This is the accessible text file for GAO report number GAO-10-358 
entitled 'State And Local Governments' Fiscal Outlook: March 2010 
Update' which was released on March 2, 2010. 

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Report to the Congress: 

United States Government Accountability Office: 
GAO: 

March 2010: 

State And Local Governments' Fiscal Outlook: 

March 2010 Update: 

GAO-10-358: 

GAO Highlights: 

Highlights of GAO-10-358 , a report to the Congress. 

Why GAO Did This Study: 

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 government 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. This update incorporates NIPA data 
including increased federal grant funding made available to the sector 
through the American Recovery and Reinvestment Act of 2009. 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 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 [hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. 

What GAO Found: 

The state and local government sector continues to face near- and long-
term fiscal challenges which grow over time. Although the sector’s 
near-term operating balance remains negative, increases in federal 
grants-in-aid—largely from the Recovery Act—-alleviated some near-term 
pressure. As shown in the insert to the figure below, the March 2010 
operating balance measure (including 2009 Recovery Act funds) shows an 
improvement compared to the January 2009 simulation. In the near-term, 
the sector’s fiscal position can be attributed to several factors, 
including steep revenue declines. 

GAO projects that the sector’s long-term fiscal position will steadily 
decline through 2060 absent any policy changes, as shown in figure 1. 
The decline in the sector’s operating balance is primarily driven by 
rising health care costs. The fiscal challenges confronting the state 
and local sector add to the nation’s overall fiscal difficulties. 
Because most state and local governments are required to balance their 
operating budgets, the declining fiscal conditions shown in GAO’s 
simulations suggest the fiscal pressures the sector faces and the 
extent to which these governments will need to make substantial policy 
changes to avoid growing imbalances. 

Figure 1: State and Local Operating Balance Measure, as a Percentage 
of Gross Domestic Product: 

[Refer to PDF for image: multiple line graph] 

Positive balance indicates a surplus; 
Negative balance indicates a deficit. 

Year: 2000; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 2001; 
Operating Balance March 2010, Percentage of GDP: -0.3%. 

Year: 2002; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

Year: 2003; 
Operating Balance March 2010, Percentage of GDP: -0.5%. 

Year: 2004; 
Operating Balance March 2010, Percentage of GDP: -0.3%. 

Year: 2005; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 2006; 
Operating Balance March 2010, Percentage of GDP: 0.3%. 

Year: 2007; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Begin magnifying near-term fiscal position: 

Year: 2008; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.4%; 
Operating Balance March 2010, Percentage of GDP: -0.4%. 

Year: 2009; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.4%; 
Operating Balance March 2010, Percentage of GDP: -0.2%. 

Year: 2010; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.3%. 

Year: 2011; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2012; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2013; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.7%; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

End magnifying near-term fiscal position. 

Year: 2014; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.6%; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

Year: 2015; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.6%; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

Year: 2016; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.6%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2017; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.7%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2018; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.9%. 

Year: 2019; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.9%; 
Operating Balance March 2010, Percentage of GDP: -0.9%. 

Year: 2020; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.9%; 
Operating Balance March 2010, Percentage of GDP: -1.0%. 

Year: 2021; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.0%; 
Operating Balance March 2010, Percentage of GDP: -1.0%. 

Year: 2022; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.0%; 
Operating Balance March 2010, Percentage of GDP: -1.1%. 

Year: 2023; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.1%; 
Operating Balance March 2010, Percentage of GDP: -1.1%. 

Year: 2024; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.2%; 
Operating Balance March 2010, Percentage of GDP: -1.2%. 

Year: 2025; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.2%; 
Operating Balance March 2010, Percentage of GDP: -1.2%. 

Year: 2026; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.3%; 
Operating Balance March 2010, Percentage of GDP: -1.3%. 

Year: 2027; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.4%; 
Operating Balance March 2010, Percentage of GDP: -1.4%. 

Year: 2028; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.5%; 
Operating Balance March 2010, Percentage of GDP: -1.5%. 

Year: 2029; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.6%; 
Operating Balance March 2010, Percentage of GDP: -1.5%. 

Year: 2030; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.7%; 
Operating Balance March 2010, Percentage of GDP: -1.6%. 

Year: 2031; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.8%; 
Operating Balance March 2010, Percentage of GDP: -1.7%. 

Year: 2032; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.9%; 
Operating Balance March 2010, Percentage of GDP: -1.8%. 

Year: 2033; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.0%; 
Operating Balance March 2010, Percentage of GDP: -1.9%. 

Year: 2034; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.1%; 
Operating Balance March 2010, Percentage of GDP: -2.0%. 

Year: 2035; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.2%; 
Operating Balance March 2010, Percentage of GDP: -2.1%. 

Year: 2036; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.3%; 
Operating Balance March 2010, Percentage of GDP: -2.2%. 

Year: 2037; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.4%; 
Operating Balance March 2010, Percentage of GDP: -2.3%. 

Year: 2038; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.5%; 
Operating Balance March 2010, Percentage of GDP: -2.5%. 

Year: 2039; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.6%; 
Operating Balance March 2010, Percentage of GDP: -2.6%. 

Year: 2040; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.7%; 
Operating Balance March 2010, Percentage of GDP: -2.7%. 

Year: 2041; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.8%; 
Operating Balance March 2010, Percentage of GDP: -2.8%. 

Year: 2042; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.9%; 
Operating Balance March 2010, Percentage of GDP: -2.9%. 

Year: 2043; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.0%; 
Operating Balance March 2010, Percentage of GDP: -3.0%. 

Year: 2044; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.1%; 
Operating Balance March 2010, Percentage of GDP: -3.1%. 

Year: 2045; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.2%; 
Operating Balance March 2010, Percentage of GDP: -3.3%. 

Year: 2046; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.3%; 
Operating Balance March 2010, Percentage of GDP: -3.4%. 

Year: 2047; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.4%; 
Operating Balance March 2010, Percentage of GDP: -3.5%. 

Year: 2048; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.5%; 
Operating Balance March 2010, Percentage of GDP: -3.6%. 

Year: 2049; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.6%; 
Operating Balance March 2010, Percentage of GDP: -3.8%. 

Year: 2050; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.8%; 
Operating Balance March 2010, Percentage of GDP: -3.9%. 

Year: 2051; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.9%; 
Operating Balance March 2010, Percentage of GDP: -4.0%. 

Year: 2052; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.0%; 
Operating Balance March 2010, Percentage of GDP: -4.2%. 

Year: 2053; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.1%; 
Operating Balance March 2010, Percentage of GDP: -4.3%. 

Year: 2054; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.2%; 
Operating Balance March 2010, Percentage of GDP: -4.4%. 

Year: 2055; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.3%; 
Operating Balance March 2010, Percentage of GDP: -4.6%. 

Year: 2056; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.4%; 
Operating Balance March 2010, Percentage of GDP: -4.7%. 

Year: 2057; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.6%; 
Operating Balance March 2010, Percentage of GDP: -4.8%. 

Year: 2058; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.7%; 
Operating Balance March 2010, Percentage of GDP: -5.0%. 

Year: 2059; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.8%; 
Operating Balance March 2010, Percentage of GDP: -5.2%. 

Year: 2060; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.9%; 
Operating Balance March 2010, Percentage of GDP: -5.3%. 

Source: GAO simulations, updated March 2010 and January 2009 adjusted. 

Notes: The operating balance is a measure of the sector’s ability to 
cover its current expenditures out of current receipts. Historical 
data are from the Bureau of Economic Analysis’s NIPA accounts from 
1980 to 2008. Data in 2009 are GAO estimates aligned with published 
data where available. GAO simulations are from 2010 to 2060, using 
many Congressional Budget Office projections and assumptions, 
particularly for the next 10 years. Simulations are based on current 
policy. 

[End of figure] 

View [hyperlink, http://www.gao.gov/products/GAO-10-358] or key 
components. For more information, contact Stanley J. Czerwinski at 
(202) 512-6806 or czerwinskis@gao.gov or Thomas J. McCool at (202) 512-
2700 or mccoolt@gao.gov. 

[End of section] 

Contents: 

Letter: 

Infusion of Recovery Act Funds Helped State and Local Governments 
Address Budget Gaps in the Near-Term: 

State and Local Sector Continues to Face Long-Term Fiscal Challenges 
Driven by Growing Health Care Costs: 

Appendix I: Scope and Methodology: 

Appendix II: GAO Contacts and Staff Acknowledgments: 

Table: 

Table 1: Modifications to Assumptions for March 2010 Update: 

Figures: 

Figure 1: State and Local Operating Balance Measure, as a Percentage 
of Gross Domestic Product: 

Figure 2: State and Local Government Taxes, as a Percentage of Gross 
Domestic Product: 

Figure 3: State and Local Government Current Receipts by Category, 
2008: 

Figure 4: State and Local Government Grants, as a Percentage of Gross 
Domestic Product: 

Figure 5: Extent of State and Local Government Action Required to 
Maintain Balance (State and Local Expenditures, as a Percentage of 
Gross Domestic Product): 

Figure 6: Health and Non-Health Expenditures of State and Local 
Governments, as a Percentage of Gross Domestic Product: 

Figure 7: Federal and State/Local Surpluses and Deficits, as a 
Percentage of Gross Domestic Product: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

March 2, 2010: 

Report to the Congress: 

Fiscal sustainability presents a national challenge shared by all 
levels of government. Recent economic events and state and local 
government efforts to maintain balance during the current recession 
have called attention to the immediate challenges facing these 
governments. The recession has substantially reduced states' and local 
governments' combined tax revenues. These immediate challenges exist 
alongside daunting long-term fiscal challenges for all levels of 
government. 

