Local, state governments facing continued fiscal gap
The effects of the Great Recession in 2008 are still being felt at the local and state levels of government. In fact, the federal Government Accountability Office (GAO) notes in a recent report that those governments’ budget crises are long-term and, without policy changes, tax revenues will not return to pre-recession rates as a percentage of gross domestic product until 2058. And, any such policy changes could mean either significant tax increases or deep spending cuts.
The GAO model for the report uses the Bureau of Economic Analysis’s National Income and Product Accounts as the chief source for data, with results representing the state and local sector as a whole. Figures are based on current and historical spending and revenue patterns and represent the level of receipts and expenditures through 2060.
State and local governments overall have seen an increase in tax receipts in recent years, mostly from property and income taxes. However, from the second quarter of 2013 to the second quarter of 2014, total tax receipts declined 1 percent and income tax receipts fell 8 percent.
Blamed for a significant amount of the decline in state and local funding are increasing health-related costs on Medicaid and the cost of health care compensation for state and local government employees and retirees. Another contributor to the sector’s tough climb out of a financial hole is the decline in state and local pension asset values.
The GAO report also examines what it would take to bridge the “fiscal gap,” what action is needed today and going forward for each of the next 50 years, to maintain revenues that are not less than expected expenditures. The report determined that to maintain that fiscal balance, some combination of spending cuts and revenue increases is likely to be needed.
The overall outlook for fiscal soundness for state and local governments, the report notes, is that this sector “will face an increasing gap between expenditures and receipts in future years.” To close the gap, policy changes are necessary “to assure that receipts are at least equal to expenditures.” The fiscal challenges of state and local governments represented in the report contribute to fiscal challenges at the national level. The result is that officials at all levels of government are likely to search for innovative financial solutions such as collaborations, public-private partnerships and other creative ways of increasing revenue and decreasing expenditures.