State and local governments could face 50 years of fiscal troubles — through 2060 — if current policy stays the same, the congressional Government Accountability Office said in a report published this week.
The report projects that under current law rising costs for health care, pension liabilities, education and infrastructure will force municipalities to cut spending by an average of 12.3% every year. Conversely, tax revenue is projected to be flat over the 50-year period, leading to a long-term fiscal imbalance.
“It’s probably on the sunny side,” said Stanley J. Czerwinski, one of the co-authors of the report. “We’re conservative in how dire we say it is.”
The GAO’s reports on state and local finances take 50-year views, he said, adding that the trends would continue beyond 2060 if the agency’s estimation model is extended.
The report makes assumptions on state and local governments’ municipal bond issuance and interest rates. But the data is derived from the Congressional Budget Office’s economic projects and are not broken down on a year-by-year basis, according to Czerwinski.
The data are computed on an aggregate basis with large states weighted more than smaller municipalities, he said. The report does not project outlooks for specific state and local governments.
Federal stimulus aid from the American Recovery and Reinvestment Act has helped state and local governments cope with the recession and their near-term budget concerns, the report said. Still, governments face operating deficits totaling $39 billion for 2010 and $124 billion for 2011, the report said.
“The results confirm our recent finding that while states’ near-term revenue shortfalls have been cushioned by the temporary infusion of [ARRA] funds, states will continue to be fiscally stressed,” the authors wrote.
Health care costs pose the greatest threat to state and local governments, according to the report.
“What we see in the state and local model is exactly the mirror image of what you see at the federal level,” Czerwinski said. Health care costs are “outstripping” all the other costs to governments, he said.
“State and local governments can cut all the other programs they want. If they don’t get health care costs under control, they will have a big problem,” he said.
Health care costs, combined with an aging population, are contributing to governments’ retiree liabilities. The problem has been exacerbated by weak portfolio investment returns, Czerwinski said.
A February report on other post-employment liabilities from the Pew Center on the States said governments had a $1 trillion gap in fiscal 2008 between what workers have been promised and available funds. It found state pension systems were 84% funded in aggregate, with 21 states below 80%. In November, a Loop Capital Markets LLC report said retiree liabilities pose a credit risk to states.
The GAO report cited two other sectors, education and infrastructure spending, where cuts have been made during the recession. Stimulus funds have propped up both sectors, but the bulk of that spending comes in 2010 and will diminish in future years, Czerwinski said.
“Long-term sustainability is not going to be there” from the federal government, he said.
The report did not include infrastructure spending figures because the data is not easy to gather, according to Czerwinski. But the budget threat remains.
“When times are tough, [governments] don’t repave the roads as much,” he said. “Maybe road paving you can get away with, but when you talk about [not making] bridge repairs, you are going to pay a bigger price down the road.”