For almost two decades, GAO has run long-term simulations showing that 
absent a change in policy, the combined effects of demographic changes 
and growing health care costs drive ever-increasing federal deficits 
and debt levels.[Footnote 1] Under the authority of the Comptroller 
General, GAO began publishing long-term fiscal simulations for the 
state and local government sector in 2007. This report updates GAO's 
state and local fiscal model for the purposes of (1) analyzing the 
near-term effects of the recent economic downturn on the sector and 
(2) assessing the long-term outlook of the sector and identifying the 
key drivers of this outlook. 

Using the U.S. Bureau of Economic Analysis's National Income and 
Product Accounts (NIPA) as the primary data source, our model projects 
the level of receipts and expenditures for the sector until 2060 based 
on current and historical spending and revenue patterns. We assume the 
current set of policies in place across federal, state, and local 
governments remains constant. This update incorporates NIPA data 
including increased federal grant funding made available to the sector 
through the American Recovery and Reinvestment Act of 2009 (Recovery 
Act). 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 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. Also, the model does not identify whether the state or local 
government sector faces greater challenges. For additional information 
on the model's key assumptions, see Appendix I. 

In summary, this March 2010 update to our model shows that the state 
and local government sector continues to face near-term budget and 
long-term fiscal challenges which grow over time. Although the 
sector's near-term operating balance remains negative, increases in 
federal grants-in-aid--largely from the Recovery Act--alleviated some 
near-term pressure. In the near-term, declines in the sector's fiscal 
position are attributable to several factors, including steep revenue 
declines. 

In the long-term, we project that the fiscal position will steadily 
decline through 2060 absent any policy changes. The decline in the 
sector's operating balance is primarily driven by rising health care 
costs. The fiscal challenges confronting the state and local sector 
add to the nation's overall fiscal difficulties. 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 and 
other adjustments to avoid growing fiscal imbalances. 

Infusion of Recovery Act Funds Helped State and Local Governments 
Address Budget Gaps in the Near-Term: 

This March 2010 update to our model shows that the state and local 
government sector faces near-term declines in its operating balance 
(figure 1).[Footnote 2] These declines in the sector's fiscal position 
are attributable to several factors, including a reduction in 
projected tax receipts. An increase in federal grants-in-aid--largely 
from the Recovery Act--has helped state and local governments address 
fiscal challenges in the near-term.[Footnote 3] As shown in the insert 
to the figure below, the March 2010 operating balance measure (which 
includes the 2009 Recovery Act funds) shows an improvement compared to 
the January 2009 simulation. 

Figure 1: State and Local Operating Balance Measure, as a Percentage 
of Gross Domestic Product[A]: 

[Refer to PDF for image: multiple line graph] 

Positive balance indicates a surplus; 
Negative balance indicates a deficit. 

Year: 1980; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 1981; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 1982; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 1983; 
Operating Balance March 2010, Percentage of GDP: 0.5%. 

Year: 1984; 
Operating Balance March 2010, Percentage of GDP: 0.6%. 

Year: 1985; 
Operating Balance March 2010, Percentage of GDP: 0.5%. 

Year: 1986; 
Operating Balance March 2010, Percentage of GDP: 0.6%. 

Year: 1987; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 1988; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 1989; 
Operating Balance March 2010, Percentage of GDP: 0.2%. 

Year: 1990; 
Operating Balance March 2010, Percentage of GDP: -0.2%. 

Year: 1991; 
Operating Balance March 2010, Percentage of GDP: -0.3%. 

Year: 1992; 
Operating Balance March 2010, Percentage of GDP: -0.2%. 

Year: 1993; 
Operating Balance March 2010, Percentage of GDP: -0.1%. 

Year: 1994; 
Operating Balance March 2010, Percentage of GDP: -0.2%. 

Year: 1995; 
Operating Balance March 2010, Percentage of GDP: -0.1%. 

Year: 1996; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 1997; 
Operating Balance March 2010, Percentage of GDP: 0.2%. 

Year: 1998; 
Operating Balance March 2010, Percentage of GDP: 0.4%. 

Year: 1999; 
Operating Balance March 2010, Percentage of GDP: 0.2%. 

Year: 2000; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 2001; 
Operating Balance March 2010, Percentage of GDP: -0.3%. 

Year: 2002; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

Year: 2003; 
Operating Balance March 2010, Percentage of GDP: -0.5%. 

Year: 2004; 
Operating Balance March 2010, Percentage of GDP: -0.3%. 

Year: 2005; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Year: 2006; 
Operating Balance March 2010, Percentage of GDP: 0.3%. 

Year: 2007; 
Operating Balance March 2010, Percentage of GDP: 0.1%. 

Begin magnifying near-term fiscal position: 

Year: 2008  
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.4%; 
Operating Balance March 2010, Percentage of GDP: -0.4%. 

Year: 2009; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.4%; 
Operating Balance March 2010, Percentage of GDP: -0.2%. 

Year: 2010; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.3%. 

Year: 2011; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2012; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2013; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.7%; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

End magnifying near-term fiscal position. 

Year: 2014; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.6%; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

Year: 2015; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.6%; 
Operating Balance March 2010, Percentage of GDP: -0.7%. 

Year: 2016; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.6%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2017; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.7%; 
Operating Balance March 2010, Percentage of GDP: -0.8%. 

Year: 2018; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.8%; 
Operating Balance March 2010, Percentage of GDP: -0.9%. 

Year: 2019; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.9%; 
Operating Balance March 2010, Percentage of GDP: -0.9%. 

Year: 2020; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-0.9%; 
Operating Balance March 2010, Percentage of GDP: -1.0%. 

Year: 2021; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.0%; 
Operating Balance March 2010, Percentage of GDP: -1.0%. 

Year: 2022; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.0%; 
Operating Balance March 2010, Percentage of GDP: -1.1%. 

Year: 2023; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.1%; 
Operating Balance March 2010, Percentage of GDP: -1.1%. 

Year: 2024; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.2%; 
Operating Balance March 2010, Percentage of GDP: -1.2%. 

Year: 2025; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.2%; 
Operating Balance March 2010, Percentage of GDP: -1.2%. 

Year: 2026; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.3%; 
Operating Balance March 2010, Percentage of GDP: -1.3%. 

Year: 2027; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.4%; 
Operating Balance March 2010, Percentage of GDP: -1.4%. 

Year: 2028; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.5%; 
Operating Balance March 2010, Percentage of GDP: -1.5%. 

Year: 2029; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.6%; 
Operating Balance March 2010, Percentage of GDP: -1.5%. 

Year: 2030; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.7%; 
Operating Balance March 2010, Percentage of GDP: -1.6%. 

Year: 2031; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.8%; 
Operating Balance March 2010, Percentage of GDP: -1.7%. 

Year: 2032; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-1.9%; 
Operating Balance March 2010, Percentage of GDP: -1.8%. 

Year: 2033; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.0%; 
Operating Balance March 2010, Percentage of GDP: -1.9%. 

Year: 2034; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.1%; 
Operating Balance March 2010, Percentage of GDP: -2.0%. 

Year: 2035; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.2%; 
Operating Balance March 2010, Percentage of GDP: -2.1%. 

Year: 2036; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.3%; 
Operating Balance March 2010, Percentage of GDP: -2.2%. 

Year: 2037; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.4%; 
Operating Balance March 2010, Percentage of GDP: -2.3%. 

Year: 2038; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.5%; 
Operating Balance March 2010, Percentage of GDP: -2.5%. 

Year: 2039; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.6%; 
Operating Balance March 2010, Percentage of GDP: -2.6%. 

Year: 2040; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.7%; 
Operating Balance March 2010, Percentage of GDP: -2.7%. 

Year: 2041; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.8%; 
Operating Balance March 2010, Percentage of GDP: -2.8%. 

Year: 2042; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-2.9%; 
Operating Balance March 2010, Percentage of GDP: -2.9%. 

Year: 2043; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.0%; 
Operating Balance March 2010, Percentage of GDP: -3.0%. 

Year: 2044; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.1%; 
Operating Balance March 2010, Percentage of GDP: -3.1%. 

Year: 2045; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.2%; 
Operating Balance March 2010, Percentage of GDP: -3.3%. 

Year: 2046; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.3%; 
Operating Balance March 2010, Percentage of GDP: -3.4%. 

Year: 2047; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.4%; 
Operating Balance March 2010, Percentage of GDP: -3.5%. 

Year: 2048; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.5%; 
Operating Balance March 2010, Percentage of GDP: -3.6%. 

Year: 2049; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.6%; 
Operating Balance March 2010, Percentage of GDP: -3.8%. 

Year: 2050; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.8%; 
Operating Balance March 2010, Percentage of GDP: -3.9%. 

Year: 2051; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-3.9%; 
Operating Balance March 2010, Percentage of GDP: -4.0%. 

Year: 2052; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.0%; 
Operating Balance March 2010, Percentage of GDP: -4.2%. 

Year: 2053; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.1%; 
Operating Balance March 2010, Percentage of GDP: -4.3%. 

Year: 2054; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.2%; 
Operating Balance March 2010, Percentage of GDP: -4.4%. 

Year: 2055; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.3%; 
Operating Balance March 2010, Percentage of GDP: -4.6%. 

Year: 2056; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.4%; 
Operating Balance March 2010, Percentage of GDP: -4.7%. 

Year: 2057; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.6%; 
Operating Balance March 2010, Percentage of GDP: -4.8%. 

Year: 2058; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.7%; 
Operating Balance March 2010, Percentage of GDP: -5.0%. 

Year: 2059; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.8%; 
Operating Balance March 2010, Percentage of GDP: -5.2%. 

Year: 2060; 
Operating Balance January 2009 Adjusted, Percentage of GDP: 
-4.9%; 
Operating Balance March 2010, Percentage of GDP: -5.3%. 

Source: GAO simulations, updated March 2010 and January 2009 adjusted. 

