Module 7 Discussion
Instructions for this Discussion
Explain how routine financial transactions shape an organization’s basic financial statements. Ensure to include an explanation of key words in your response: assets, liability, revenue, expenses, cash accounting, and fund accounting.
Use Chapter 6 in the attachment to answer discussion post.
FINANCIAL STRATEGY FOR PUBLIC MANAGERS
SHARON KIOKO AND JUSTIN MARLOWE
Financial Strategy for Public Managers by Sharon Kioko and Justin Marlowe is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.
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1. How We Pay for the Public Sector 8
2. The Basic Financial Statements 37
3. Financial Statement Analysis 78
4. Transaction Analysis 113
5. Cost Analysis 151
6. Budget Strategy 184
There are many fine textbooks on public financial management. Each does certain things well, but in our view
none covers all the concepts, techniques, and analytical tools that today’s graduate students of public policy
and administration need to put their passion into action. This book is our best attempt to weave that material
together in a fresh, robust, concise, and immersive way. We also believe the time is right to bring to the market a
free, open source treatment of this critically important subject.
At the University of Washington we use this text for a one quarter (10 week) introductory course titled “Public
Financial Management and Budgeting.” We believe it’s suitable for a similarly-structured semester-long course.
Sections of the text might also be suitable for other courses often found in Master of Public Administration,
Master of Public Policy, and other programs. Chapters 2 and 3 would be appropriate for courses on governmental
accounting, debt management, credit analysis, or non-profit financial management. Chapters 4 and 5 work well
for an applied course on public or non-profit budgeting.
The first time we taught “Public Financial Management and Budgeting” together we quickly realized that we
approached the course in similar ways. That shared thinking is in part the result of our shared experiences
with some exceptional teachers and scholars. They include, in no particular order: the late, great Bill Duncombe,
(formerly of Syracuse University); Bart Hildreth, Ross Rubinstein, and Katherine Willoughby (Georgia State);
Jerry Miller (Arizona State); and Dwight Denison (Kentucky).
We’d also like to acknowledge the people who helped make this book a reality. It’s been a true pleasure to
work with the staff at the Rebus Community Project, namely Liz Mays, Zoe Hyde, and Hugh McGuire. They’re
building a wonderful model for open textbooks, and we’re proud to be one of their early products. Chelle
Batchelor from the UW Libraries connected us with Rebus and has been a steady supporter and advocate all
along. In the autumn 2016 quarter we test drove an early version of this text with our Evans School MPA
students. A big thanks to them for their patience and helpful feedback throughout that experience. We’re also
most grateful to the long list of scholars and practitioners who prepared anonymous reviews of the book for
Rebus. We did our best to address all of your invaluable comments.
Finally, we’d also like to publicly thank our boss, Sandra Archibald. Fifteen years ago Sandy took over as Dean
of the Evans School. On Day One she committed to making the School a leader in public financial management.
This text is a testament to that commitment, and a reflection of our progress so far.
Sharon Kioko and Justin Marlowe
Daniel J. Evans School of Public Policy and Governance
University of Washington
FINANCIAL STRATEGY FOR PUBLIC MANAGERS v
In late 2015 Mark Zuckerberg, founder of Facebook, launched a plan to give away most of his $45 billion fortune. Along with his wife Priscilla Chan, he announced the creation of a philanthropic organization known as the “Chan-Zuckerberg Initiative.” This “Initiative” defies conventional labels. At one level it’s similar to a traditional non-profit organization. It can deliver social services, participate in public policy debates, and partner with other non-profits. It’s also like a traditional philanthropic foundation, with plans for grant-making in areas like education reform in the US and clean water in developing countries.
But the Initiative is also decidedly non-traditional. It’s organized as a for-profit limited liability corporation. That means when it wants to, it can do many things non-profits and governments can’t. It can invest money in other for-profit entities. It can fund election campaigns. It can manage and invest money on behalf of other non-profit and for-profit organizations. So the important question around Chan-Zuckerberg is not what will it do, but rather, what won’t it do? With $45 billion at its disposal, and few if any limits on how to spend it, the possibilities are endless.
Some are calling this “philanthro-capitalism.” Chan-Zuckerberg is the largest and most visible recent example. But there are many others. If you’ve ever bought a sweater at Patagonia, worn a pair of TOMS shoes, or used a shot of insulin from by Novo Nordisk, you’ve participated in philanthro- capitalism. These are all for-profit companies with a social purpose hard-wired into their mission. This also works from the other direction. Strange as it sounds, IKEA – whose founder Ingvar Kamprad was once the wealthiest person in the world – is controlled by a charitable family foundation.
Maybe you didn’t think public finance has anything to do with cat videos, Fair Trade Certified™ fleece vests, or the FJÄLKINGE shelving unit. Turns out it does.
Philanthro-capitalism brings the glamour and prestige of big business to the decidedly un-glamorous work of feeding the hungry, housing the homeless, and the other essential efforts of governments and non-profits. That’s important. But even more important, it’s forced us to re-think what it means to manage “public” money.
Showtime’s hit show “Billions” is the story of a hedge fund that operates in the shadowy underworld of finance. That fund – known as Axe Capital, for its founder Bobby Axelrod – will do anything to turn a profit. It’s traders buy and sell stocks on inside information, bribe regulators, and spread market-moving rumors, among many other nefarious tactics.
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 1
Season 2 features a compelling storyline ripped from the proverbial public finance headlines. Axe learns through a back-channel that the Town of Sandicot, a long-struggling upstate New York community on the verge of bankruptcy, is about to be awarded a state license to open a new casino.
Axe sees an opportunity. When a government is on the verge of bankruptcy investors steer clear of it. As a result, Sandicot’s municipal bonds (a form of long-term loan) are available for pennies on the dollar. Axe believes the new casino will drive an economic recovery, and once that recovery is under way, investors will look to buy up Sandicot’s bonds. So he decides to get there first. He “goes long” and buys several hundred million of Sandicot municipal bonds.
But then the story takes an unexpected turn. Word of the Sandicot play leaks out, and Axe’s opponents persuade the State to locate the casino in another town. At that moment Axe faces a difficult choice: Sell the bonds and lose millions, or force Sandicot to pay back the bonds in full. Unfortunately, Sandicot can repay only if Axe forces it to enact savage cuts to its police, firefighters, schools, and other basic services. Axe is leery of the bad press that will surely follow a group of billionaire hedge fund managers profiting at the expense of a struggling town.
