Absent any policy changes, state and local governments will face an increasing gap between receipts and expenditures in future years, the Government Accountability Office concludes in a new report.
Using data from the Bureau of Economic Analysis’s National Income and Product Accounts, the 15-page GAO report projected the level of receipts and expenditures for state and local governments through 2060 based on current and historical spending.
In the long-term, total tax revenues for state and local governments as a percentage of gross domestic product are estimated to remain below the 2007 historical high through 2060 due to the projected modest growth in receipts, the report found.
“In addition, as most outlays from the American Recovery and Reinvestment Act of 2009 have already occurred, the state and local government sector will continue to adjust to a reduced level of federal assistance from that provided by the Recovery Act,” the report said.
The fiscal gap ¬¬¬— the amount of spending reductions or tax increases needed to prevent operating deficits — is an estimate of the action needed today and maintained for each year to achieve fiscal balance over the next 50 years, the GAO said.
In order for state and local governments to close the fiscal gap, they would have to cut expenditures by 14.2% each year for the next 50 years, the GAO said. More likely though, a combination of expenditure reductions and revenue increases would be required to close the fiscal gap, the report said.
The primary driver of fiscal challenges for the state and local government sector in the long term continues to be the projected growth in health related costs, the report said. Health-related costs for state and local governments will be about 3.8% of gross domestic product in 2013 and 7.2% of GDP in 2060.
“Since most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations continue to suggest that the [state and local government] sector would need to make substantial policy changes to avoid growing fiscal imbalances in the future,” the report said.
Declines in state and local pension asset values stemming from the 2007 to 2009 economic recession could also affect the state and local government sector’s long-term fiscal position.
Pension asset values increased by almost 22% to $2.8 trillion at the end of 2011 from $2.3 trillion at the end of 2008. However, as of 2011, values have not recovered to match or exceed the 2007 value of $3.2 trillion.