Notes: Historical data are from the Bureau of Economic Analysis's 
National Income and Product Accounts from 1980 to 2008. Data in 2009 
are GAO estimates aligned with published data where available. GAO 
simulations are from 2010 to 2060, using many Congressional Budget 
Office projections and assumptions, particularly for the next 10 
years. Simulations are based on current policy. 

[A] Data for this and other figures in this report can be downloaded 
at [hyperlink, http://www.gao.gov/special.pubs/longterm/data.html]. 

[End of figure] 

The model uses the operating balance as a measure of fiscal balance 
for the sector for each year until 2060.[Footnote 4] As illustrated in 
figure 1, the operating balance generally was positive in the past 
except during and after recent recessions. This suggests that, in the 
aggregate, the sector had been able to cover its expenses with 
incoming receipts. 

The model results in near-term projected deficits, even after the 
inclusion of updated NIPA data which reflect Recovery Act grant funds 
received by state and local governments.[Footnote 5] Specifically, the 
model estimates operating deficits for the state and local sector of 
about $39 billion for 2010 and $124 billion for 2011. The cumulative 
two-year projected operating deficit is estimated to total 
approximately $163 billion for 2010 and 2011.[Footnote 6] These 
results confirm our recent finding that while states' near-term 
revenue shortfalls have been cushioned by the temporary infusion of 
Recovery Act funds, states will continue to be fiscally stressed. 
[Footnote 7] 

One of the factors contributing to the model's projected near-term 
deficits is the sector's decline in some tax receipt categories, as 
illustrated in figure 2. Total tax receipts for the sector declined 
from about 9.25 percent of GDP in 2008 to 8.80 percent of GDP in 2009. 
We project a slight increase in total tax receipts to 8.82 percent of 
GDP in 2010.[Footnote 8] Personal income tax receipts declined from 
about 2.3 percent of GDP in 2008 to 1.9 percent in 2009. We project 
that these receipts will increase as a share of GDP beginning in 2009. 
As a percentage of GDP, state and local personal income tax declines 
exceeded revenue shifts from sales and property tax. Property tax 
receipts as a percentage of GDP increased from about 2.8 percent in 
2008 to about 3.0 percent in 2009. While property taxes increased as a 
percentage of GDP, property tax receipts increased just 2.7 percent-- 
from about $411 billion in 2008 to $422 billion in 2009, the lowest 
annual increase since 1995. In addition, GDP decreased 1.3 percent-- 
from about $14.4 trillion to about $14.3 trillion during the same 
period. We project that property tax receipts will continue to be 
about 3.0 percent of GDP through 2015. 

Figure 2: State and Local Government Taxes, as a Percentage of Gross 
Domestic Product: 

[Refer to PDF for image: multiple line graph] 

Percentage of GDP: 

Year: 2005; 
Personal Income: 2.2%; 
Sales Tax: 3.2%; 
Property Tax: 2.7%. 

Year: 2006; 
Personal Income: 2.3%; 
Sales Tax: 3.2%; 
Property Tax: 2.8%. 

Year: 2007; 
Personal Income: 2.3%; 
Sales Tax: 3.2%; 
Property Tax: 2.8%. 

Year: 2008; 
Personal Income: 2.3%; 
Sales Tax: 3.1%; 
Property Tax: 2.8%. 

Year: 2009; 
Personal Income: 1.9%; 
Sales Tax: 3.0%; 
Property Tax: 3.0%. 

Year: 2010; 
Personal Income: 2.1%; 
Sales Tax: 2.9%; 
Property Tax: 2.8%. 

Year: 2011; 
Personal Income: 2.2%; 
Sales Tax: 2.9%; 
Property Tax: 2.8%. 

Year: 2012; 
Personal Income: 2.2%; 
Sales Tax: 2.9%; 
Property Tax: 2.8%. 

Year: 2013; 
Personal Income: 2.2%; 
Sales Tax: 2.9%; 
Property Tax: 2.8%. 

Year: 2014; 
Personal Income: 2.3%; 
Sales Tax: 2.9%; 
Property Tax: 2.9%. 

Year: 2015; 
Personal Income: 2.3%; 
Sales Tax: 2.9%; 
Property Tax: 2.9%. 

Source: GAO simulations, updated March 2010. 

Notes: Historical data are from the Bureau of Economic Analysis's 
National Income and Product Accounts from 1980 to 2008. Data in 2009 
are GAO estimates aligned with published data where available. GAO 
simulations are from 2010 to 2060, using many Congressional Budget 
Office projections and assumptions, particularly for the next 10 
years. Simulations are based on current policy. 

[End of figure] 

The state and local government sector's receipts in 2008 totaled 
almost $2 trillion. As illustrated in figure 3, 68 percent--or about 
$1.3 trillion in 2008--of the sector's receipts are comprised of tax 
receipts, including personal income, sales, and property taxes. 
Federal grants-in-aid comprise the second largest source of receipts 
for the sector, providing about $392 billion to the sector. In 2008, 
the sector had about $246 billion in other receipts, including income 
on assets and contributions for government insurance. 

Figure 3: State and Local Government Current Receipts by Category, 
2008: 

[Refer to PDF for image: pie-chart] 

Current tax receipts: 68%; 
Federal grants-in-aid: 20%; 
Other receipts: 12%. 

Source: GAO analysis of NIPA data. 

Notes: Other receipts includes income on assets, contributions for 
government insurance, surplus from government enterprises, and 
transfer receipts from businesses and persons. 

[End of figure] 

In the near-term, federal grants-in-aid--which in 2009 included 
funding from the Recovery Act--helped offset the sector's tax receipt 
declines. Medicaid and other federal grants are projected to grow as a 
share of GDP through 2010 (figure 4).[Footnote 9] After 2010, the 
model projects that as a percentage of GDP, Medicaid grants will 
decline through 2012 and then begin to increase. Other federal grants--
including those for education, highways, weatherization, housing, and 
other programs--are projected to decline as a percentage of GDP after 
2010, consistent with CBO's assumptions. 

Figure 4: State and Local Government Grants, as a Percentage of Gross 
Domestic Product: 

[Refer to PDF for image: multiple line graph] 

Percentage of GDP: 

Year: 2005; 
Medicaid Grants: 1.4%; 
Other Grants: 1.4%. 

Year: 2006; 
Medicaid Grants: 1.3%; 
Other Grants: 1.3%. 

Year: 2007; 
Medicaid Grants: 1.3%; 
Other Grants: 1.3%. 

Year: 2008; 
Medicaid Grants: 1.4%; 
Other Grants: 1.3%. 

Year: 2009; 
Medicaid Grants: 1.8%; 
Other Grants: 1.5%. 

Year: 2010; 
Medicaid Grants: 1.8%; 
Other Grants: 1.8%. 

Year: 2011; 
Medicaid Grants: 1.7%; 
Other Grants: 1.6%. 

Year: 2012; 
Medicaid Grants: 1.7%; 
Other Grants: 1.3%. 

Year: 2013; 
Medicaid Grants: 1.6%; 
Other Grants: 1.2%. 

Year: 2014; 
Medicaid Grants: 1.7%; 
Other Grants: 1.1%. 

Year: 2015; 
Medicaid Grants: 1.7%; 
Other Grants: 1.0%. 

Source: GAO simulations, updated March 2010. 

Note: Historical data are from the Bureau of Economic Analysis's 
National Income and Product Accounts from 1980 to 2008. Data in 2009 
are GAO estimates aligned with published data where available. GAO 
simulations are from 2010 to 2060, using many Congressional Budget 
Office projections and assumptions, particularly for the next 10 
years. Simulations are based on current policy. 

[End of figure] 

State and Local Sector Continues to Face Long-Term Fiscal Challenges 
Driven by Growing Health Care Costs: 

The fiscal challenges confronting the state and local sector add to 
the nation's overall fiscal difficulties. As we have reported in 
previous model updates, and as shown in figure 1 above, the sector 
faces growing long-term fiscal challenges.[Footnote 10] We project 
that the fiscal position of the sector will steadily decline through 
2060 absent any policy changes.[Footnote 11] The decline in the 
sector's operating balance is primarily driven by rising health care 
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. 

One way of measuring the long-term challenges faced by the state and 
local sector is through a measure known as the "fiscal gap." The 
fiscal gap is an estimate of the action needed today and maintained 
for each and every year to achieve fiscal balance over a certain 
period. We measured the gap as the amount of spending reduction or tax 
increase needed to prevent operating deficits (or negative operating 
balances). As shown in figure 5, we calculated that closing the fiscal 
gap would require action to be taken today and maintained for each and 
every year going forward equivalent to a 12.3 percent reduction in 
state and local government current expenditures. Closing the fiscal 
gap through revenue increases would require action of a similar 
magnitude through increased state and local tax receipts. 

Figure 5: Extent of State and Local Government Action Required to 
Maintain Balance (State and Local Expenditures, as a Percentage of 
Gross Domestic Product): 

[Refer to PDF for image: multiple line graph] 

Percentage of GDP: 

Year: 2000; 
Base Case: 14.1%; 
Maintain Balance: 14.1%. 

Year: 2001; 
Base Case: 14.8%; 
Maintain Balance: 14.8%. 

Year: 2002; 
Base Case: 15.1%; 
Maintain Balance: 15.1%. 

Year: 2003; 
Base Case: 15.1%; 
Maintain Balance: 15.1%. 

Year: 2004; 
Base Case: 14.8%; 
Maintain Balance: 14.8%. 

Year: 2005; 
Base Case: 14.6%; 
Maintain Balance: 14.6%. 

Year: 2006; 
Base Case: 14.4%; 
Maintain Balance: 14.4%. 

Year: 2007; 
Base Case: 14.7%; 
Maintain Balance: 14.7%. 

Year: 2008; 
Base Case: 15.1%; 
Maintain Balance: 15.1%. 

Year: 2009; 
Base Case: 15.4%; 
Maintain Balance: 15.2%. 

