From the U.S. Government Accountability Office, www.gao.gov

Transcript for: AskGAOLive Chat on State and Local Fiscal Outlook

Description: Online video chat with Stan Czerwinski, Director, Strategic
Issues

Related GAO Work: GAO-12-523SP: State and Local Governments' Fiscal
Outlook

Released: April 2012


>> Jeremy Cluchey: All right, thank you very much for tuning in to
AskGAOLive, GAO's online streaming interactive chat where we talk about
new reports that the agency's issued. My name's Jeremy Cluchey. I work
in our Public Affairs office and I'm here with Stan zer- Czerwinski,
excuse me, a director in our Strategic Issues team. Today we're going to
be talking about GAO's latest update to our state and local fiscal
outlook simulations and before we begin the discussion, this is an
interactive chat. We want to encourage you to submit any questions you
may have. There are a few ways to do that. One is to send an email to
askgaolive@gao.gov. You can also submit a question on Twitter by using
the hashtag askgaolive, or right here in Ustream if you're viewing on
the Ustream platform, there's a social stream, should be to the right of
the screen, you can ask your question there and we'll do our best to get
you a response in the 30 minutes that we have. So to start, Stan, thank
you first of all for joining us.

>> Stan Czerwinski: My pleasure, Jeremy.

>> Jeremy Cluchey: And I'm hoping you can give a brief introduction to
why GAO prepares these simulations for state and local governments.

>> Stan Czerwinski: Sure. Sure, thanks Jeremy. Glad to do that. As you
know, GAO follows the federal dollar, and in terms of federal programs,
a large number of the programs depend very heavily upon state and local
governments, so the message that we have is that federal, state, and
local governments are all in it together and the fiscal condition of the
state and local governments is essential to the success of federal
programs.

>> Jeremy Cluchey: And can you talk a little bit about the current
status of state and local government's fiscal position and how GAO's
model projects that's going to change over time?

>> Stan Czerwinski: Sure. Currently the position is that the governments
are under some stress. Our model simulates what will be happening in
terms of pressures upon the sector and what we're showing is continued
stress over the time period of our simulations.

>> Jeremy Cluchey: I think we have a slide to illustrate that, so maybe
we'll switch over to that.

>> Stan Czerwinski: Sure. Sure. As you can see from the slide that we
have, currently the line that shows the balance for the sector is
somewhat below where it should be but not dramatically. If you look over
time though, that line continues to slope downward. The message we have
here is that the stresses upon the sector should be addressed earlier
rather than later, because the longer you wait, the harder it's going to
get. The one thing I want to point out at the start is that our model
looks at the sector as a whole. We don't look at individual states or
localities. Also, as you probably know, state and local governments are
prohibited from running deficits, so we are not projecting that there'll
be deficits. What we're showing is stress upon the individual states and
localities because of the difference between their expenditures and
their revenues.

>> Jeremy Cluchey: Great. Our next question here is what sources of
revenue are state and local governments currently depending on?

>> Stan Czerwinski: I'm really glad we were asked that question because
this, as I mentioned at the start, the federal government depends very
heavily upon state and local governments to carry out its programs.
Conversely, state and local governments depend very heavily upon the
federal government as a source of revenue, and I think we have a chart
that we can show--

>> Jeremy Cluchey: We do.

>> Stan Czerwinski: them on that one, Jeremy.

>> Jeremy Cluchey: and it's up.

>> Stan Czerwinski: Good. As you can see from the chart, the states have
a number of, and localities have a number of own source revenues. Their
own source revenues primarily are income taxes, sales taxes and property
taxes, but if you look individually among the revenue sources, grants
and aids from federal government are the single largest source of
revenue to the sector. So again that stresses the interdependency that
there is between federal, state, and local governments where the federal
government depends upon state and local governments to carry out their
programs, but the state and local  governments depend upon the
governments for the money to run the programs and help their operations
in general.

>> Jeremy Cluchey: All right thank you for that.

>> Stan Czerwinski: Sure.

>> Jeremy Cluchey: Our next question here came in via email. What do
state and local governments spend their budgets on and has that changed
over time?

>> Stan Czerwinski: Oh. Oh it has changed and I think I have a chart for
that one too.

>> Jeremy Cluchey: You do.

