GAO: Without Reform, States, Localities Face Financial Pressure

A new report from the federal watchdog says that state and local governments should move quickly to address financial challenges facing them.
by | April 10, 2012

A new report by the Government Accountability Office shows that states and localities will continue to see their financial condition slide over the next 50 years if they fail to enact meaningful reforms soon.

According to GAO's simulations, if states don't make changes to their expenditure and revenue levels, they'll be in the red through 2060. Of course, almost all states and localities are required to balance their budgets. But the report is valuable in that it shows how states and localities would have an easier time righting their finances by making reforms sooner than later, as funding gaps would widen with time.

Stan Czerwinski, a GAO director who wrote the report, called the findings "a bit scary" during a webinar Tuesday.

The model doesn't provide information about specific states and localities but does provide aggregate information about their financial condition. GAO has an interest in states and localities because they're often charged with carrying out federal programs, Czerwinski said.

There is some good news in the report. States and localities are rebounding from the revenue slumps they saw in the wake of the recession. From the second quarter of 2009 to the third quarter of 2011, total tax receipts increased nearly 11 percent and returned to pre-recession levels, primarily due to boosts in income and sales tax receipts. Property tax revenues remain depressed.

In the short-term, states and localities have struggled with lower revenues that are only now starting to bounce back. Their longer-term challenges are due to untenable expenditure levels.

"The earlier we take the action, the easier it is to handle," Czerwinski says.

The report helps to identify the "fiscal gap" facing states and localities. The fiscal gap is an estimate of what needs to be done to reach fiscal balance over the next 50 years. To prevent operating deficits, states and localities would have to cut spending or increase revenue by 12.7 percent and maintain it. That number grows each year they delay.

The report also highlights the enormous growth on health care spending via Medicaid, as well as health care benefits for government employees and retirees. At the same time, education spending has had a significant decline.

The report also says it's unclear exactly how last year's Budget Control Act -- the debt ceiling deal -- would affect state and local finances. 

 

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