Year: 2010; 
Base Case: 15.5%; 
Maintain Balance: 15.3%. 

Year: 2011; 
Base Case: 15.8%; 
Maintain Balance: 15.0%. 

Year: 2012; 
Base Case: 15.4%; 
Maintain Balance: 14.6%. 

Year: 2013; 
Base Case: 15.1%; 
Maintain Balance: 14.4%. 

Year: 2014; 
Base Case: 15.0%; 
Maintain Balance: 14.4%. 

Year: 2015; 
Base Case: 15.1%; 
Maintain Balance: 14.4%. 

Year: 2016; 
Base Case: 15.1%; 
Maintain Balance: 14.4%. 

Year: 2017; 
Base Case: 15.2%; 
Maintain Balance: 14.4%. 

Year: 2018; 
Base Case: 15.4%; 
Maintain Balance: 14.5%. 

Year: 2019; 
Base Case: 15.5%; 
Maintain Balance: 14.5%. 

Year: 2020; 
Base Case: 15.5%; 
Maintain Balance: 14.6%. 

Year: 2021; 
Base Case: 15.6%; 
Maintain Balance: 14.6%. 

Year: 2022; 
Base Case: 15.7%; 
Maintain Balance: 14.6%. 

Year: 2023; 
Base Case: 15.8%; 
Maintain Balance: 14.7%. 

Year: 2024; 
Base Case: 15.8%; 
Maintain Balance: 14.7%. 

Year: 2025; 
Base Case: 15.9%; 
Maintain Balance: 14.7%. 

Year: 2026; 
Base Case: 16.0%; 
Maintain Balance: 14.7%. 

Year: 2027; 
Base Case: 16.1%; 
Maintain Balance: 14.8%. 

Year: 2028; 
Base Case: 16.3%; 
Maintain Balance: 14.8%. 

Year: 2029; 
Base Case: 16.4%; 
Maintain Balance: 14.8%. 

Year: 2030; 
Base Case: 16.5%; 
Maintain Balance: 14.9%. 

Year: 2031; 
Base Case: 16.6%; 
Maintain Balance: 14.9%. 

Year: 2032; 
Base Case: 16.8%; 
Maintain Balance: 15.0%. 

Year: 2033; 
Base Case: 16.9%; 
Maintain Balance: 15.0%. 

Year: 2034; 
Base Case: 17.1%; 
Maintain Balance: 15.1%. 

Year: 2035; 
Base Case: 17.2%; 
Maintain Balance: 15.1%. 

Year: 2036; 
Base Case: 17.4%; 
Maintain Balance: 15.2%. 

Year: 2037; 
Base Case: 17.5%; 
Maintain Balance: 15.2%. 

Year: 2038; 
Base Case: 17.7%; 
Maintain Balance: 15.3%. 

Year: 2039; 
Base Case: 17.8%; 
Maintain Balance: 15.3%. 

Year: 2040; 
Base Case: 18.0%; 
Maintain Balance: 15.4%. 

Year: 2041; 
Base Case: 18.2%; 
Maintain Balance: 15.4%. 

Year: 2042; 
Base Case: 18.3%; 
Maintain Balance: 15.4%. 

Year: 2043; 
Base Case: 18.5%; 
Maintain Balance: 15.5%. 

Year: 2044; 
Base Case: 18.6%; 
Maintain Balance: 15.5%. 

Year: 2045; 
Base Case: 18.8%; 
Maintain Balance: 15.6%. 

Year: 2046; 
Base Case: 18.9%; 
Maintain Balance: 15.6%. 

Year: 2047; 
Base Case: 19.1%; 
Maintain Balance: 15.6%. 

Year: 2048; 
Base Case: 19.3%; 
Maintain Balance: 15.7%. 

Year: 2049; 
Base Case: 19.5%; 
Maintain Balance: 15.7%. 

Year: 2050; 
Base Case: 19.6%; 
Maintain Balance: 15.7%. 

Year: 2051; 
Base Case: 19.8%; 
Maintain Balance: 15.8%. 

Year: 2052; 
Base Case: 20.0%; 
Maintain Balance: 15.8%. 

Year: 2053; 
Base Case: 20.1%; 
Maintain Balance: 15.8%. 

Year: 2054; 
Base Case: 20.3%; 
Maintain Balance: 15.9%. 

Year: 2055; 
Base Case: 20.4%; 
Maintain Balance: 15.9%. 

Year: 2056; 
Base Case: 20.6%; 
Maintain Balance: 15.9%. 

Year: 2057; 
Base Case: 20.8%; 
Maintain Balance: 15.9%. 

Year: 2058; 
Base Case: 20.9%; 
Maintain Balance: 16.0%. 

Year: 2059; 
Base Case: 21.2%; 
Maintain Balance: 16.0%. 

Year: 2060; 
Base Case: 21.3%; 
Maintain Balance: 16.0%. 

Source: GAO simulations, updated March 2010. 

Note: Historical data are from the Bureau of Economic Analysis's 
National Income and Product Accounts from 1980 to 2008. Data in 2009 
are GAO estimates aligned with published data where available. GAO 
simulations are from 2010 to 2060, using many Congressional Budget 
Office projections and assumptions, particularly for the next 10 
years. Simulations are based on current policy. In the "base case" 
model we assume that the tax structure is not changed in the future 
and that the provision of real government services per capita remains 
roughly constant. That is, a basic assumption of our model is that the 
current set of policies in place across state and local government 
remains constant. 

[End of figure] 

The primary driver of fiscal challenges for the state and local 
government sector continues to be the growth in health-related costs. 
Specifically, state and local expenditures on Medicaid and the cost of 
health insurance for state and local retirees and employees are 
projected to grow more than GDP.[Footnote 12] The model also projects 
that the sector's health-related costs will be about 3.5 percent of 
GDP in 2010 and 3.8 percent of GDP in 2011. In contrast, we found that 
other types of state and local government expenditures--including 
wages and salaries of state and local workers and investments in 
capital goods--are expected to grow slightly less than GDP. We also 
found that revenue growth, excluding Medicaid grants from the federal 
government, is projected to be relatively flat as a percentage of GDP. 
As such, the projected rise in health-related costs is the root of the 
fiscal difficulties these simulations suggest will occur. Our 
simulations for health-related and other expenditures are shown in 
figure 6.[Footnote 13] 

Figure 6: Health and Non-Health Expenditures of State and Local 
Governments, as a Percentage of Gross Domestic Product: 

[Refer to PDF for image: multiple line graph] 

Percentage of GDP: 

Year: 2000; 
Non-health care Expenditures: 10.7%; 
Health Care Expenditures: 2.6%. 

Year: 2001; 
Non-health care Expenditures: 11.1%; 
Health Care Expenditures: 2.9%. 

Year: 2002; 
Non-health care Expenditures: 11.2%; 
Health Care Expenditures: 3.1%. 

Year: 2003; 
Non-health care Expenditures: 11.1%; 
Health Care Expenditures: 3.2%. 

Year: 2004; 
Non-health care Expenditures: 10.8%; 
Health Care Expenditures: 3.3%. 

Year: 2005; 
Non-health care Expenditures: 10.7%; 
Health Care Expenditures: 3.3%. 

Year: 2006; 
Non-health care Expenditures: 10.7%; 
Health Care Expenditures: 3.1%. 

Year: 2007; 
Non-health care Expenditures: 10.9%; 
Health Care Expenditures: 3.2%. 

Year: 2008; 
Non-health care Expenditures: 11.2%; 
Health Care Expenditures: 3.2%. 

Year: 2009; 
Non-health care Expenditures: 11.2%; 
Health Care Expenditures: 3.4%. 

Year: 2010; 
Non-health care Expenditures: 11.2%; 
Health Care Expenditures: 3.5%. 

Year: 2011; 
Non-health care Expenditures: 11.2%; 
Health Care Expenditures: 3.8%. 

Year: 2012; 
Non-health care Expenditures: 10.8%; 
Health Care Expenditures: 3.7%. 

Year: 2013; 
Non-health care Expenditures: 10.5%; 
Health Care Expenditures: 3.7%. 

Year: 2014; 
Non-health care Expenditures: 10.3%; 
Health Care Expenditures: 3.8%. 

Year: 2015; 
Non-health care Expenditures: 10.2%; 
Health Care Expenditures: 3.9%. 

Year: 2016; 
Non-health care Expenditures: 10.1%; 
Health Care Expenditures: 4.0%. 

Year: 2017; 
Non-health care Expenditures: 10.0%; 
Health Care Expenditures: 4.1%. 

Year: 2018; 
Non-health care Expenditures: 9.9%; 
Health Care Expenditures: 4.2%. 

Year: 2019; 
Non-health care Expenditures: 9.9%; 
Health Care Expenditures: 4.3%. 

Year: 2020; 
Non-health care Expenditures: 9.8%; 
Health Care Expenditures: 4.4%. 

Year: 2021; 
Non-health care Expenditures: 9.7%; 
Health Care Expenditures: 4.5%. 

Year: 2022; 
Non-health care Expenditures: 9.6%; 
Health Care Expenditures: 4.5%. 

Year: 2023; 
Non-health care Expenditures: 9.6%; 
Health Care Expenditures: 4.6%. 

Year: 2024; 
Non-health care Expenditures: 9.5%; 
Health Care Expenditures: 4.7%. 

Year: 2025; 
Non-health care Expenditures: 9.5%; 
Health Care Expenditures: 4.8%. 

Year: 2026; 
Non-health care Expenditures: 9.4%; 
Health Care Expenditures: 4.9%. 

Year: 2027; 
Non-health care Expenditures: 9.3%; 
Health Care Expenditures: 5.0%. 

Year: 2028; 
Non-health care Expenditures: 9.3%; 
Health Care Expenditures: 5.1%. 

Year: 2029; 
Non-health care Expenditures: 9.2%; 
Health Care Expenditures: 5.2%. 

