December 13, 2016

A Snapshot of Ohio’s Budget Situation from 2006 to 2015

Summary

Considering both recent findings published by the Mercatus Center on Ohio public pensions and the analysis above, the state’s financial situation is likely to change in the future. Such change will necessitate spending cuts, tax increases, or both, and these difficult decisions will only become more difficult if action is delayed. Ohio voters, legislators, and the governor will have to decide which tradeoffs to make, and the sooner they act, the less painful the solution will be.

Ohio has a problem. Its public sector pensions are strained, and if retirees want their pensions to be paid in full the status quo cannot continue. In order for Ohio to adequately fund its pensions, some combination of spending cuts and tax increases is necessary, because Ohio’s economy is unlikely to grow its way out of the problem.

It is important to understand how Ohio spends its tax dollars before discussing any potential spending cuts. The first chart displays Ohio’s state spending by category.

Over the past 10 years, the category that has seen the greatest increase in spending has been “public assistance and Medicaid.” From 2006 to 2016, spending on public assistance and Medicaid steadily increased (except for a slight dip from 2007 to 2008 during the recession), rising from roughly $19 billion to $28 billion. The “education” category has had the second highest level of spending, but education spending started to decline in 2009 after public assistance and Medicaid spending resumed rising in 2008.

Meanwhile, other spending in other categories has either decreased or remained roughly constant. The category “general government and other funds” saw a slight decline in spending after 2011, while “transportation and development” saw a slight increase after 2010. Spending for “justice and public protection” has hovered between $3 billion and $4 billion for the entire time period. “Health and human services” spending saw a significant drop in 2013, when spending on public assistance and Medicaid sharply increased (corresponding with Ohio’s 2013 Medicaid expansion).

During the past decade, Ohio’s expenditures have generally exceeded its revenue, as shown in the second chart. The majority of the state’s revenue was from state-level sources (between $27 billion and $34 billion). Aside from taxes, the state also gets revenue from licenses, permits and fees, sales, services and charges, and the federal government. While the majority of Ohio’s revenue is from state-level sources, revenue from the federal government began increasing after 2008 following the recession and has remained relatively high post-recession.

Ohio lawmakers will need to make changes to Ohio’s pension plans if they are to remain solvent. The two most obvious changes are increasing spending on pensions by cutting it from other areas, such as public assistance and Medicaid or education, and raising additional revenue through tax increases. Another option to consider is whether Ohio can grow its way out of its spending problems. After all, greater economic growth can generate more tax revenue without any change to the percentage of total economic output collected.

While we do not have a crystal ball, such growth appears unlikely. The third chart shows the change in real GDP and the percentage change in GDP from 2006 to 2015. The contraction from 2006 to 2009 due to the financial crisis and recession is evident, and then from 2009 onward the Ohio economy grew modestly.

The sharpest increases in economic growth usually occur in the years immediately following a crash, but these boom years never materialized after the latest recession. Recent growth has just barely returned Ohio to its 2006 GDP level (roughly $608 billion). The recent modest growth rates suggest that unless something changes it is unlikely that Ohio can grow its way out of its pension problem.

Considering both recent findings published by the Mercatus Center on Ohio public pensions and the analysis above, the state’s financial situation is likely to change in the future. Such change will necessitate spending cuts, tax increases, or both, and these difficult decisions will only become more difficult if action is delayed. Ohio voters, legislators, and the governor will have to decide which tradeoffs to make, and the sooner they act, the less painful the solution will be.

Note: The first chart uses the categories from Ohio’s comprehensive annual financial reports (CAFRs). The “education” category combines the primary and secondary education and higher and other education categories from the CAFRs. The “general government and other funds” category combines the general government, environmental protection and natural resources, and community and economic development categories from the CAFRs.