When asked for their opinion, a superstar Axe analyst named Taylor Mason – the first gender non- binary character on a major television show – says:
“In many ways, a town is like a business. And when a business operates beyond its means, and the numbers don’t add up, and the people in charge continue on heedless of that fact, sure that some Sugar Daddy, usually in the form of the federal government will come along and scoop them up and cover the shortfalls, well, that truly offends me. People might say you hurt this Town but in my opinion, the Town put the hurt on itself. Corrections are in order. There’s a way to make this work and that way is hard, but necessary…Oncewedothis thetownwill facethatchallengeandcomeoutstronger.Oritwillceasebeing. Either result is absolutely natural.”
Governments and non-profits tend to have a “retrospective” view on money. To them, an organization’s money is well-managed, if it stayed within its budget, complied with donors’ restrictions, and completed its financial audit on time. To them, bigger questions like “is this program working?” or “does this program deliver more benefits than it costs?” are best answered by elected officials and board members. In their view, if we mingle the different sectors’ money, taxpayers will never know what they get for their tax dollar, and elected officials and board members won’t know if programs they worked so hard to create and fund are delivering on their promises. To public organizations, financial accountability has often meant looking back to ensure that public money was spent according to plan.
Zuckerberg and many others who now operate in the public sector see public money in “prospective” terms. To them, public money is a means to an end. It’s how we’ll end racial disparities in public education, cure communicable diseases, close the gender pay gap, and pursue other lofty goals. These folks are not particularly concerned with how government tax dollars are different from charitable donations or business profits. If money can move an organization closer to its goals, regardless of where that money comes from, why not add it to the mix? They don’t think of financial contributions
as a way to divvy up credit for a program’s success. They want to know how their money was spent, but far more important, they want to know what their money accomplished.
The opposite is also true. Taylor Mason, and many others who share their views, also sees public money in “prospective” terms. But instead of thinking about what the public sector could accomplish, they also believe no public sector organization is “too big to fail.” If a local government like Sandicot is no longer accomplishing its mission, they argue, it should cease to exist.
Both these perspectives – philanto-capitalism and “government is like a business” – are big departure from public financial management’s status quo. They’re also why public organizations have tended to segregate themselves into “money people” and “everyone else.” Money people tend to see the world differently.
And to be clear, both these perspectives illustrate a much broader recent trend: blending the financial lines across the sectors. Many non-profits now operate profitable lines of business that subsidize other services they provide for free. Governments around the world have created for-profit corporations that allow private sector investors to build, operate, and maintain public infrastructure like bridges, subways, and water treatment facilities. Charitable foundations of all sizes now act as “Angel Investors.” They buy stock in small start-up companies that develop products to improve the quality of life in the developing world. Many of those investments have turned a handsome profit that in turn subsidized other, far-less-profitable endeavors.
Philanthro-capitalism and “government is like a business” are also animated by pressure on governments to do more with less. For roughly 50 years, taxpayers around the world have said no to new taxes, but yes to a steady expansion of the size and scope of government. They have demanded more spending on health care, education, environmental conservation, and other services, but left unclear how to pay for it. They have allowed their governments to borrow record amounts of money, but denied them the financial means to repay that money. Many governments today are simply maxed out. They have little or no new money to commit to innovate programs of the sort that Zuckerberg and others would like to see.
These trends – blurring of the sectors, emphasis on outcomes, scarce government resources – are redefining what it means to manage public money.
You got into public service because you want to make a difference. Maybe, like Mr. Zuckerberg, you want to tackle big, complex public problems. Maybe you want to make governments and non- profits work just a bit more efficiently. Maybe you think government should do a lot more in areas like health care, education, and transportation. Maybe, like Taylor Mason, you think government should get out of the way and make room for non-profits and for-profits. Regardless of your goals, to make that difference you’ll need to speak the language of public financial management. You’ll need to translate your aspirations into cost estimates, budgets, and financial reports. You’ll need to show how an investment in your program/product/idea/initiative/movement will produce results. You’ll need to understand where public money comes from, and where it can and can’t go. You probably didn’t get into public service to manage money, but in today’s rapidly changing public sector, “we’re all money people now.”
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 3
And the opposite is also true. In today’s public sector money people must also step outside of their comfort zone. They must be able to communicate with program managers, board members, and many other stakeholders from whom they don’t traditionally interact. They must help others translate their ideas into the language of finance. As a public manager, a big part of your job will be learning to inspire your money people to step far outside of their comfort zone in the name of accomplishing your organization’s goals.
WHAT IS FINANCIAL STRATEGY?
Money is to public organizations what canvas is to painting. The painter wants to bring his or her artistic vision to life on the canvas. But to do this they must work within the confines of that canvas. If the canvas is too small, too rough, or the wrong shape, the painter must adapt their vision. If they stray too far from their vision, they must know when to find a different canvas.
As a public servant, you are like a painter. You know what you want your organization to accomplish, but you must bring those accomplishments to life on its financial canvas. Every organization’s financial canvas is a bit different. Some have many revenue streams that produce more than enough money, where others depend on a single revenue source to generate just enough money to keep the organization running. Some have broad legal authority to raise new revenue and borrow money, where others must get permission at every step from their board, taxpayers, or other stakeholders. Some have sophisticated financial experts to produce their budgets and manage their money, where others have no such expertise.
It’s not a problem that each public organization’s financial canvas is different from the rest. In fact, those differences are an important part of what makes public financial management an exciting and dynamic field of study. The problem, however, is that many great policies and programs fail because they’re painted on the wrong financial canvas. Public organizations often take on policy challenges without the right financial tools, authority, and capacity. By contrast, some organizations are too modest. They have the tools, authority, and capacity to take on big challenges, but for a variety of reasons they don’t. Financial strategy is how public organizations use their financial resources to accomplish their objectives. It’s how they put their organization’s vision to its financial canvas.
All public organizations must confront limits on the amount and scope of financial resources they can access. So in practical terms, financial strategy is often about tempering our expectations to match what our financial canvas can support. It’s about analyzing a program’s cost structure to make it more efficient, scaling back its goals and objectives, or finding partner organizations to help launch it. Sometimes strategy means finding a new canvas. That might mean forming a new organization, re-purposing an existing program, or recruiting a new foundation or venture capitalist to invest. This book tells you how to understand the many different types of canvases available to you, and the many different ways to put your organization’s vision to one of those canvases.