Year: 2030; 
Non-health care Expenditures: 9.2%; 
Health Care Expenditures: 5.3%. 

Year: 2031; 
Non-health care Expenditures: 9.1%; 
Health Care Expenditures: 5.4%. 

Year: 2032; 
Non-health care Expenditures: 9.1%; 
Health Care Expenditures: 5.5%. 

Year: 2033; 
Non-health care Expenditures: 9.0%; 
Health Care Expenditures: 5.7%. 

Year: 2034; 
Non-health care Expenditures: 9.0%; 
Health Care Expenditures: 5.8%. 

Year: 2035; 
Non-health care Expenditures: 8.9%; 
Health Care Expenditures: 5.9%. 

Year: 2036; 
Non-health care Expenditures: 8.9%; 
Health Care Expenditures: 6.1%. 

Year: 2037; 
Non-health care Expenditures: 8.8%; 
Health Care Expenditures: 6.2%. 

Year: 2038; 
Non-health care Expenditures: 8.8%; 
Health Care Expenditures: 6.3%. 

Year: 2039; 
Non-health care Expenditures: 8.7%; 
Health Care Expenditures: 6.4%. 

Year: 2040; 
Non-health care Expenditures: 8.7%; 
Health Care Expenditures: 6.6%. 

Year: 2041; 
Non-health care Expenditures: 8.6%; 
Health Care Expenditures: 6.7%. 

Year: 2042; 
Non-health care Expenditures: 8.6%; 
Health Care Expenditures: 6.8%. 

Year: 2043; 
Non-health care Expenditures: 8.5%; 
Health Care Expenditures: 6.9%. 

Year: 2044; 
Non-health care Expenditures: 8.5%; 
Health Care Expenditures: 7.0%. 

Year: 2045; 
Non-health care Expenditures: 8.4%; 
Health Care Expenditures: 7.1%. 

Year: 2046; 
Non-health care Expenditures: 8.4%; 
Health Care Expenditures: 7.2%. 

Year: 2047; 
Non-health care Expenditures: 8.3%; 
Health Care Expenditures: 7.3%. 

Year: 2048; 
Non-health care Expenditures: 8.3%; 
Health Care Expenditures: 7.4%. 

Year: 2049; 
Non-health care Expenditures: 8.2%; 
Health Care Expenditures: 7.5%. 

Year: 2050; 
Non-health care Expenditures: 8.2%; 
Health Care Expenditures: 7.6%. 

Year: 2051; 
Non-health care Expenditures: 8.2%; 
Health Care Expenditures: 7.7%. 

Year: 2052; 
Non-health care Expenditures: 8.1%; 
Health Care Expenditures: 7.8%. 

Year: 2053; 
Non-health care Expenditures: 8.1%; 
Health Care Expenditures: 7.9%. 

Year: 2054; 
Non-health care Expenditures: 8.1%; 
Health Care Expenditures: 7.9%. 

Year: 2055; 
Non-health care Expenditures: 8.0%; 
Health Care Expenditures: 8.0%. 

Year: 2056; 
Non-health care Expenditures: 8.0%; 
Health Care Expenditures: 8.1%. 

Year: 2057; 
Non-health care Expenditures: 8.0%; 
Health Care Expenditures: 8.1%. 

Year: 2058; 
Non-health care Expenditures: 7.9%; 
Health Care Expenditures: 8.2%. 

Year: 2059; 
Non-health care Expenditures: 7.9%; 
Health Care Expenditures: 8.3%. 

Year: 2060; 
Non-health care Expenditures: 7.9%; 
Health Care Expenditures: 8.4%. 

Source: GAO simulations, updated March 2010. 

Note: Historical data are from the Bureau of Economic Analysis's 
National Income and Product Accounts from 1980 to 2008. Data in 2009 
are GAO estimates aligned with published data where available. GAO 
simulations are from 2010 to 2060, using many Congressional Budget 
Office projections and assumptions, particularly for the next 10 
years. Simulations are based on current policy. 

[End of figure] 

Recent declines in pension asset values stemming from the current 
recession could also affect the sector's long-term fiscal position. 
The sector experienced a decline in pension asset values of 27.6 
percent--from $3.2 trillion at the end of 2007 to $2.3 trillion at the 
end of 2008. Our March 2009 estimate of the sector's required 
contribution rate rose to 9.9 percent of the sector's wages, which is 
higher than the sector's actual 8.3 percent of wages contributed in 
2008. While governments can postpone increasing the annual 
contribution rate, postponing action could increase the rate needed to 
fully fund pensions. In addition to declines in pension asset values 
and the challenge of fully funding pension benefits, state and local 
governments also face challenges funding their liabilities for other 
public employee benefits (which are primarily retiree health 
benefits). [Footnote 14] 

Similar to these state and local model findings, our most recent long- 
term federal model simulations continue to show health spending as one 
of the key drivers of long-term, unsustainable structural deficits. 
[Footnote 15] As we, the CBO, and others have previously reported, the 
continued rise in health care costs poses challenges to not only the 
budgets of federal, state, and local governments, but also to American 
businesses, families, and societies as a whole. Figure 7 shows two 
simulations for the federal fiscal path under alternative assumptions 
and overlays the simulated fiscal imbalance of the state and local 
government sector. The overlay of the state and local government 
model's simulations in both the baseline and alternative scenarios 
shows that state and local governments' fiscal challenges impose 
further fiscal challenges on the nation's economy in the next several 
decades. 

Figure 7: Federal and State/Local Surpluses and Deficits, as a 
Percentage of Gross Domestic Product: 

[Refer to PDF for image: multiple line graph] 

Percentage of GDP: 

Year: 2000; 
Baseline Extended: Federal Only: 2.4%; 
Baseline Extended: Federal, State and Local: 2.1%; 
Alternative: Federal Only: 2.4%; 
Alternative: Federal, State and Local: 2.1%. 

Year: 2001; 
Baseline Extended: Federal Only: 1.3%; 
Baseline Extended: Federal, State and Local: 0.3%; 
Alternative: Federal Only: 1.3%; 
Alternative: Federal, State and Local: 0.3%. 

Year: 2002; 
Baseline Extended: Federal Only: -1.5%; 
Baseline Extended: Federal, State and Local: -2.9%; 
Alternative: Federal Only: -1.5%; 
Alternative: Federal, State and Local: -2.9%. 

Year: 2003; 
Baseline Extended: Federal Only: -3.5%; 
Baseline Extended: Federal, State and Local: -4.7%; 
Alternative: Federal Only: -3.5%; 
Alternative: Federal, State and Local: -4.7%. 

Year: 2004; 
Baseline Extended: Federal Only: -3.6%; 
Baseline Extended: Federal, State and Local: -4.5%; 
Alternative: Federal Only: -3.6%; 
Alternative: Federal, State and Local: -4.5%. 

Year: 2005; 
Baseline Extended: Federal Only: -2.6%; 
Baseline Extended: Federal, State and Local: -3.1%; 
Alternative: Federal Only: -2.6%; 
Alternative: Federal, State and Local: -3.1%. 

Year: 2006; 
Baseline Extended: Federal Only: -1.9%; 
Baseline Extended: Federal, State and Local: -2.2%; 
Alternative: Federal Only: -1.9%; 
Alternative: Federal, State and Local: -2.2%. 

Year: 2007; 
Baseline Extended: Federal Only: -1.2%; 
Baseline Extended: Federal, State and Local: -1.8%; 
Alternative: Federal Only: -1.2%; 
Alternative: Federal, State and Local: -1.8%. 

Year: 2008; 
Baseline Extended: Federal Only: -3.2%; 
Baseline Extended: Federal, State and Local: -4.2%; 
Alternative: Federal Only: -3.2%; 
Alternative: Federal, State and Local: -4.2%. 

Year: 2009; 
Baseline Extended: Federal Only: -9.9%; 
Baseline Extended: Federal, State and Local: -10.9%; 
Alternative: Federal Only: -9.9%; 
Alternative: Federal, State and Local: -10.9%. 

Year: 2010; 
Baseline Extended: Federal Only: -9.2%; 
Baseline Extended: Federal, State and Local: -10.2%; 
Alternative: Federal Only: -9.6%; 
Alternative: Federal, State and Local: -10.6%. 

Year: 2011; 
Baseline Extended: Federal Only: -6.5%; 
Baseline Extended: Federal, State and Local: -8.0%; 
Alternative: Federal Only: -8.9%; 
Alternative: Federal, State and Local: -10.4%. 

Year: 2012; 
Baseline Extended: Federal Only: -4.1%; 
Baseline Extended: Federal, State and Local: -5.6%; 
Alternative: Federal Only: -7.7%; 
Alternative: Federal, State and Local: -9.2%. 

Year: 2013; 
Baseline Extended: Federal Only: -3.2%; 
Baseline Extended: Federal, State and Local: -4.6%; 
Alternative: Federal Only: -7.3%; 
Alternative: Federal, State and Local: -8.7%. 

Year: 2014; 
Baseline Extended: Federal Only: -2.7%; 
Baseline Extended: Federal, State and Local: -4.0%; 
Alternative: Federal Only: -7.2%; 
Alternative: Federal, State and Local: -8.5%. 

Year: 2015; 
Baseline Extended: Federal Only: -2.6%; 
Baseline Extended: Federal, State and Local: -3.9%; 
Alternative: Federal Only: -7.5%; 
Alternative: Federal, State and Local: -8.8%. 

Year: 2016; 
Baseline Extended: Federal Only: -2.7%; 
Baseline Extended: Federal, State and Local: -4.1%; 
Alternative: Federal Only: -8.0%; 
Alternative: Federal, State and Local: -9.3%. 

Year: 2017; 
Baseline Extended: Federal Only: -2.6%; 
Baseline Extended: Federal, State and Local: -4.0%; 
Alternative: Federal Only: -8.3%; 
Alternative: Federal, State and Local: -9.7%. 

