Up to now, the "guesstimated" state and local spending for years after the latest US Census Bureau report on State and Local Government Finances has been a simple projection of the change between the last two reported years. If, e.g., education spending increased by 5% between 2007 and 2008 we have constructed an education spending value for all future years by increasing each year by five percent.
Effective immediately we are changing the "guesstimated" method. The new method assumes that state and local spending and revenue in the next few years will trend back towards the average value recorded in the recent past, expressed as a percent of GDP (or GSP).
Here is the new method for computing "guesstimated" spending for all states combined and for each individual state.
- Establish a five year Reference Period. At present the last year for which state spending is available is 2009, so the reference period is 2005 through 2009.
- For each spending and revenue item calculate an average value for the Reference Period as percent of GDP for a combined state or local value, or as percent of Gross State Project (GSP) for individual states.
- Compute a Projected Value (e.g., for 2010) that would continue the percentage change for the latest two years (2008 and 2009) for each spending or revenue item.
- Compute a Revert-to-mean Value (e.g., for 2010) that would return the spending or revenue item to the average calculated for the Reference Period as percent of projected GDP for the US or state GSP for the year.
- Calculate and save in the database (e.g., for 2010) a Mean Value for the spending/revenue item that is half way between the Projected Value and the Revert-to-mean Value.
- Repeat procedure for all spending and revenue items.
- Compute total spending and total revenue from new values for 2010.
- Repeat for other states.
The projected value for US GDP is the value for each year from Table 10.1 in the Historical Tables of the federal budget. The projected value for each state GSP is computed by applying the change in federal GDP growth rate to the last year's state GSP and then moving the state GSP growth rate towards the federal growth rate by 40 percent of the difference between the state and the federal growth rate.
The "guesstimated" value for state and local revenue code "X08 Employee Retirement - Earnings on Investments" is too volatile to be "guesstimated" using this method. It is computed by changing the latest year's value by 60 percent of the difference between the latest year's value and the average value for the Reference Period. This value, for all states combined, was a $500 billion loss in 2009. This method reverts "X08" to a substantial gain in 2010 and future years.