TECHNIQUE SUPPORTS STRATEGY
This book is organized around a simple idea: technique supports strategy. There are many fine textbooks on public financial management, and almost all of them focus on technical skills. For more than a generation students of this subject have learned how to forecast revenues, build budgets, record basic transactions in an organization’s financial books, and many other useful skills. At the
same time, students have rarely been asked a far more important question: Where and how should they apply those skills? We believe technical skill is useful only if it informs actual management decisions. A cost analysis is useful only if tells us whether and how to launch a new program. Financial statement analysis is a powerful tool because it can inform when to build a new building, start a capital campaign, or invest unused cash. Budget variance analysis is important because it tells program managers where to focus their attention. And so forth. We present these and other techniques, but more important, we try to explain how those techniques can and should inform crucial management, strategy, and policy decisions.
Strategic thinking is at some level about “knowing what you don’t know.” It’s about stepping outside of your own experience. It’s about looking into your organization’s future. It’s about putting yourself in your stakeholders’ shoes. That’s why one of the most valuable tools in financial strategy is asking the right questions. No one can be an expert on all things financial. But if you can ask the right questions and access the right expertise, you can know enough to drive your strategy.
That’s why one of the most important techniques in public financial management is asking good questions. This book is littered with questions. In fact, each chapter begins not with learning objectives, but with the kinds of questions managers ask, and how the information, conceptual frameworks, and analytical tools from financial management can help answer those questions. It includes exercises to help you refine your financial management technique. But more important, it includes cases and other opportunities for you to apply that technique in support of a genuine financial strategy. In fact, the centerpiece case at the end of the book – “The Cascadia Hearing School” – offers several opportunities to develop a financial strategy for a real public organization.
Strategy is not entirely sector-specific. What works in the for-profit sector might work in non- profits or governments, and vice versa. And as sector distinctions matter less, the origins of financial management strategy also matter less. That’s why most of the discussion in this book is predicated on the idea that all governments, non-profits, and “for benefit” organizations (i.e. for-profit organizations with an explicit social purpose) are mostly alike. You’ll see “public organization” and “public manager” used often. These are generic terms to describe people who interact with the financial strategy of any of these types of organizations. To be clear, “public manager” includes policy analysts, community organizers, for-profit contractors, and anyone else who has a stake in a public organization’s finances. Where necessary and appropriate, you’ll see discussions that highlight how each sector’s technical information, legal environment, and strategic directions are different. But for the most part, this text assumes that public organizations have a lot in common.
HOW THIS BOOK IS ORGANIZED
First and foremost, this is a book about people and organizations. To many of us finance and budgeting are abstract subjects. They’re numbers in a spreadsheet, but not much more.
In reality public financial management is how real public servants in real public organizations bring their passions to life. That’s why all of the technical information is presented in the context of specific people, organizations, and strategies. Throughout this book you’ll also find lots of illustrations and examples drawn from real public organizations.
The first chapter is titled “How we Pay for the Public Sector.” It covers where public organizations’
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 5
money comes from, and where it goes. It also highlights some of the pressing challenges now facing public organizations – namely shrinking public resources, debt, and entitlements – and how those challenges present tremendous opportunities for entrepreneurial public managers.
Each of the subsequent chapters covers a bundle of tools that public financial managers use to inform financial strategy. The second chapter covers the basic financial statements. Financial statements are an essential and often overlooked tool to understand an organization’s financial story. This chapter introduces those statements, the information they contain, and the questions they help public sector managers ask and answer.
Chapter 3 is about financial statement analysis. If financial statements tell an organization’s financial story, financial statement analysis is the annotated bibliography of that story. It’s a tool to understand the specific dimensions of an organization’s financial position, to place that position in an appropriately nuanced context, and to identify strategies to improve that financial position in both the near and long term.
To truly understand the numbers in the financial statements, and how those numbers might change as an organization pursues different financial strategies, you must also understand the core concepts of accounting. To that end, the fourth chapter is an applied primer on core accounting concepts like accruals, revenue and expense recognition, depreciation and amortization, and encumbrances. These concepts and their application to actual financial activity are collectively known as “transaction analysis.”
Chapter 5 is about cost analysis. Many public organizations struggle to meaningfully answer a simple question: What do your programs and services cost? They struggle not because they’re lazy or inept, but because it’s challenging to measure all the different costs incurred to produce public services, and then express those costs in an intuitive way. It’s even more challenging to think about how those costs change as the amount of service changes, or as the scope of a service expands or contracts. It’s challenging, but it’s also essential. Every successful public program ever devised was designed with a careful eye toward its cost structure. In this chapter you’ll learn the different types of costs, the core concepts of cost behavior, and how to think about ways to improve an organization’s financial position given its cost behavior.
Chapter 6 covers budgeting. A public organization’s budget is its most important policy statement. It’s where the mission and the money connect. Budgeting is at one level a technical process. It demands solid cost analysis, revenue and expense forecasting, and clear technical communication. But more important, it’s a political process. It’s how policymakers bring their political priorities to life, and shut down their opponents priorities. It’s how the media and taxpayers hold public organizations accountable. It’s where sophisticated public managers can advance their own priorities. This chapter focuses on budgeting as a technical process, with particular emphasis on the different types of budgets and the legal processes by which budgets are made. But it also covers some of the common political strategies that play out in the budget process, and how public managers do and do not engage those strategies. The discussion of those strategies is loosely organized around concepts borrowed from the burgeoning field of behavioral economics, such as loss aversion and the “endowment effect.”
At the outset it’s also worth highlighting what this book does not cover:
• Unlike other textbooks in this space, we do not give special attention to healthcare financial management. Health care financial management has much in common with public financial management. But recent trends in the former – especially the Medicare Modernization Act, the Affordable Care Act (i.e. “Obamacare”), and the collapse of the municipal bond insurance market – have made it too distinct to cover in a coherent way within the framework of this book.
• We gloss over government budgeting systems and processes. We cover the steps outlined in law that governments are supposed to follow to arrive at a budget. But for roughly a decade now the actual budget processes in Washington, DC and many state governments have been quite different from what’s prescribed in law. Terms that used to describe deviations from that process, like “continuing resolution,” “sequestration,” “sweeps” and “recissions” now seem like parts of that process. That’s why it seems silly to devote much attention to the budget process. Instead, we treat budgeting as the place where money, politics, and priorities come together in predictable and unpredictable ways.
