Does Oregon Spend Too Much?

To answer the question “does Oregon spend too much?” we first have to make state and local government spending data transparent, so everyone has access to it. But second, we have to put that spending into a useful context.

To put government spending into such a useful context, Cascade Policy Institute recently asked two prominent Oregon economists* to update their previous reports which demographically benchmarked the five main areas of state and local government spending: education, health care, welfare, police and corrections, and highway expenditures.

Benchmarking Oregon to other states isn’t simple; good comparative data, for example, is three years old. In addition, simplistic benchmarks can be misleading. For example, on a per capita basis, the latest data available puts Oregon at $8,060 in state and local government spending per person per year, or at about the 18th top spending state. But per capita measures do not account for demographic differences across states. For example, a state with a large population of young people would be expected to spend more than average on education, while a state with a large low-income population might be expected to spend more on welfare.

Adjusting for the appropriate demographic differences now finds that Oregon ranks 7th in total overspending compared to other states. Our state and local governments spend approximately 10.6 percent more than would be expected for a state with Oregon’s demographics. This overspending equaled more than $2.7 billion in the 2004-2005 fiscal year.

Controlling for such factors as age composition, income levels, education levels and poverty rates produces the following comparisons in our major spending areas:

$ Oregon state and local government overall spending is 10.6 percent higher
than expected;
$ K-12 education spending is 7.5 percent higher than expected;
$ Health and hospital spending is 3.3 percent higher than expected;
$ Highway spending is 9.7 percent higher than expected;
$ Police and corrections spending is 29.5 percent higher than expected;
$ Welfare spending is 3.4 percent higher than expected.

The report authors are quick to point out that these calculations do not necessarily imply that Oregon’s recent spending has been “too much,” compared to taxpayers’ wishes. But taxpayers deserve to know that they are being asked to spend more than demographically similar states.

Whether taxes and spending grow in the future or are reduced, it only makes sense to look for ways to provide the same (or better) services at lower cost. The report authors made a number of proposals in their 2004 report which would lower spending while maintaining service levels. The validity of these prescriptions is just as relevant today. They include:

“¢ Incorporate flexibility into government operations by reducing wage rigidity and seniority rules in staffing decisions;

“¢ Rely on less volatile revenue sources, especially capital gains revenue;

“¢ Institute greater accountability and choice in public education;

“¢ Reform the Oregon Health Plan to provide Health Savings Accounts to encourage price and cost competition in the provision of health care and health insurance;

“¢ Establish a system of charging for roadway use that more fairly targets the users who are imposing the greatest burdens on capacity and wear and tear;

“¢ Involve the private sector in policing and corrections;

“¢ Direct welfare efforts toward encouraging work and education;

“¢ Eliminate “prevailing wage” rules in government contracts.

In summary, these proposals would lower barriers to competitive and private provision of public services, while increasing reliance on user charges rather than broad-based tax schemes. Having consumers make sharp-penciled choices among alternative vendors every day is the only certain way to winnow out expensive and low-quality services. By taking the consumer out of the loop in many public services, we have lost an important ally in the battle for better and lower-cost services.

Demographically benchmarking Oregon spending goes an important step beyond simply making government spending transparent. Without knowing how our spending compares to demographically similar states we cannot even begin to answer the question “does Oregon spend too much?” With this knowledge we not only can answer the question; we also can begin taking steps to reduce government spending while improving service delivery.

*Pozdena, Randall J. and Eric Fruits, “How Does Oregon Spending Rank? Ideas for Budget Stability,” Cascade Policy Institute, September 2004; updated in “The Ranking of Oregon State and Local Spending,” Cascade Policy Institute, June 2008.

Founder and Senior Policy Analyst at Cascade Policy Institute, Steve Buckstein is Director of Cascade’s Government Transparency Project and the Oregon Economic Opportunity Project. Based in Portland, Cascade Policy Institute is Oregon’s free market research center.