State and Local Governments' Fiscal Outlook:

April 2011 Update

GAO-11-495SP: Published: Apr 6, 2011. Publicly Released: Apr 6, 2011.

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Fiscal sustainability presents a national challenge shared by all levels of government. Since 2007, GAO has published long-term fiscal simulations for the state and local government sector. These simulations show that, like the federal government, the state and local sector faces persistent and long-term fiscal pressures. Using the Bureau of Economic Analysis's National Income and Product Accounts (NIPA) as the primary data source, GAO's model projects the level of receipts and expenditures for the sector until 2060 based on current and historical spending and revenue patterns. GAO assumes the current set of policies in place across federal, state, and local governments remains constant. The model simulates the long-term fiscal outlook for the state and local sector as a whole and, while the model incorporates the Congressional Budget Office's (CBO) economic projections, adjustments are made to capture the budgetary effects of near-term cyclical swings in the economy. Because the model covers the sector in the aggregate, the fiscal outcomes for individual states and localities cannot be captured. This product is part of a body of work on the nation's long-term fiscal challenges. Related products can be found at http://www.gao.gov/special.pubs/longterm.

The state and local government sector continues to face near- and long-term fiscal challenges that grow over time. The fiscal challenges confronting the state and local sector add to the nation's overall fiscal difficulties. Although the sector's near-term fiscal picture has improved slightly since our March 2010 update, the economic downturn has created an unprecedented fiscal situation for states as revenues declined in tandem with the economy. As we have reported in previous model updates, the sector faces long-term fiscal challenges that grow over time. The model's simulations show that the fiscal position of the sector will steadily decline through 2060 absent any policy changes. Since most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations suggest that these governments would need to make substantial policy changes to avoid growing fiscal imbalances. That is, absent any intervention or policy changes, state and local governments would face an increasing gap between receipts and expenditures in the coming years. One of the factors contributing to the near-term fiscal picture is the decline in the sector's tax receipts. Total tax receipts declined nearly 5 percent from 2008 to 2009. Personal income and sales taxes accounted for most of the 2009 decline, dropping about 16 percent and 5 percent respectively. In 2010, neither receipt category grew more than 2 percent. In addition, 2010 total tax receipts still remained below their 2008 level as well as their 2008 share of Gross Domestic Product (GDP). This April 2011 update to our model incorporates these near-term revenue changes as well as recent expenditure data but focuses on the long-term outlook for state and local governments as a sector. The decline in the sector's operating balance over time is primarily driven by rising health-related costs. 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.

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