• Financial managers find themselves in the throes of some transformational changes in public organizations. They are asked to push the boundaries of what traditional procurement and contracting processes will allow. They are often asked to implement massive new information technology projects. They find themselves leading new initiatives around “evidence-based decision-making,” “lean management”, and “performance benchmarking,” among others. Woefully, we do not have time or space to devote to these processes. We hope to cover these topics in future iterations of this text.
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 7
HOW WE PAY FOR THE PUBLIC SECTOR
WHERE THE MONEY COMES FROM, AND WHERE IT GOES
Managers need to know where public money comes from, and where it goes. That information can answer important
• What revenue options are available to governments? Non-profits?
• What are the advantages and disadvantages of various revenue sources with respect to efficiency, equity,
fairness, and other goals?
• How will the US federal government’s financial challenges shape the financial future of state governments,
local governments, non-profits, and other public organizations?
• What is the optimal “capital structure” for a non-profit?
• How, if at all, can governments address the challenges of entitlements and legacy costs?
In January of 2010 the United States Department of Justice (DOJ) received a formal civil rights complaint from a local community organization in the City of Ferguson, MO. In their complaint they accused the Ferguson Police Department of aggressive and biased policing tactics, including large numbers of traffic stops, searches, seizures, and arrests in the city’s African-American communities. DOJ officials corroborated the report with the Missouri Attorney General’s office, who had also received several similar complaints throughout the previous five years. Both offices agreed to monitor the situation.
On August 9, 2014, Michael Brown, a teenager and resident of Ferguson, was shot and killed by a Ferguson police officer who was investigating a nearby robbery. Ferguson police officials drew sharp criticism for the incident and for their management of the subsequent investigation into potential police misconduct. Several weeks later a grand jury later declined to indict the police officer. In their view the evidence suggested the police officer had reason enough to consider Brown a potentially dangerous suspect.
The shooting sparked violent protests across the US. Ferguson residents said the shooting was just the most recent example of the racist policing they had pointed out to federal and state officials
8 HOW WE PAY FOR THE PUBLIC SECTOR
years earlier. They implored Attorney General Eric Holder to immediately open a DOJ civil rights investigation into the Ferguson Police Department. Holder said his office would gather as much information as possible, but cautioned everyone that anecdotes and demographics are not sufficient to prove an accusation of biased policing. For several weeks, the country anxiously awaited word on what DOJ would do next.
On September 20, 2014 DOJ opened a formal civil rights investigation. The report from that investigation was released in March 2015. It excoriated the Ferguson Police Department and the Ferguson City Council for encouraging, both actively and passively, the sort of aggressive policing that Ferguson residents had decried. But perhaps even more important, it explained that the most compelling evidence of biased policing was not arrest records or police reports. It was Ferguson’s budget. The report said “Ferguson’s law enforcement practices are shaped by the City’s focus on revenue rather than on public safety needs.” It documented a recent trend toward raising new city revenues through aggressive enforcement of fines and fees. Ferguson generated more than $2.5 million in municipal court revenue in fiscal year 2013, an 80 percent increase from only two years prior. In all, fines and forfeitures comprised 20 percent of the city’s operating revenue in fiscal year 2013, up from about 13 percent in 2011. By comparison, other St. Louis suburbs relied on fines and fees for no more than six percent of operating revenue. This budget strategy legitimized and even encouraged Ferguson’s law enforcement and court officials, most of whom were not racists, to pursue such aggressive policing against Ferguson’s majority African-American community.
The take away here is clear: Where a public organization gets its money says a lot about its priorities. In Ferguson’s case, choices about where to get revenue led to a nationwide social movement.
After reading this chapter you should be able to:
• Identify the revenue sources used by the federal, state, and local governments.
• Contrast government revenue sources with non-profit revenue sources like donations and earned income.
• Identify public organizations’ main spending areas, and the division of that spending across the government,
non-profit, and for-profit sector.
• Show how similar governments pay for similar services in quite different ways.
• Identify some of the “macro-challenges” that will shape public organizations’ finances well into the future.
Governments across the United States do the same basic things. Cities and towns mostly maintain roads, plow snow, keep neighborhoods safe, prevent and fight fires, and educate children. County governments run elections, care for the mentally ill, and prevent infectious diseases. State governments coordinate health care for the poor, incarcerate prisoners, and operate universities. The national – or “federal” – government regulates trade and commerce, defends our borders, and pays for health care for the elderly.
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 9
At the same time, governments are remarkably dis-similar in how they pay for and deliver these services. Some rely on a single tax source for most or all of their revenue. Others draw on many different revenue sources. Some deliver their services with the help of non-profits, health care organizations, private sector contractors, and other stakeholders. Others engage outside entities infrequently, if at all. Some citizens want their government to deliver many different high-quality services. Others want their government to do as little as possible.
These choices, about how governments pay for their services, how much they provide, and how they ultimately deliver those services, matter a lot to citizens. For instance, if a city government depends mostly on property taxes, its leaders might have an incentive to emphasize services that benefit property owners, such as public safety and sidewalks, and to worry less about services more likely to benefit those who do not own property, like public parks or housing the homeless. In some regions governments pay non-profit organizations to deliver most or all of the basic services in areas like foster care, child immunizations, and assisted living for seniors. For those who use those services, the quality of service they receive can depend a lot on which non-profit manages their case.
So at a high level, governments look the same. But if we examine them more carefully, we see they vary a lot on where their money comes from, and where it goes. That variation, and its implications for citizens, is a key part of the study of public finance. This chapter is a basic overview of where governments get their money, where they spend it, and some of the financial challenges they’re likely to face in the future.
THE FEDERAL GOVERNMENT
The national government – also known as the “federal government” – is one of the largest and most important employers in the United States. Every soldier in the military, customs agent at an airport, and astronaut at NASA (the “National Aeronautics and Space Administration”) works for the federal government. And so do many, many others. In 2015 the federal government spent just under $4 trillion and employed an estimated five million people, both directly and as contractors. For the past decade or so, federal government spending has accounted for roughly one-quarter of the entire economic output of the US.