>> Stan Czerwinski: So, so--

>> [Inaudible]

>> Stan Czerwinski: We're doing great so far. In terms of the sources of
programs, if you look, the growth is showing up in health care, and this
is actually a major point that we have in our model. For health care,
our look out into the future is that if this trend continues of growing
health care expenditures, there'll be essentially no way for state and
local governments to cut down in other areas enough to handle the
growing health care expenditures. There's another story or two that I
wanted to point out here and that is if you look at the education bar,
that is by far the largest single expenditure for the state and local
governments themselves, however, with the growing health care costs,
that is being choked out a bit. There is some good news though too. If
you look at income security, you'll see actually a decrease in what the
state and local governments have been spending [inaudible] security and
you might recall that during the 1990's there was a welfare reform
package that went through. What this shows is that when you do reform
and if you do it successfully, you can actually cut your costs, which
has an implication for health care going forward.

>> Jeremy Cluchey: All right thank you. Our next question now came in
via email. It's from Chris.

>> Stan Czerwinski: Uh hum.

>> Jeremy Cluchey: And he asks, "How much has state and local government
employment dropped?"

>> Stan Czerwinski: That wasn't something that we actually covered in
this review. This review that we're doing here is a simulation of the
sector as a whole, and of course employment is part of it but we don't
look specifically at that. However, GAO has done other work looking at
state programs and we hear anecdotal evidence of significant stress upon
the employment levels. Some places even about 10 percent, and the point
that I want to make here is if you look at the sectors importance to the
US economy, about 1 in every 7 jobs in this country is with a state and
local employee.

>> Jeremy Cluchey: All right well thank you for that for a response. We
have another question that came in via email from Stephen and he asks,
"How often does GAO update the state and fiscal outlook?"

>> Stan Czerwinski: We update annually, Stephen, and this actually is
the fifth year that we've been doing our model for the state and local
sector.

>> Jeremy Cluchey: All right. And a Twitter question now. What can be
done to neutralize the long-term fiscal pressures on state and local
governments?

>> Stan Czerwinski: Yeah. That's a really good question, and with our
model, if I could just take a step back for a second, not surprisingly
what we do is we look at revenues and expenditures and what we have
found is that on the long term stresses, it really is expenditure
driven, and the answer's actually pretty simple-- it's health care. The
health care costs are rising at such a significant rate that that is the
area that state and local governments are going to have to find cost
containment if they're going to make their budgets have less pressure.

>> Jeremy Cluchey: Chris has emailed with another question. What are the
impacts of pensions and post retirement costs to states?

>> Stan Czerwinski: Yeah. Thank you very much for that question Chris,
and actually we just put out a report in the last couple of weeks
looking at state and local pensions. The report is up on our web,
gao.gov. In terms of pensions, there's some good news and there's some
bad news. The good news is that the state and local pensions aren't a
major driver of the fiscal position of the sector. The bad news is that
the economy has been so rough in the past years that it has increased
the pressure on the pensions and what we found in the report that I just
mentioned that's up on the web for us is that state and local
governments have been taking a number of actions to change the
contributions and the benefits for their pension plans as well as trying
to retool their investment strategies and expectations of investment,
'cause it's those three things that really determine the fiscal health
of pensions.

>> Jeremy Cluchey: Another question via email. Recent news has talked
about the impact of welfare reform on growing unemployment. Can federal
funds fix these shortfalls?

>> Stan Czerwinski: Yeah, unfortunately this is a question that is
outside the scope of our review. As good as that question is, that's the
one that I really can't answer in this forum.

>> Jeremy Cluchey: Sure. All right, another question here, this
questioner asks about the near term fiscal issues that could affect
state and local governments--

>> Stan Czerwinski: Yeah.

>> Jeremy Cluchey: if you could talk and elaborate a little bit on
those.

>> Stan Czerwinski: Yeah, that's a really helpful question. As I
mentioned before, if you look long-term, the drivers are on the
expenditure side. Conversely, if you're looking short-term, the real
stresses on state and local governments have been on the revenue side.
And it's intuitive because if you think about the economy struggling as
it has the past several years, you see unemployment had increased which
has an effect upon sales taxes and income taxes. If people don't have
jobs, they're not buying things and obviously they're not paying as much
income taxes, 'cause that's down. There is some good news there too and
that is we've seen a turnaround in the last couple years, from the last
couple years on the revenue projections for the state and local
governments where we're starting to see income taxes and sales taxes
come up. There is one other major revenue stream that we've talked about
before and that's property taxes. Property taxes are primarily a source
of revenue for the local governments and with the economy struggling,
particularly with the housing issues, we had anticipated property taxes
declining. Property taxes actually had held their own for the past
several years, but unfortunately we're now starting to see a decline in
the property taxes, so that is a revenue stream particularly for local
governments that's under siege right now.