Year: 2018; 
Baseline Extended: Federal Only: -2.6%; 
Baseline Extended: Federal, State and Local: -4.1%; 
Alternative: Federal Only: -8.7%; 
Alternative: Federal, State and Local: -10.2%. 

Year: 2019; 
Baseline Extended: Federal Only: -3.0%; 
Baseline Extended: Federal, State and Local: -4.5%; 
Alternative: Federal Only: -9.5%; 
Alternative: Federal, State and Local: -11.0%. 

Year: 2020; 
Baseline Extended: Federal Only: -3.0%; 
Baseline Extended: Federal, State and Local: -4.6%; 
Alternative: Federal Only: -10.0%; 
Alternative: Federal, State and Local: -11.5%. 

Year: 2021; 
Baseline Extended: Federal Only: -3.3%; 
Baseline Extended: Federal, State and Local: -4.9%; 
Alternative: Federal Only: -10.3v
Alternative: Federal, State and Local: -11.9%. 

Year: 2022; 
Baseline Extended: Federal Only: -3.6%; 
Baseline Extended: Federal, State and Local: -5.3%; 
Alternative: Federal Only: -10.7%; 
Alternative: Federal, State and Local: -12.3%. 

Year: 2023; 
Baseline Extended: Federal Only: -4.0%; 
Baseline Extended: Federal, State and Local: -5.6%; 
Alternative: Federal Only: -11.0%; 
Alternative: Federal, State and Local: -12.7%. 

Year: 2024; 
Baseline Extended: Federal Only: -4.3%; 
Baseline Extended: Federal, State and Local: -6.0%; 
Alternative: Federal Only: -11.4%; 
Alternative: Federal, State and Local: -13.1%. 

Year: 2025; 
Baseline Extended: Federal Only: -4.7%; 
Baseline Extended: Federal, State and Local: -6.4%; 
Alternative: Federal Only: -11.9%; 
Alternative: Federal, State and Local: -13.7%. 

Year: 2026; 
Baseline Extended: Federal Only: -5.0%; 
Baseline Extended: Federal, State and Local: -6.9%; 
Alternative: Federal Only: -12.5%; 
Alternative: Federal, State and Local: -14.4%. 

Year: 2027; 
Baseline Extended: Federal Only: -5.4%; 
Baseline Extended: Federal, State and Local: -7.3%; 
Alternative: Federal Only: -13.2%; 
Alternative: Federal, State and Local: -15.0%. 

Year: 2028; 
Baseline Extended: Federal Only: -5.8%; 
Baseline Extended: Federal, State and Local: -7.8%; 
Alternative: Federal Only: -13.8%; 
Alternative: Federal, State and Local: -15.8%. 

Year: 2029; 
Baseline Extended: Federal Only: -6.2%; 
Baseline Extended: Federal, State and Local: -8.3%; 
Alternative: Federal Only: -14.4%; 
Alternative: Federal, State and Local: -16.5%. 

Year: 2030; 
Baseline Extended: Federal Only: -6.7%; 
Baseline Extended: Federal, State and Local: -8.8%; 
Alternative: Federal Only: -15.1%; 
Alternative: Federal, State and Local: -17.2%. 

Year: 2031; 
Baseline Extended: Federal Only: -7.1%; 
Baseline Extended: Federal, State and Local: -9.3%; 
Alternative: Federal Only: -15.8%; 
Alternative: Federal, State and Local: -18.0%. 

Year: 2032; 
Baseline Extended: Federal Only: -7.5%; 
Baseline Extended: Federal, State and Local: -9.8%; 
Alternative: Federal Only: -16.5%; 
Alternative: Federal, State and Local: -18.7%. 

Year: 2033; 
Baseline Extended: Federal Only: -8.0%; 
Baseline Extended: Federal, State and Local: -10.3%; 
Alternative: Federal Only: -17.2%; 
Alternative: Federal, State and Local: -19.5%. 

Year: 2034; 
Baseline Extended: Federal Only: -8.4%; 
Baseline Extended: Federal, State and Local: -10.9%; 
Alternative: Federal Only: -17.9%; 
Alternative: Federal, State and Local: -20.3%. 

Year: 2035; 
Baseline Extended: Federal Only: -8.8%; 
Baseline Extended: Federal, State and Local: -11.4%; 
Alternative: Federal Only: -18.6%; 
Alternative: Federal, State and Local: -21.1%. 

Year: 2036; 
Baseline Extended: Federal Only: -9.3%; 
Baseline Extended: Federal, State and Local: -11.9%; 
Alternative: Federal Only: -19.3%; 
Alternative: Federal, State and Local: -21.9%. 

Year: 2037; 
Baseline Extended: Federal Only: -9.7%; 
Baseline Extended: Federal, State and Local: -12.5%; 
Alternative: Federal Only: -20.0%; 
Alternative: Federal, State and Local: -22.8%. 

Year: 2038; 
Baseline Extended: Federal Only: -10.2%; 
Baseline Extended: Federal, State and Local: -13.0%; 
Alternative: Federal Only: -20.7%; 
Alternative: Federal, State and Local: -23.6%. 

Year: 2039; 
Baseline Extended: Federal Only: -10.6%; 
Baseline Extended: Federal, State and Local: -13.6%; 
Alternative: Federal Only: -21.4%; 
Alternative: Federal, State and Local: -24.4%. 

Year: 2040; 
Baseline Extended: Federal Only: -11.0%; 
Baseline Extended: Federal, State and Local: -14.1%; 
Alternative: Federal Only: -22.1%; 
Alternative: Federal, State and Local: -25.2%. 

Year: 2041; 
Baseline Extended: Federal Only: -11.5%; 
Baseline Extended: Federal, State and Local: -14.6%; 
Alternative: Federal Only: -22.9%; 
Alternative: Federal, State and Local: -26.0%. 

Year: 2042; 
Baseline Extended: Federal Only: -11.9%; 
Baseline Extended: Federal, State and Local: -15.2%; 
Alternative: Federal Only: -23.6%; 
Alternative: Federal, State and Local: -26.9%. 

Year: 2043; 
Baseline Extended: Federal Only: -12.3%; 
Baseline Extended: Federal, State and Local: -15.7%; 
Alternative: Federal Only: -24.3%; 
Alternative: Federal, State and Local: -27.7%. 

Year: 2044; 
Baseline Extended: Federal Only: -12.8%; 
Baseline Extended: Federal, State and Local: -16.3%; 
Alternative: Federal Only: -25.1%; 
Alternative: Federal, State and Local: -28.6%. 

Year: 2045; 
Baseline Extended: Federal Only: -13.3%; 
Baseline Extended: Federal, State and Local: -16.9%; 
Alternative: Federal Only: -25.9%; 
Alternative: Federal, State and Local: -29.5%. 

Year: 2046; 
Baseline Extended: Federal Only: -13.7%; 
Baseline Extended: Federal, State and Local: -17.4%; 
Alternative: Federal Only: -26.6%; 
Alternative: Federal, State and Local: -30.3%. 

Year: 2047; 
Baseline Extended: Federal Only: -14.2%; 
Baseline Extended: Federal, State and Local: -18.0%; 
Alternative: Federal Only: -27.4%; 
Alternative: Federal, State and Local: -31.2%. 

Year: 2048; 
Baseline Extended: Federal Only: -14.7%; 
Baseline Extended: Federal, State and Local: -18.6%; 
Alternative: Federal Only: -28.2%; 
Alternative: Federal, State and Local: -32.2%. 

Year: 2049; 
Baseline Extended: Federal Only: -15.2%; 
Baseline Extended: Federal, State and Local: -19.3%; 
Alternative: Federal Only: -29.0%; 
Alternative: Federal, State and Local: -33.1%. 

Year: 2050; 
Baseline Extended: Federal Only: -15.7%; 
Baseline Extended: Federal, State and Local: -19.9%; 
Alternative: Federal Only: -29.9%; 
Alternative: Federal, State and Local: -34.1%. 

Year: 2051; 
Baseline Extended: Federal Only: -16.2%; 
Baseline Extended: Federal, State and Local: -20.5%; 
Alternative: Federal Only: -30.7%; 
Alternative: Federal, State and Local: -35.1%. 

Year: 2052; 
Baseline Extended: Federal Only: -16.7%; 
Baseline Extended: Federal, State and Local: -21.2%; 
Alternative: Federal Only: -31.6%; 
Alternative: Federal, State and Local: -36.1%. 

Year: 2053; 
Baseline Extended: Federal Only: -17.3%; 
Baseline Extended: Federal, State and Local: -21.9%; 
Alternative: Federal Only: -32.5%; 
Alternative: Federal, State and Local: -37.1%. 

Year: 2054; 
Baseline Extended: Federal Only: -17.8%; 
Baseline Extended: Federal, State and Local: -22.5%; 
Alternative: Federal Only: -33.4%; 
Alternative: Federal, State and Local: -38.1%. 

Year: 2055; 
Baseline Extended: Federal Only: -18.4%; 
Baseline Extended: Federal, State and Local: -23.2%; 
Alternative: Federal Only: -34.3%; 
Alternative: Federal, State and Local: -39.2%. 

Year: 2056; 
Baseline Extended: Federal Only: -19.0%; 
Baseline Extended: Federal, State and Local: -24.0%; 
Alternative: Federal Only: -35.3%; 
Alternative: Federal, State and Local: -40.2%. 

Year: 2057; 
Baseline Extended: Federal Only: -19.6%; 
Baseline Extended: Federal, State and Local: -24.7%; 
Alternative: Federal Only: -36.2%; 
Alternative: Federal, State and Local: -41.4%. 

Year: 2058; 
Baseline Extended: Federal Only: -20.2%; 
Baseline Extended: Federal, State and Local: -25.4%; 
Alternative: Federal Only: -37.2%; 
Alternative: Federal, State and Local: -42.5%. 