The chart below shows where the federal government has received and spent its money since just before World War II. Areas shaded blue represent revenue, or money that comes into the government. Areas shaded red are spending items. Spending is called many different things in public finance, including expenses, expenditures, and outlays. These different labels have slightly different meanings that you’ll learn throughout this text. All the figures shown here are in per capita constant 2015 dollars. In other words, they’ve been adjusted for inflation, and they’re expressed as an amount for every person in the US.
Roughly 80% of the federal government’s revenue is from two sources: the individual income tax and social insurance receipts.1
• In 2015 the federal government collected just over $3,500 per capita from individual income taxes. The income tax an individual pays is determined by their taxable, tax rate, and any applicable tax
1. Portions of the following discussion are quoted and adapted from the Governing Guide to Financial Literacy, Volume 1
10 HOW WE PAY FOR THE PUBLIC SECTOR
preferences. Taxable income is an individual’s income minus any tax preferences. The federal government offers a standard exemption, or a reduction of an individual’s taxable income, that all taxpayers can claim. Beyond that standard deduction, eligible taxpayers can claim hundreds of other exemptions and other tax benefits related to home ownership, retirement savings, health insurance, investments in equipment and technology, and dozens of other areas. Why does the federal government offer these preferences? To encourage taxpayers to save for retirement, buy a home, invest in a business, or participate in many other types of economic activity. Whether tax preferences actually encourage those behaviors is the subject of substantial debate and analysis (see the discussion later on tax efficiency and market distortions). The tax rate is the amount of tax paid per dollar of taxable income. In 2015 the federal tax code had seven different rates that applied across levels of taxable income (also known as “tax brackets”). Those statutory rates ranged from a 10% on individual annual income up to $9,225, to 39.6% on annual income over $413,201. An individual’s effective tax rate is their tax liability divided by their taxable income. If an individual claims a variety of tax preferences, their effective tax rate might be much lower than the statutory tax rate listed here.
• Social insurance receipts are taxes levied on individuals’ wages. Employers take these taxes out of workers’ wages and send them to the federal government on their behalf. That’s why they’re often called payroll taxes or withholding taxes. Social insurance receipts are the main funding source for social insurance programs like Social Security and Medicare (see below).
• The remaining 20% or so of federal revenue is from a variety of sources including the corporate income tax (taxes on business income, rather than individual income), excise taxes (taxes on the purchase of specific goods like gasoline, cigarettes, airline tickets, etc.), and estate taxes (a tax imposed when a family’s wealth is transferred from one generation to the next). As shown in the figure, these revenues as a share of total revenues have not changed much in the past several decades.
Tax Preferences: Spending by Another Name
Tax preferences – sometimes called tax expenditures – are provisions in tax law that allow preferential treatment
for certain taxpayers. They include credits, waivers, exemptions, deductions, differential rates, and anything else
to reduce a person’s or business’ tax liability. Many are quite specific. For example, some states have reduced tax
rates that apply only to particular employers, industries, or geographic areas. Tax expenditures are, in effect, a
form of spending. They require the government to collect less revenue than it would otherwise collect. Some think
they’re unfair because they offer targeted benefits but without the transparency of the traditional budget process.
Proponents say that despite these drawbacks, tax preferences are essential to promote important behaviors, like
buying a home or starting a business. At the state and local level they’re an especially important tool to attract and
retain businesses in today’s competitive economic development environment.
Federal government spending is divided roughly equally across six main areas:
• National defense includes pay and benefits for all members of the US Army, Navy, Air Force, and
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 11
Federal Government Revenues and Outlays since 1940; source: authors’ calculations based on data from the Congressional Budget Office,
the Office of Management and Budgeting, and the US Department of Commerce
Marines, and all civilian support services. It also includes capital outlays – or spending on items with long useful lives – for military bases, planes, tanks, and other military hardware. Note the large spike in national defense spending during World War II (1939-1945) and the Korean War (1950-1953).
• Medicare is the federal government’s health insurance program for the elderly. It was established in 1965. By some estimates, Medicare paid for nearly one-quarter of all the health care delivered in the US, a total of nearly $750 billion in 2015. Medicare has three main components. “Part A” pays for hospital stays, surgery, and other medical procedures that require admission to a hospital. “Part B” covers supplementary medical services like physician visits and procedures that do not require hospital admission. “Part D” pays for prescription drugs. Part A is funded through payroll taxes and through premiums paid by individual beneficiaries. Part B and Part D are funded mostly through payroll taxes. Medicare does not employ physicians or other health care providers. It is, in effect, a health insurance company funded by the federal government. In 2015 it served more than 55 million beneficiaries and spent an average of $18,500 per beneficiary.
• Health is a broad category that covers health-related spending outside of Medicare. The largest segment of this spending is the federal government’s contribution to state Medicaid programs. It
12 HOW WE PAY FOR THE PUBLIC SECTOR
includes funding for public health and population health agencies like the National Institutes of Health (NIH) and the Centers for Disease Control and Prevention, and for health- focused regulatory agencies like the Food and Drug Administration.
• Social Security is an income assistance program for retirees. In 2015, over 59 million Americans received nearly $900 billion in Social Security benefits. Social Security is simple. Individuals contribute payroll taxes while they are working, those taxes are deposited into a fund, and when they retire, they are paid from that fund. In 2015, the average Social Security benefit was around $1,300 per month. Social Security also distributes benefits to disabled individuals who are not able to work.
• Income security is cash and cash-like assistance programs outside of Social Security. Most of these programs help individuals pay for specific, basic necessities. It includes unemployment insurance, food stamps, foster care etc.
• The federal government borrows a lot of money. Some of that borrowing is to pay for “big ticket” or capital outlays like aircraft carriers or refurbishing national parks. Like most consumers, the federal government does not have the money “saved up” to purchase these items, so it borrows money and pays it back over time. It also borrows when revenue collections fall short of spending needs. This is known as deficit spending. The federal government borrows money by issuing three types of Treasury Obligations: Treasury bills, Treasury notes, and Treasury bonds. Much like loans, obligations are bought by investors and the government agrees to pay them back, with interest, over time. Treasury bills come due – i.e. they have a maturity – of three months to one year. Treasury notes have maturities of two years to ten years. Treasury bonds mature in ten years upto 30 years. Each year the government pays the annual portion of the interest it owes on its Treasury obligations, and that payment is known as net interest.
• “Everything Else” is just as it sounds. This includes federal government programs for transportation, student loans, affordable housing, the arts and humanities, and thousands of other programs.
