Though the projection is dire, it's unlikely to actually happen, as most state and local governments are required to balance their budgets. But the report does serve to underscore the size of the fiscal hurdles facing state and local governments.
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The projections come from simulations that consider current and historical spending and revenue patterns.
The main driver of fiscal pressure is declining tax receipts. Tax revenues fell nearly 5 percent from 2008 to 2009. In 2010, there was a slight rebound, but they're still below their 2008 level.
Though the near-term picture has improved slightly since the GAO's last update, in March 2010, "the sector faces long-term challenges which grow over time."
The struggles are primiarly due to rising health care costs, which will consume a growing portion of budgets through Medicaid expenditures and health insurance costs for retirees. While increased Medicaid costs in the next 10 years will largely be picked up by the feds, states and local governments will also bare some of that burden. The model’s simulations show states and localities spending 3.7 percent of GDP on health care costs in 2010 and 8.3 percent of GDP in 2060.
"Because most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations suggest the fiscal pressures the sector faces and foreshadow the extent to which these governments will need to make substantial policy changes to avoid growing fiscal imbalances," the GAO wrote.
To prevent deficits, states and localities would have to reduce expenditures or increase revenues by about 12.5 percent and maintain those levels. The GAO projects that revenues, as a percentage of GDP, will continue to decline absent policy changes.