Year: 2059; 
Baseline Extended: Federal Only: -20.8%; 
Baseline Extended: Federal, State and Local: -26.2%; 
Alternative: Federal Only: -38.2%; 
Alternative: Federal, State and Local: -43.7%. 

Year: 2060; 
Baseline Extended: Federal Only: -21.5%; 
Baseline Extended: Federal, State and Local: -27.0%; 
Alternative: Federal Only: -39.2%; 
Alternative: Federal, State and Local: -44.8%. 

Source: Historical data from NIPA and GAO analysis. 

Note: Historical data are from the Bureau of Economic Analysis's 
National Income and Product Accounts from 1980 to 2008. Data in 2009 
are GAO estimates aligned with published data where available. GAO 
simulations are from 2010 to 2060, using many Congressional Budget 
Office projections and assumptions, particularly for the next 10 
years. The state and local balance measure is similar to the federal 
unified budget measure. The baseline simulation uses CBO projections 
and assumes that taxes and expenditures during the next 10 years are 
in line with current law. The alternative simulation assumes expiring 
tax provisions are extended and that discretionary spending grows with 
GDP. 

[End of figure] 

Our federal baseline simulation uses CBO projections for the next 10 
years and assumes that taxes and expenditures during this time period 
are in line with current law. For example, we assume that a variety of 
federal tax provisions--mostly tax reductions--that are set to expire 
are allowed to expire, and that discretionary expenditures of the 
federal government grow with inflation. After the first 10 years, we 
use the Social Security and Medicare Trustees' 75-year intermediate 
estimates for those programs and CBO's mid-range Medicaid estimates. 
All other expenditures, as well as receipts, are held constant as a 
share of GDP after the first 10 years. 

Our alternative federal simulation assumes that during the next 10 
years, expiring tax provisions are extended and that federal 
discretionary spending grows with GDP--a faster pace than inflation. 
After the 10-year timeframe, we assume that action is taken to return 
revenue to its historical share of GDP. The alternative simulation 
also incorporates somewhat higher Medicare estimates reflecting 
historical trends that physician payments are not reduced as specified 
under current law. 

We conducted our work for this model update from August 2009 to March 
2010 in accordance with all sections of GAO's Quality Assurance 
Framework that are relevant to our objectives. The framework requires 
that we plan and perform the engagement to obtain sufficient and 
appropriate evidence to meet our stated objectives and to discuss any 
limitations in our work. We believe that the information and data 
obtained, and the analysis conducted, provide a reasonable basis for 
any findings and conclusions. 

We are sending copies of this report to interested congressional 
committees. The report is part of a body of work on the long-term 
fiscal challenge and is available free of charge at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. 

If you or your staffs have any questions about this report, please 
contact Stanley J. Czerwinski at (202) 512-6806 or czerwinskis@gao.gov 
or Thomas J. McCool at (202) 512-2700 or mccoolt@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix II. 

Signed by: 

Stanley J. Czerwinski: 
Director, Strategic Issues: 

Signed by: 

Thomas J. McCool: 
Director, Center for Economics: 

[End of section] 

Appendix I: Scope and Methodology: 

To answer our two reporting objectives, we incorporated updated data 
into and analyzed output from GAO's State and Local Fiscal Model. 
While the model's key data sources and assumptions are summarized 
below, a detailed explanation of the model's methodology is available 
in Appendices I-IV of GAO, State and Local Governments: Growing Fiscal 
Challenges Will Emerge During the Next 10 Years, GAO-08-317 
(Washington, D.C.: January 2008). 

Using the National Income and Product Accounts prepared by the U.S. 
Bureau of Economic Analysis as a primary data source, our state and 
local model projects the level of receipts and expenditures for the 
sector in future years based on current and historical spending and 
revenue patterns.[Footnote 16] To develop these long-run simulations, 
we make projections for each major receipt and expenditure category of 
the state and local government sector in future years. We project the 
growth in each category of receipts and expenditures using CBO's 
economic assumptions whenever possible.[Footnote 17] In several cases 
we were not able to obtain existing projections and needed to develop 
our own assumptions about the likely future growth path of certain 
receipts or expenditures. Key categories of receipts for state and 
local governments include several types of taxes (personal income, 
sales, property, and corporate), income on assets owned by the sector, 
and grants from the federal government. Categories of expenditures 
include wages and salaries of state and local employees, health 
insurance costs, pension costs, payments of social benefits (e.g. 
Medicaid and unemployment), depreciation expenses on state and local 
capital stock, interest payments on state and local financial debt, 
and other expenditures of the sector. Our model assumes current 
policies remain in place. Since our last simulation in January 2009, 
we have made several adjustments to the model in light of recent 
economic events, as summarized in table 1. 

Table 1: Modifications to Assumptions for March 2010 Update: 

Variable: State and local consumption excluding employee compensation 
and capital consumption--or "other consumption" (GSLCO); 
Previous assumptions: Other consumption expenditures grow with 
population plus inflation. In our January 2009 simulations, we 
adjusted the projected 2008 value of this variable upward because 
energy price increases raised other consumption expenditures far more 
than the growth of population plus inflation; 
Updated assumptions: In 2009, oil prices fell greatly, and the level 
of other consumption expenditures was below the level our standard 
assumption implies. In 2010 we increased this spending category to its 
2000-2007 average as a share of GDP. Thereafter, we let other 
consumption expenditures grow with population plus inflation as per 
our standard assumption. In figure 1, we adjusted the January 2009 
simulation (now labeled January 2009 adjusted) to incorporate the same 
assumptions for this spending category. Specifically, we used the same 
percentage of GDP for other consumption in the January 2009 adjusted 
simulation as we are using in the March 2010 simulation. This 
adjustment for years 2008, 2009, and 2010 removes the over-prediction 
of other consumption caused by our assumption in January 2009 that the 
2008 historical peak in consumption expenditures was permanent rather 
than temporary. 

Variable: Total state and local government retirement fund assets 
(L1TOTALFA); 
Previous assumptions: In previous updates, we used the last year-end 
historical value of pension fund assets, along with other elements, to 
calculate the contribution that governments must make to fully fund 
employee pension benefits[A]; 
Updated assumptions: Because asset values can exhibit substantial 
volatility, governments typically use smoothed asset values in their 
pension funding calculations. Accordingly, in this update, we use the 
average value of pension fund assets over the previous five years to 
calculate the contribution rate needed to fully fund pensions. Even 
though this smoothing somewhat dampens the effect of the recent drop 
in asset values, that drop still raises our estimate of the required 
contribution rate significantly from previous estimates. 

Variable: Medium and long-term municipal securities outstanding 
(DBTGSLLT); 
Previous assumptions: The model's estimate of state and local 
governments' issuance of medium-and long-term debt depends on the 
difference between capital acquisitions and federal investment grants, 
municipal bond rates, and a first-order autoregressive error term, 
which adjusts the current year's estimate by some portion of the 
amount by which the equation over-or under-estimated the previous 
year's value; 
Updated assumptions: Because an anomalously low amount of debt was 
issued in 2008, the year before the first projection year, the model 
under-predicted the change in debt in the early projection years. This 
overstated the model's estimate for the operating deficit because it 
implies a greater portion of general revenues must be used to finance 
investment rather than operating expenditures.[B] To address this 
issue, we now generate projections for debt issuance by excluding the 
autoregressive error term, which produces debt issuance values closer 
to general historical trends. 

Variable: Employment cost indexes for private wages and salaries 
(JECIWSP) and state and local government wages and salaries (JECISTLC); 
Previous assumptions: Our standard assumption is that both private 
wages and salaries and state and local government wages and salaries 
grow at the rate CBO assumes for the employment cost index in the 
final years of its ten-year economic projections; 
Updated assumptions: We used a wage growth assumption of 3.1 percent, 
which is 0.1 percent higher than CBO's 3.0 percent assumption, to 
offset the 0.1 percent increase in CBO's GDP price inflation 
assumption from 1.7 percent in August 2009 to 1.8 percent in January 
2010. If we had used CBO's wage growth assumption, wages would decline 
as a share of GDP when compared with our previous projections, which 
is inconsistent with our projections' unchanged rates of real GDP 
growth. 

Variable: Total state and local government employment (EGSLALL); 
Previous assumptions: Our standard assumption is that state and local 
government employment grows at the same rate as total population. We 
obtain data from NIPA to estimate this variable; 
Updated assumptions: Because 2009 data on total employment was not 
available from NIPA at the time of our analysis, we used data from the 
Bureau of Labor Statistic's Current Employment Statistics program to 
estimate the sector's 2009 employment level. Also, we chose not to use 
our standard assumption because the economy was in recession during 
2009. Instead, we estimated a non-recessionary employment level for 
2010 by multiplying the average share of total population during the 
2001-2009 period by 2010's projection population. After 2010, we 
assume the employment level grows with total population. 

Variable: Rate on AAA-rated municipal bonds (RMMUNIBB20); 
Previous assumptions: In previous models, we used the rate on Moody's 
AAA-rated municipal bonds (RMMUNIAAA) as the interest rate to derive 
the effective rate on the sector's credit market debt (RATEOWED). Our 
standard approach to project the AAA-rated municipal bond rate has 
been to use an estimated relationship between that rate and the 10-
year Treasury yield, with an adjustment for the amount by which the 
relationship under-or over-predicts the last historical value; 
Updated assumptions: To align our methods with other major sources, we 
now use the Bond Buyer GO 20-Bond Municipal Bond Index as our data 
source and adjusted our relationships for RATEOWED accordingly. 
Because municipal bond rates were unusually high relative to Treasury 
yields in the year preceding our projections, our standard assumption 
results in what appears to be excessively high projections for the 
municipal bond rate. We added an adjustment factor that gradually 
brings the municipal bond rate below the 10-year Treasury note rate. 