Who Owns Treasury Bonds?
At the end of 2015, the US Treasury had $19 trillion of outstanding Treasury bonds. About $12 trillion is owned by
US investors. The remaining $7 trillion are held by investors outside the US, including nearly $1.5 trillion in China,
and just over $1 trillion in Japan. The remaining $3.8 trillion is held by nearly 100 other countries. Why are US
Treasury bonds so attractive to foreign investors? Because the US government is seen as the safest investment in
the world. Investors across the globe believe the US government will pay back those bonds, with interest, no matter
We often divide federal government spending into two categories: discretionary spending and non- discretionary or mandatory spending. Non-discretionary spending is controlled by law. Social Security is a good example. A person becomes eligible for “full” Social Security benefits once they are over age 65 and have paid payroll taxes for almost four years. Once they become eligible, the benefit
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 13
they receive is determined by a formula that is linked to the total wages they earned during their last 35 years of working. That formula is written into the law that created Social Security. Once a person becomes eligible they are “entitled” to the benefits determined by that formula. Other federal programs like Medicare, food stamps, Supplemental Security Income, and many others follow a formula-based structure. If Congress and the President want to change how much is spent on these programs, they must change the relevant laws. By some estimates, non-discretionary spending is more than 65% of all federal spending. Add to that the roughly 7-8% for interest on the debt, and we see that nearly three-quarters of federal spending is “locked in.”
The remaining one-quarter is discretionary spending. This is spending that Congress and the President can adjust in the annual budget. It includes national defense, most of the “health” spending category, and virtually all of the “everything else” category. There is considerable debate on whether national defense is, in fact, discretionary spending. Legislators are not eager to cut funding to troops in harm’s way. So keep in mind that when Congress debates its annual budget, in effect, it’s debating about 10-25% of what it will eventually spend. The vast majority of federal spending is driven by laws, rules, and priorities that originate outside the budget.
This discussion about entitlements raises another absolutely essential point: the Federal Government has a substantial structural deficit. A structural deficit is when a government’s long-term spending exceeds its long-term revenues. The figure below illustrates this point. It shows that in 2016, the federal government has a projected budget deficit of 2.9% of the US Gross Domestic Product (GDP; the county’s total economic output), or around $1.5 trillion. By the year 2046, assuming no major changes in spending or revenue policies, that annual budget deficit will grow to 8.8% of GDP. Why is the deficit expected to grow so quickly? In part because federal non-discretionary spending is going to grow. More and more of the “Baby Boomer” population will become eligible for Medicare, Social Security, and other programs. As the eligible population grows, so too will spending. Moreover, the cost of health care services has increased three to four times faster than all other costs across the economy. That’s why health-related non-discretionary spending is the proverbial “double whammy” – the number of people who need those services will increase, and so will the rate of spending per person to deliver those services. At the same time, most economists are projecting slower economic growth for the next several decades. Given the federal government’s current revenue policies, that will mean slower revenue growth over time. Those two main factors, growth in non-discretionary spending and slower revenue growth, will lead to much larger deficits over time.
You’re probably asking yourself how will the federal government finance those deficits? If it does not collect enough revenue to cover its spending needs, it will borrow. The figure below shows how the federal government’s debt will increase in response. In 2016, federal government debt was around 72% of GDP. The Congressional Budget Office estimates it will grow to just under 150% of GDP by 2046. For context, consider that in 2015 Greece, long considered the “fiscal problem child” of the European Union, had a debt-to-GDP ratio of 158%.
This rapid growth in debt is concerning for many reasons. First, federal government borrowing “crowds out” borrowing by small businesses, homeowners, state and local governments, and others who need to borrow to invest in their own projects. Since there are only so many investors with money to invest, if the federal government takes a larger share of that money, there’s less for everyone else. Many economists and finance experts have also warned that if the federal government’s debt
14 HOW WE PAY FOR THE PUBLIC SECTOR
Components of the Federal Government’s Structural Deficit; Source: Congressional Budget Office
grows too high, then investors might be less willing to loan it money in the future. If investors are less willing to loan the government money, the government must offer higher interest rates to increase investors’ return on investment. As the federal government’s interest rates rise, interest rates rise for everyone else. Occasional increases to interest rates are not necessarily a bad thing, but prolonged high interest rates mean less investment by people and business, and that leads to lower productivity and slower economic growth.
The federal government’s structural deficit is the single most important trend in public budgeting and finance today. Without major changes in federal government policy, especially in areas like Medicare and Social Security, the federal government will have no choice but to run enormous deficits and cut non-discretionary spending. Those cuts will mean less money for many of the key programs that you probably care about the most: basic scientific research, student loans, highways, transit systems, national parks, and every other discretionary program. In fact, some cynics have said that in the future, “the federal government will be an army with a health care system.” State and local governments will be forced to take on many of the services the federal government used to provide in areas like affordable housing, environmental protection, international trade promotion etc. At the same time, some optimists say this is a welcome change. Without the rigidity and uniformity of the federal government, local communities will have the latitude and flexibility to experiment with new approaches to social problems. What’s not debatable is that absent major changes in policy, especially for non-discretionary spending, federal government spending will look quite different in the not-too- distant future.
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 15
Projected Growth in Federal Debt and the Structural Deficit; Source: Congressional Budget Office
What Moves Interest Rates?
Interest rates are one of the most important numbers in public budgeting and finance. Interest is what it costs to use
someone else’s money. Banks and other financial institutions lend consumers and governments money at “market
interest rates” like the annual percentage rate (APR). Small changes in interest rates can mean big differences in the
cost to deliver public projects. That’s why it behooves public managers to know what drives interest rates.
Interest rates fluctuate for a variety of macroeconomic reasons. If inflation is on the rise, then businesses will
be less willing to spend money on new buildings, equipment, and other capital investments. If demand for capital
investments is down, then so is demand for borrowed money to finance those investments. In those market
conditions banks and other financial institutions will lower the interest rates they offer on loans to entice
businesses to make those investments. The opposite is also true. Businesses will seek to invest during periods of low
inflation, and that drives up demand for borrowed money, and that drives interest rates up. Government borrowing
and capital investment can also drive demand for borrowed money. Macroeconomists have complex models that
explain and predict these interrelationships between consumer spending, investments, and government spending.