>> Jeremy Cluchey: All right, another question. What are the primary
fiscal challenges driving state and local governments in the long-term?

>> Stan Czerwinski: Well in the long-term as I mentioned, it's on the
expenditure side, and in a simple phrase it's, health care is the
driver. If state local governments working with the federal government
can contain health care costs, they will be in a much sol- more solid
financial footing going forward. At the same time there are a number of
other expenditures that state and local governments have to deal with--
salaries, their other programs. What we're projecting there actually is
fairly solid containment of those costs which helps, but without
addressing the health care issue that, they can't relieve this stress
successfully.

>> Jeremy Cluchey: And you've mentioned health care a couple times as a
driver of cost, can you elaborate a little bit on some of the issues
there--

>> Stan Czerwinski: Sure.

>> [inaudible].

>> Stan Czerwinski: Sure.

>> Jeremy Cluchey: And I can pull up the chart on that too.

>> Stan Czerwinski: Sure. On health care, you obviously have the
Medicaid program. As you probably know, Medicaid provides health care
services primarily to low income persons and this is a program that's
jointly funded by the federal and state government. That is a major
piece of the health care puzzle. The other part obviously is the state
and local employees themselves because you have health care benefits for
those employees and their retirees. So those are the major pieces, but
again, Medicaid is the single largest.

>> Jeremy Cluchey: All right we have a question from email, via email
here from Catherine. She asks, "What are some of the most positive
indicators in local conditions?"

>> Stan Czerwinski: Positive indicators. Well, probably the most
positive would be in terms of the expenditure side 'cause what we're
seeing there is local expenditures being, essentially holding the line.
On the revenue side, the local governments depend upon funds from state
governments that have passed through to them as well as their own source
which is primarily property taxes. Those are the pictures not quite as
rosy because we're seeing some stress in those areas. So I'd have to say
on the expenditure side is probably the most positive side.

>> Jeremy Cluchey: And the next question, how concerned should we be
about the fiscal pressures faced by state and local governments?

>> Stan Czerwinski: Well, you're asking GAO so and we're always very
cautious and this is a situation where actually the projections that we
show are cautious and optimistic. So as challenging as what we're
showing, there's a fair chance it could be worse. What I would suggest
to look at here is the interaction between federal, state, and local
governments and to look at the overall picture that you have of the
fiscal position of the state and local sector as well as the position of
the federal sector and they're both heading into difficult territories.
So the message there is that we should act sooner rather than later,
'cause it'll just get harder the longer we go.

>> Jeremy Cluchey: This next question has to do with the models
themselves and so maybe you could take this opportunity to talk a little
bit about those models--

>> Stan Czerwinski: Sure.

>> Jeremy Cluchey: for the simulations. How does GAO account for
uncertainty when projecting state and local fiscal outlook into the
future?

>> Stan Czerwinski: Sure. What we do with our model is that we have
tried to essentially mirror what goes on in the state and local
governments as a whole. So what we then do is put in equations that
match the different patterns and expenditures and revenues. We then
populate those equations with data from the Bureau of Economic Analysis.
What we didn't build in the model, and this is an interesting story, we
went and embedded the model with all the experts we could find to see
how it worked, and then what we have done since the model has been up
and running is we look back and we see how well did the model fit
actual, and then we make adjustments. So a long answer to your question
is by looking back and by calibrating, we make adjustments as we go
along. The other thing that we do too is we look at scenarios because
there are different things that can happen. Our model as a base case
that essentially says things will remain as they are. There won't be
changes to revenue policy or spending policy that's projected forward.
But what you can then do is make assumptions that there will be
different actions taken that have different impacts. So we then have
essentially a sensitivity analysis that we run on top of it too.

>> Jeremy Cluchey: All right. Thank you for that. We have a question
here via Twitter for Ryan. Ryan says, starts with a statement, "This
looks terrifying." And then he asks, "Is it really as terrifying as it
seems or am I missing something?"

>> Stan Czerwinski: [Laughing] It's a bit scary Ryan, but and you're not
missing anything, but the good news, as I mentioned, the earlier we take
the action, the easier it is to handle. And the thing that I'd point you
to, is that if you think about the first graphic that I showed which was
the line getting steeper and steeper below where it should be, it's
harder and harder to fill that gap as we go along. So the quicker we can
take some fundamental changes in the way we've done business, the easier
it'll be.

