spending (headline following the fall 1987 deficit summit: “Governors Disgusted by Inaction on Deficit”) don’t like to add that states and cities are among the foremost beneficiaries of federal subsidy. In 1984, for example, a year when the federal deficit was $185 billion, state and local governments enjoyed $97 billion in federal grants. Had state and local aid been cut off, the federal deficit would have been reduced by half.

Looked at another way, approximately 18% of all revenue received by state and local governments comes from the federal treasury. Without this money, no governor or county manager could boast of a “balanced budget.” Meanwhile, about 20% of federal spending is deficit spending. If a cosmic philanthropist made an 18% annual contribution to Washington--that is, if the same bookkeeping switcheroo enjoyed by states prevailed at the federal level--the federal deficit would nearly disappear.

Let’s take a closer look at chief executive Dukakis. In 1984, pivotal years of the “Massachusetts Miracle,” as Dukakis calls his own administration, Massachusetts received $10.2 billion and spent $9.7 billion. According to Dukakis, that’s a balanced budget. Yet some $2 billion of the Massachusetts revenue came from Washington--not raised through any action by Dukakis but as checks written against the Reagan deficit. Massachusetts had a balanced budget only in the sense that a student whose college costs are being financed by a second mortgage on the family house might say that his bills are all paid--but look at his spendthrift parents.

Dukakis is merely the most prominent hypocrite on this subject. Recently Michigan Gov. James J. Blanchard called federal deficit reduction efforts “mirrors, feathers and hot air” while boasting “we governors are for real” because states balance their budgets. Michigan budget: 21% federal subsidy. New Hampshire Gov. John H. Sununu on the 1987 deficit compromise: “Nobody can say anything nice about this piece of paper.” New Hampshire: $98-million budget surplus thanks to $331 million in federal grants. Former Colorado Gov. Richard D. Lamm, shortly before leaving office, blasted “federal budget mismanagement” and “20 years of Washington blank checks.” Recent “balanced” Colorado budget: $4.8 billion total revenues including $928 million of federal subsidies.

Pork-barrel funds appropriated for sweetheart projects, the kind of spending that draws headlines, pale in dollar magnitude before routine federal assistance to states for highways, mass transit, health, aid to the poor, environmental protection and a dozen other services. Total U.S. grants to states, cities and counties has increased from $24 billion in 1970 to $109 billion last year, a rate that far exceeds inflation.

Don’t states and towns need the money? Sure. Everybody needs money. But the money also has to come from somewhere--and where it comes from is either the deficit or the pockets of federal taxpayers, every one of them a resident of some state, county and town. Local politicians like to have Washington raise revenues for them through that distant, impersonal, nasty Internal Revenue Service. Experience with referendums such as Proposition 13 taught politicians that reliance on state and local taxes may make them targets for voter revolts.

As a bonus, federal money leaves the state or local pol in the ideal double-talk position of receiving the benefits of deficit spending while being able to blast the big spenders in Washington, patting himself on the back for his own apparent fiscal restraint. Recently, for example, the National Governors Assn. voted down a proposal to cancel the federal gasoline tax, transfer the right to impose that tax to states, then require states to assume responsibility for funding highway maintenance. That may sound like “new federalism,” but it would have left governors to blame for highway taxes. Far better to shift the blame to Washington.

The worst excess in this category was “revenue sharing,” a Great Society program of simply sending federal money to cities (including suburbs and small towns) not for specific programs like building subways or sheltering the poor, but as unrestricted donations to operating budgets. By 1980, its peak year, revenue sharing was feeding $7 billion per year to municipal governments. When the Reagan Administration decided to end the program, mayors formed a bipartisan consensus. Democrat or Republican, small town or big city, they all joined together to go nuts. Ernest “Dutch” Morial of New Orleans, then-chairman of the U.S. Conference of Mayors, hit a rhetorical high when he declared that stopping this subsidy would mean “balancing the federal budget on the backs of cities.”

Revenue sharing did end in 1986 after a fight in the Senate. Sen. Paul Simon of Illinois, a presidential race place-and-show finisher, told the Conference of Mayors that, if elected, he would restore the program. Simon’s basic stump speech condemned the deficit while promising a smorgasbord of costly new programs; it’s worrisome--the last successful presidential candidate was also one who cheerfully pledged that he could increase spending while reducing borrowing.

Federal aid to states or cities might be defensible if it flowed on a progressive basis, from wealthy areas to poor. In most cases it doesn’t. Instead money flows to all locales, including affluent ones. Connecticut, richest state in the country per capita, nonetheless reels in about $1 billion per year in federal subsidies. Connecticut has often run budget surpluses in recent years but, strangely enough, returned nothing to the Treasury for use by more needy states, or for debt retirement.

Washington grants that foster the common national welfare may be proper but not grants that mainly benefit local citizens. Thus one could justify federal investment in the interstate highway system but not federal underwriting of urban freeways and mass transit used only by local commuters. Why should the deficit pay for that? If local commuters want new cloverleafs, they should tax themselves accordingly.

Ingratitude No. 1: Boston mayor Raymond Flynn recently complained that if he didn’t get additional federal funds he would cut police patrols. He couldn’t increase local taxes to make up for a city shortfall, Flynn explained, because a Massachusetts proposition has forbade new local taxes. Listen to that reasoning. We won’t fund it ourselves because we’ve voted that we don’t like taxes; so will people who live in other cities please pay extra taxes to cover our costs?

Ingratitude No. 2: Remember the early 1980s fight over Westway, the $2-billion Manhattan boulevard? Both New York Mayor Edward I. Koch and New York Gov. Mario M. Cuomo grumbled when the federal government would pay only 90% of the price--for a project that might benefit local residents, contractors and crooked city pols exclusively.

When Westway fell through, New York officials successfully demanded that the city be allowed to keep $1 billion of the federal money, because it was “theirs.” The remaining federal $810 million is to be spent on a Westway Jr. Amazingly enough, now that there is a cap on Westway spending, state highway engineers have discovered how to cut the cost of the road dramatically. Usually it’s in local interest to inflate the price tag of federally funded projects, since that makes for more local jobs. Some $100 million in federal funds will also go toward an “esplanade” to make the area around Westway Jr. visually harmonious for nearby residents. Think of this expense--which might be used to house the homeless--next time you hear Cuomo rattle on about Washington’s misplaced spending priorities.

If states really are “taking the lead” in facing the great issues of the day, as governors and their backers like to claim, it’s time to take states at their word. Make them stop using the federal deficit as a crutch.