The Federal Reserve Bank of the US – i.e. “The Fed” – is also a crucial and closely-watched player. The Fed is the central
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bank. It lends money to banks and holds deposits from banks throughout the US. Its mission is to fight inflation and
keep unemployment to a minimum. In finance circles, this is called the Dual Mandate.
The Fed has many tools to achieve that mission, and most of those tools involve interest rates. It can raise or lower
the Federal Funds Rate, or the interest rates at which banks lend money to each other. It can demand that banks keep
more money on deposit at the Fed. Increases in either will reduce the amount of money banks have available to lend,
and that drives up interest rates. It’s most powerful tool is called open market operations (OMO). If the Fed wishes to
lower interest rates it buys short-term Treasury bonds and other financial securities from investors. This increases
the money available for lending and reduces interest rates. When it wishes to raise rates it sells securities to banks.
When banks buy those securities they have less money available to lend, and that increases interest rates.
There’s an old adage that state governments are in charge of “medication, education, and incarceration.” That saying is both pithy and true. In 2015 state governments spent $1.6 trillion, and most of it was spent on schools, Medicaid, and corrections. That said, they vary a lot in how much of those services they deliver, and how they pay for those services. In some regions, the state is one of the largest employers. This is especially true in rural areas with state universities or state prisons. In other regions state government has a limited presence.
The figure below shows the trends in state government revenues and spending since the late 1970s. All the shaded areas above 0 are revenues, and all the area below 0 is spending. All figures are expressed in 2015 per capita dollars.
Three trends stand out from this chart. First, the size and scope of state governments varies a lot. Today Nevada, for example, spends just under $5,000 per capita. On a per capita basis it’s one of the smallest state governments. Vermont, by contrast, spends more than $9,000. Both states have roughly the same population, but one state’s government spends almost twice as much per capita. There are several reasons for this. One is that much of Nevada’s land is managed by the federal Department of Interior and by Native American Tribes. Those governments deliver many of the basic services that state governments deliver in other states. Citizens in Nevada have also historically preferred less government overall. In Vermont, the state government is largely responsible for roads, public health, primary and secondary education, and many other services that local governments deliver in most other states. That’s why state government spending in Vermont is roughly equivalent to state government spending plus total local government spending in most other states.
A second key trend is that overall state spending grew substantially over the past few decades. In 1977, the average state per capita spending was around $2,800. In 2012 it was $5,100. Revenues have grown on a similar trajectory. But note that growth was not uniform. Spending in states like Arizona, California, Colorado, and Washington grew far slower than the average. This is not a coincidence. These states have passed strict laws, broadly known as tax and expenditure limitations, that restrict how quickly their revenues and spending can grow. States without those limits, like Connecticut, Delaware, New York, and Massachusetts, have seen much faster growth in both revenues and
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 17
State Government Revenues and Spending, 1977-2012; Source: Authors’ Calculations Based on US Census of Governments Data; Note
that Alaska is excluded because it is an outlier. In 2015 it spent more than $22,000 per capita.
spending. North Dakota, Wyoming, and New Mexico saw large jumps in revenues and spending in the past decade or so, due mostly to growth of their respective shale oil industries (more commonly known as fracking).
Tax and Expenditure Limitations
Tax and expenditure limits (or TELs) restrict the growth of government revenues or spending. While there are no two
TELs that are alike, they all share key elements. At the state-level, TELs are either dollar limits on tax revenues or
procedural limits that mandate either voter approval or a legislative super-majority vote for new or higher taxes.
In estimating the dollar limits, the state is required to establish base year revenues or appropriations subject to the
limit and adjust for a factor of growth that is equal to changes in population, inflation, or personal income. States can
only exceed the TEL revenue or appropriation caps if they exercise their override provision (e.g., legislative majority
or super-majority vote). Funds in excess of the limitation are refunded to taxpayers, deposited in a reserve fund
(commonly referred to as a rainy day fund), or used for purposes as provided by law (e.g., capital improvements,
K-12 spending). Procedural limits are unique in that they are not part of the budgeting processes and apply only if
the Governor seeks to levy new or higher taxes.
At the local level, TELs are either a limit on property tax rates, the taxable base (or assessed value of taxable
property), property tax levy, or on the aggregate of local government taxing or spending authority. The limits on
tax rates apply to either all municipal governments (an overall property tax rate limit) or specific municipalities
(e.g., city, county, or a school district). Limits on assessed valuation are limits on annual growth in the valuation of
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property (e.g., 2 percent) while limits on property tax revenues are dollar limits on the total amount of revenue that
can be raised from the property tax. Caps on the aggregate of local government taxing or spending authority are
dollar limits on overall spending authority.
While these revenue suppression measures remain popular, they have had unintended and perhaps detrimental
effects, especially at the local level. For example, data from 1977 through 2007 shows the precipitous decline in
property tax revenues as a share of own-source revenues. In California, Massachusetts, and Oregon, revenues from
the property tax revenues fell more than 15 percent. In response, local governments have come to rely more on
intergovernmental transfers and user charges and fees. They have also adopted local-option sales and/or income
taxes to make up for lost property tax revenues. As a result of changes, revenues are more volatile and local
governments have less control over their budgets than they did prior to the tax-revolt movement. TELs have also
altered how local governments are willing to borrow, market perceptions of their credit quality (or default risk), and
their ability to manage their other long-term obligations and legacy costs.
A third important trend is that state revenues roughly equal state spending. Virtually every state’s constitution requires that its legislature and governor pass a balanced budget. As you’ll see later, “balanced budget” can mean rather different things in different places. But overall, states don’t spend more money than they collect. This is in sharp contrast to the federal government. As you saw above, throughout the past several decades the federal government’s spending has routinely exceeded its revenues. Unlike the federal government, the states cannot borrow money to finance budget deficit. In a number of states, restrictions on deficit spending are enshrined in law.
What is a “Fair” Tax?
Governments tax many different types of activity with many different types of revenue instruments (i.e. taxes, fees,
charges, etc.). Each instrument is fair in some ways, but less fair in other ways. In public finance we typically define
fairness along several dimensions:
• Efficiency. Basic economics tells us that if a good or service is taxed, then consumers will purchase or
produce less of it. An efficient tax minimizes these market distortions. For instance, most tax experts
agree the corporate income tax is one of the least efficient. Most large corporations are willing and
able to move to the state or country where they face the lowest possible corporate income tax
burden. When they move they take jobs, capital investments, and tax revenue with them. Property
taxes, by contrast, are one of the most efficient. The quantity of land available for purchase is fixed, so
taxing it cannot distort supply the same way that taxing income might discourage work, or that taxing
investment might encourage near-term consumption.