Variable: Federal investment grants (IGRANTCBO) and federal non- 
Medicaid grants--or other federal grants (GFAIDSLO); 
Previous assumptions: We assume that federal investment grants grow at 
the same rate as CBO's projections for federal capital transfers for 
the first 10 years. We project other federal grants by subtracting 
CBO's Medicaid grant projections from CBO's total grants for current 
expenditures. For both federal investment and other federal grants, we 
assume that grants grow with inflation plus population growth after 
the first 10 years; 
Updated assumptions: At the time of our March 2010 update, CBO 's NIPA-
consistent values for federal grants were not available. To estimate 
federal investment and other federal grants, we multiplied the January 
2010 GDP projection with an estimate of each variable's respective 
share of GDP derived from CBO's most recently available projections. 

Variable: State personal income tax receipts (TXPGSTATE); 
Previous assumptions: We simulate future state personal income tax 
receipts by estimating the long-run responsiveness, or elasticity, of 
receipts to taxable personal income. The long-run elasticity estimate 
depicts the extent to which tax receipts grow in response to income 
growth but does not capture their short-run reaction to changes in 
income over the business cycle; 
Updated assumptions: We assumed a delay in adjustment that kept 
receipts one-tenth of one percent of GDP below the long run level in 
2010. In 2011, we let state personal tax receipts return to their long 
run level. 

Variable: General sales tax receipts (TXIMGSLSGEN); 
Previous assumptions: We estimated the long-term responsiveness of our 
measure of the sales tax base to aggregate wage and salary income. 
Given projections of aggregate income, this elasticity provides a 
future path for the sales tax base; 
Updated assumptions: Because this long-run relationship does not 
capture cyclical adjustments well, we adjusted the 2010 level downward 
by a tenth of a percent of GDP so that the category of which it is a 
part is the same share of GDP as IHS Global Insight projections in 
2010. 

Variable: Property tax receipts (TXIMGSLPROP); 
Previous assumptions: Property tax receipts are assumed to grow with 
our projections of the property tax base. In turn, property tax base 
projections are based on our estimate of the relationship between real 
GDP and the real market value of real estate owned by both the 
household sector and the nonfarm, nonfinancial business sector; 
Updated assumptions: Because our standard assumption does not 
adequately capture shorter term developments--particularly in recent 
years--we set property taxes in 2010 equal to their 2.8 percent 
average share of GDP during the non-recessionary years from 2002 
through 2008. Thereafter, we let receipts grow from this level 
according to the long run relationship. 

Source: GAO analysis: 

Note: See Appendices I-IV of GAO, State and Local Governments: Growing 
Fiscal Challenges Will Emerge During the Next 10 Years, GAO-08-317 
(Washington, D.C.: January 2008) for a description of all assumptions 
made in the state and local model. Appendix V in GAO-08-317 provides a 
list of all model variables and definitions. 

[A] Other elements include employment growth, beneficiary growth, wage 
growth, inflation, mortality, the real rate of return, and the 
employees' own contributions. 

[B] In developing the operating balance measure, we subtract an 
estimate of general funds used to finance longer-term projects--such 
as investments in equipment and roads--from total receipts since these 
funds would not be available to cover current expenses. The estimate 
of general funds used for investment equals total investment minus the 
sum of federal grants and the change in debt. 

[End of table] 

[End of section] 

Appendix II: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Stanley J. Czerwinski at (202) 512-6806 or czerwinskis@gao.gov: 
Thomas J. McCool at (202) 512-2700 or mccoolt@gao.gov: 

Staff Acknowledgments: 

In addition to the contacts listed above, Richard Krashevski and 
Michelle Sager (Assistant Directors), Shannon Finnegan (Analyst-in- 
Charge), Andrew Ching, and Kathleen Padulchik made significant 
contributions to this report. 

[End of section] 

Footnotes: 

[1] See GAO, The Federal Government's Long-Term Fiscal Outlook: 
January 2010 Update, [hyperlink, 
http://www.gao.gov/products/GAO-10-468SP] (Washington, D.C.: March 
2010). This and related products can be found at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. 

[2] In figure 1, we use the term "January 2009 Adjusted" to refer to 
the results of our model published in GAO, Update of State and Local 
Government Fiscal Pressures, [hyperlink, 
http://www.gao.gov/products/GAO-09-320R] (Washington, D.C.: Jan. 26, 
2009), which we adjusted to reflect the effect of reduced oil prices 
on the sector's expenditures. "March 2010" refers to the results of 
our most recent simulation, published in this report. See table 1 for 
a description of adjustments made to our simulations since the January 
2009 report. 

[3] Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009). 

[4] The operating balance is a measure of the sector's ability to 
cover its current expenditures out of current receipts. 

[5] While most states have requirements related to balancing their 
budgets, deficits might arise because of unanticipated events such as 
recessions. These cyclical deficits can occur because the planned 
annual revenues are not generated at the expected rate, demand for 
services exceeds planned expenditures, or both, thus resulting in a 
near-term or cyclical operating deficit. 

[6] These estimates do not attempt to assume forthcoming policy 
actions by federal, state or local governments and are based on 
analysis of historical data. Actual amounts will reflect policy 
actions taken by state and local governments to balance their budgets. 
Years are calendar years. 

[7] See GAO, Recovery Act: Status of States' and Localities' Use of 
Funds and Efforts to Ensure Accountability, [hyperlink, 
http://www.gao.gov/products/GAO-10-231] (Washington, D.C.: Dec. 10, 
2009); and GAO, Recovery Act: Funds Continue to Provide Fiscal Relief 
to States and Localities, While Accountability and Reporting 
Challenges Need to Be Fully Addressed, [hyperlink, 
http://www.gao.gov/products/GAO-09-1016] (Washington, D.C.: Sept. 23, 
2009). See also National Governors Association and National 
Association of State Budget Officers, The Fiscal Survey of States 
(Washington, D.C.: Dec. 2009); National Association of Counties, How 
are Counties Doing? An Economic Status Survey (Washington, D.C.: Nov. 
2009); and National League of Cities, Research Brief on America's 
Cities, City Fiscal Conditions in 2009 (Washington, D.C.: Sept. 2009). 

[8] We use historical data from BEA NIPA from 1980 to 2008. Data in 
2009 are GAO estimates based on data available through the third 
quarter of 2009. GAO projections are from 2010 to 2060. 

[9] Medicaid is a joint federal-state program that finances health 
care for certain categories of low-income individuals, including 
children, families, persons with disabilities, and persons who are 
elderly. The federal government provides assistance to states (known 
as the Federal Medical Assistance Percentage, or FMAP) for Medicaid 
services according to a formula based on each state's per capita 
income in relation to the national average per capita income. Under 
the Recovery Act, states are eligible for an increased FMAP for 
expenditures that states make in providing services to their Medicaid 
populations. The Recovery Act provides eligible states with this 
increased FMAP for 27 months between October 1, 2008, and December 31, 
2010. 

[10] The most recent prior update is GAO, Update of State and Local 
Fiscal Pressures, [hyperlink, http://www.gao.gov/products/GAO-09-320R] 
(Washington, D.C.: Jan. 26, 2009). See also GAO, State and Local 
Fiscal Challenges: Rising Health Care Costs Drive Long-term and 
Immediate Pressures, [hyperlink, 
http://www.gao.gov/products/GAO-09-210T] (Washington, D.C.: Nov. 19, 
2008). 

[11] The explicit definition of our operating balance measure is all 
receipts, excluding funds used for long-term investments, minus 
current expenditures. To develop this measure, we subtract funds used 
to finance longer-term projects--such as investments in buildings and 
roads--from receipts since these funds would not be available to cover 
current expenses. Similarly, we exclude capital-related expenditures 
from spending. 

[12] One of the most central assumptions we must make to estimate the 
pay-as-you-go health expenditures for employees and retirees in future 
years is the cost growth of health care. The extent to which the per- 
person cost of health care is expected to grow beyond GDP per capita 
is called the "excess cost factor." We estimate the excess cost factor 
using unpublished data from the Centers for Medicare & Medicaid 
Services' (CMS) Office of the Actuary. Between 2008 and 2009, CMS 
reduced its assumption for average annual excess cost growth during 
2010-2080 from 1.3 percent to 0.8 percent, which we incorporated into 
our model. This reduced the growth in our Medicaid and employee and 
retiree health spending projections from our January 2009 simulation. 

[13] Interest payments that these governments will need to pay on 
their outstanding debt will also likely be a rising expense for the 
sector in the future. Rising interest costs are merely a reflection of 
the sustained deficits the model predicts across future years. 

[14] See GAO, State and Local Government Retiree Health Benefits: 
Liabilities Are Largely Unfunded, but Some Governments Are Taking 
Action, GAO-10-61 (Washington, D.C.: Nov. 30, 2009). Most state and 
local governments pay for employee and retiree health insurance on a 
pay-as-you-go basis--that is, these benefits are generally not 
prefunded. To estimate expenditures for employee and retiree health 
insurance in future years, we assume that the same percentage of 
employees and retirees of state and local governments will be enrolled 
in health insurance through their previous employer as we observe were 
enrolled in 2005. The Agency for Healthcare Research and Quality 
updated its Medical Expenditure Panel Survey (MEPS) data in the fall 
of 2009 covering the period through 2008, which we have incorporated 
into this update. 

[15] [hyperlink, http://www.gao.gov/products/GAO-10-468SP. 

[16] The model incorporates data available after BEA's comprehensive 
revision of the NIPA in July 2009. 

[17] In Congressional Budget Office, CBO's Economic Forecasting 
Record: 2009 Update (Washington, D.C.: July 2009), CBO warns that the 
uncertainty inherent in its current forecasts exceeds the historical 
average because the current degree of economic dislocation exceeds 
that of any previous period in the past half-century. 

[End of section] 

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