>> Jeremy Cluchey: And we have a question and statement here via email
from Ryan-- I'm not sure if it's the same Ryan 'cause they came in via
email, but this is what he says. "Can you clarify what we're supposed to
take away from this report?" He says, "It seems like the projections are
based on the assumption that states and localities won't increase their
revenue or decrease their expenditures, but this seems like a strange
assumption. They're required to balance their budgets, so we know they
will do this."

>> Stan Czerwinski: Right. Right, that goes back to the opening
statement that I made Ryan, and that is we know that state and local
governments are required to balance their budgets and therefore what we
have is simulations of pressure, not actual deficit. But what we show is
growing pressure unless action is taken. And that's the take-away, that
we need to take some action earlier rather than later.

>> Jeremy Cluchey: Another question via email. What other kinds of GAO
reports focus on US government fiscal conditions?

>> Stan Czerwinski: Sure. Sure we actually do have a body of work
looking at the federal fiscal position and what we do also is that we,
as we conduct our reviews in the program areas, we'll often take into
account the fiscal position either of the federal, state, or local
governments when we do that. And we have a web link on our site of
gao.gov that actually has the fiscal outlook for the gover- the federal
government as a whole as well as the state and local government. So if
you go to gao.gov and then look at our fiscal link, you can see some of
that work.

>> Jeremy Cluchey: Yeah I think if you go to gao.gov there's a featured
topic section on the lower right and a link to the fiscal outlook for
the federal government, long-term fiscal outlook, and also for state and
local governments is right there.

>> Stan Czerwinski: Thanks Jeremy.

>> Jeremy Cluchey: No problem.

>> Stan Czerwinski: You said it better than I could've.

>> Jeremy Cluchey: I spend a little bit of time on the website. This
next question also came in via email. Are there any other sources for
projections of state and local fiscal pressures, and how do they compare
to those from those GAO?

>> Stan Czerwinski: Yeah. Actually our model is unique. We are the only
place in the United States that can make these kind of simulations and
projections.

>> Jeremy Cluchey: Okay. So could you talk a little bit more about this
chart, the projection? Is it-- sorry, it's chart number one.

>> Stan Czerwinski: Sure. Sure.

>> Jeremy Cluchey: And in terms of the longevity that is projected here?

>> Stan Czerwinski: Yeah, yeah. And that actually goes back to the last
question too. We project out for 50 years, so we can do long-term
projections. In terms, there are some other places that can do some
short-term estimates of what's going to be happening with the state and
local sector and those are very much in line with what we say, but we're
the only ones who can take it out long-term. And again, our story is the
further out you get, unless we take some action, the worse the story
gets.

>> Jeremy Cluchey: All right, thank you for that. In one of the later
charts which I'll pull up, it emphasizes education spending as being a
major factor. Can, what can you say about trends in education spending?

>> Stan Czerwinski: Sure. There's actually two trends there. Education
spending is the largest single spending component for the state and
local sector itself and there is federal funding that goes with
education but frankly what the state and local put into it themselves is
lar--significantly larger than what the federal puts in. But the other
trend that I want to mention is that when you look at the percentage of
spending that state and locals are able to devote to education, that is
going down. So what we have is a programmatic area that depends heavily
on the state and local governments themselves with federal input, but
still the states have a very big piece of this, but it's one that they
seem to be able to fund less and less as time goes on.

>> Jeremy Cluchey: And we received another question via e-mail during
that answer I think referring to that chart. This person asked why the
increase in public safety spending?

>> Stan Czerwinski: Public safety spending is one that is very much--are
funded by state and local sources themselves, and this is where the
federal government doesn't participate as much as it does in some other
programs. The why is something that we didn't look at though.

>> Jeremy Cluchey: All right. Well, that will wrap it up for today. I
really appreciate you participating in this chat and I want to thank
everyone who's tuned in today and posted questions via e-mail and
Twitter. We really value this opportunity to have a conversation with
you about our new reports. We're hoping to do more of these moving
forward. If you have any feedback about today's chat we would really
appreciate it if you could e-mail it to askgaolive@gao.gov and we'll
take that into consideration as we look to how we can improve this
format. Thank you again. Thank you, Stan. If you need any more
information, please visit our website gao.gov. You can follow our latest
reports on Twitter, Twitter.com/usgao and also on Facebook,
Facebook.com/usgao. Thank you again.