• Vertical Equity. Vertical equity means the amount of tax someone pays increases with their ability
to pay. Most income tax systems impose higher tax rates on individuals and businesses with higher
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 19
incomes. This is meant to ensure taxpayers who have greater ability to pay will contribute a higher
share of their income through taxes. A tax with a high degree of vertical equity, like the income tax, is
known as a progressive tax. A regressive tax is a tax where those who have less ability to pay ultimately
pay a higher share of their income in taxes.
• Horizontal Equity. Horizontal equity – sometimes called “tax neutrality” – means that people with similar
ability to pay contribute a similar amount of taxes. The property tax is a good example of a tax that promotes
horizontal equity. With a properly administered property tax system, homeowners or business owners with
similar properties will pay similar amounts of property taxes. Income taxes are quite different. Because of
tax preferences, it’s entirely possible for two people with the same income to pay very different amounts
of income tax.Elasticity. An elastic tax responds quickly to changes in the broader economy. If the
economy is growing and consumers are spending money, collections of elastic taxes increase and
overall revenue grows. This is quite attractive to policymakers. With elastic taxes, they can see
growth in tax collections without increasing the tax rate. Of course, the opposite is also true. If the
economy is in recession, consumer spending decreases, and so do revenue collections. Sales taxes and
income taxes are the most elastic revenues.
• Stability. A stable – or “inelastic” – tax does not respond quickly to changes in the economy. Property
taxes are among the most inelastic taxes. Property values don’t typically fluctuate as much as prices
of other goods, so property tax collections don’t increase or decrease nearly as fast as sales or income
taxes. They’re more predictable, but they can only grow so fast.
• Administrative Costs. Some taxes require a lot of time and resources to administer. Property taxes are
a good example. Tax assessors go to great lengths to make certain the appraised value they assign to
a home or business is as close as possible to its actual market value. To do this they perform a lot of
spatial analysis. That analysis demands time and expertise.
The chart below illustrates a basic fact about taxation: all taxes come with trade-offs. For instance, the property
tax is stable and promotes horizontal equity, but it’s costly to administer and generally non-responsive to broader
trends in the economy. The sales tax is cheap to administer and produces more revenue during good economic
times, but it’s also quite regressive. Also note that for many of these instruments the evidence is mixed. That is, tax
policy experts disagree on whether that characteristic is a strength or weakness for that particular revenue
States rely on a few key revenue sources:
• About one-third of state government revenues are from sales taxes. There are two basic types of sales taxes: 1) a general sales tax that applies to all retail sales transactions, and; 2) special sales taxes that apply only to sales of certain goods and services, such as gasoline, cigarettes, alcohol, and gambling. Some states tax construction, personal trainers, catering, and other professional services, while many do not. Many special sales taxes are administered as excise taxes. Like with the income tax, sales tax revenues are derived from a tax rate applied to a taxable base. A state’s
20 HOW WE PAY FOR THE PUBLIC SECTOR
sales tax base is all the retail sales of personal property that happen within its borders. The challenge is that it’s not always clear what is included in that taxable base. For instance, a business will remit state sales tax only if it has a substantial portion of its business, known as a sales tax nexus, in that state. When a company does business in multiple states, or in multiple countries, it must use complicated calculations, known as tax apportionment formulas, to determine the sales tax it owes in each state. Online retailers like Amazon.com have argued they should not pay state sales tax because they do not have a nexus in any one state. Some states require consumers to pay a use tax if they purchase a good without paying sales tax. In many states, the goods and services purchased by businesses, for the purposes or producing are good or delivering a service, are exempt from sales taxes. For these and other reasons sales tax administration is quite complex.
• Approximately 18% of total state revenues are from individual and corporate income taxes. For states that have them – 10 states do not have an income tax – income taxes are always the largest or the second largest revenue source. State income taxes are administered much like the federal income tax. In fact, most states apply the federal government’s definition of taxable income to determine state taxable income. Interestingly, overall spending has grown much slower in states that do not have an individual income tax.
• All state governments depend to some extent on intergovernmental revenues (IGR). For the states, most intergovernmental revenue is transfers from the federal government for its share of certain mandated programs. Medicaid (see below) is the largest and most important for most states. The federal government also sends states money for transportation infrastructure, the child health insurance program (or S-CHIP), federal student loan assistance, and many other programs. Federal IGR falls into roughly two categories: categorical grants that are restricted to specific purposes, and block grants that are less restricted but must produce measurable outcomes or deliverables. Federal funds for highways and university research are good examples of categorical grants. The Community Development Block Grant program is a good example of a block grant.
• Most state revenues are from the sales tax, income tax, and IGR. That said, states do depend on a variety of other smaller revenues. Some states levy a limited property tax (see below) on transactions of certain personal property, like vehicles. States also generate revenue through fees attached to everything from hunting to running a tavern to practicing medicine. Some states also tax private electricity and water utility operators.
FINANCIAL STRATEGY FOR PUBLIC MANAGERS 21
As mentioned, most state spending is around health, education, and corrections.
• About one-third of total state spending is related to health. Most of that one-third is state Medicaid programs. Medicaid is the federal government’s healthcare program for the poor. It’s delivered through a partnership with the states. Each state designs its own Medicaid program, and the federal government covers 50-70% of the spending related to that program. That’s why it’s actually part of “Assistance/Cash Transfers” in the figure above. Medicaid is non-discretionary spending. In most states, an individual qualifies for it if their income falls below a certain level. It’s also the default health insurer for many vulnerable populations, including foster children, the permanently disabled, and the mentally ill. Older individuals who are poor or disabled often qualify for both Medicare and Medicaid. They are known as dual-eligibles. Medicaid is to the states what Medicare is to the federal government: a massive health insurance program that is expected to cover more people and become vastly more expensive over time. In fact, in most states the primary source of growth in Medicaid spending is spending on nursing homes and other long- term care for the elderly. Health and hospitals spending also includes public hospitals and free health clinics run by state governments, and state public health services like vaccinations, diabetes prevention, and outreach programs to prevent sexually-transmitted diseases.
Medicaid Expansion (and Contraction