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

Transcript for: 2014 Update to GAO’s State and Local Fiscal Outlook
Model

Description: Audio interview by GAO staff with Michelle Sager, Director,
Strategic Issues

Related GAO Work: GAO-15-224SP: State and Local Governments’ Fiscal
Outlook: 2014 Update

Released: December 2014


[ Background Music ]

[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the U.S. Government Accountability Office. It's
December 2014. Nationwide state and local governments face long-term
fiscal sustainability challenges. Since 2007, GAO has published
simulations of fiscal trends in the state and local government sectors.
A team lead by Michelle Sager, a director in GAO's Strategic Issues
team, recently updated GAO's state and local fiscal outlook. GAO's
Jacques Arsenault sat down with Michelle to talk about what they found.

[ Jacques Arsenault: ] The state and local fiscal outlook uses a 50-year
fiscal gap as a way to measure fiscal challenges at the state and local
level. Can you talk about what this gap is? And what does it tell us?

[ Michelle Sager: ] To explain the fiscal gap and what it means, it's
likely helpful to first explain a few key aspects of GAO's state and
local model. In its simplest form, the state and local fiscal outlook
looks at the revenues, or the receipts, coming in to all state and local
governments compared to the expenditures going out for these
governments. The difference between receipts and expenditures is what we
refer to as the operating balance of state and local sector as a whole.
In other words, the simple version of the model is to think of a math
problem where expenditures are subtracted from receipts, and the
difference is the operating balance. The model then simulates the state
and local sectors ability to cover expenditures with receipts. One way
of using these data to illustrate the long-term outlook for the state
and local government sector is through a measure we refer to as the
fiscal gap. The fiscal gap is an estimate of the action that would be
needed today and then maintained for each year going forward to achieve
fiscal balance during the next 50 years from 2014 to 2063. Closing this
gap would require state and local governments to make policy changes to
assure that receipts are at least equal to expenditures. So, we
calculated that closing the fiscal gap would require action to be taken
today and then maintained for each year going forward, roughly
equivalent to an 18% reduction in state and local government current
expenditures. Closing the gap through revenue increases would require
action of a similar magnitude through increases in state and local tax
revenues. More likely, closing the fiscal gap would require some
combination of revenue increases and expenditure reductions. It's
important to note that a key assumption of the model is that the current
set of policies in place across state and local government remains
constant just for purposes of the simulation. Now we know that state and
local governments make policy changes to adjust their revenues and
expenditures and maintain balanced budgets. But we do not attempt to
predict what these changes might be. In other words, the fiscal gap
provides an illustration of the pressures that are facing the sector
rather than a prediction of future fiscal outcomes.

[ Jacques Arsenault: ] So, then how has the outlook for states and
localities changed since your last update?

[ Michelle Sager: ] As a long-term outlook for the sector in the
aggregate, the year-to-year variations and the findings tend to be
fairly subtle. Since GAO first completed the state and local model in
2007, our simulations have consistently shown that state and local
governments face long-term fiscal pressures. These pressures contribute
to the overall fiscal challenges for the nation as a whole.

[ Jacques Arsenault: ] One of the things that your report cited was
healthcare costs as one of the primary drivers of costs for states and
localities, can you talk about the impact of these costs?

[ Michelle Sager: ] The rising health-related costs affect states and
localities in two ways. First, state and local expenditures on Medicaid.
And second, the cost of healthcare compensation for state and local
government employees and retirees. The model simulation suggests that
the sectors health-related costs will be about 3.9% of gross domestic
product, or GDP, in 2014 and about 7.4% of GDP in 2060. In contrast,
other types of state and local government expenditures such as wages and
salaries for state and local employees decline as a percentage of GDP
and by 2060 would drop below the sectors health-related cost in our
model.

[ Jacques Arsenault: ] And finally, for taxpayers and for state and
local policymakers, what would you say is the bottom line of this
report?

[ Michelle Sager: ] The state and local government sector continues to
face fiscal challenges, which contribute to the overall fiscal
challenges of the nation as a whole. Our model simulation suggest that
the sector could continue to face a gap between revenue and spending
during the next 50 years and that state and local governments would need
to make substantial policy changes to avoid these fiscal imbalances in
the future. The bottom line is that fiscal sustainability presents a
national challenge shared by all levels of government.

[ Background Music ]

[ Narrator: ] To learn more, visit GAO.gov and be sure to tune in to the
next episode of GAO's Watchdog Report for more from the congressional
watchdog, the U.S. Government Accountability Office.