Key Issues > Fiscal Outlook > State and Local Fiscal Model

Fiscal Outlook: State and Local Fiscal Model

GAO's simulations show the size of the fiscal challenges that confront the state and local sector, and highlight the sector's key fiscal pressures.

 

  1. Share with Facebook 
  2. Share with Twitter 
  3. Share with LinkedIn 
  4. Share with mail 

State and Local Fiscal Outlook

GAO’s simulations of long-term fiscal trends in the state and local government sector have consistently shown that state and local governments face long-term fiscal pressures. Absent any policy changes, the state and local government sector faces a gap between expenditures and receipts in future years. The simulated operating balance measure—an indicator of the sector’s ability to cover its current expenditures out of current receipts – suggests that the sector will continue to face a gap between spending and revenue over the next 46 years. 

Figure: State and Local Operating Balance Measure as a Percentage of Gross Domestic Product (GDP)

State and Local Operating Balance Measure, as a Percentage of Gross Domestic Product (GDP)

Note: The simulated operating balance measure is all receipts, excluding funds used for long-term investments, minus current expenditures. For additional detail on our assumptions and methodology, see link to Data, Methodology, and Equation Updates.

State and Local Operating Balance Measure as a Percentage of Gross Domestic Product (GDP): TXT | PDF

The model assumes that the current set of policies in place across state and local government, and the provision of real government services per capita, remains relatively constant. The model does not account for changes to the federal tax code that were enacted in December 2017. GAO’s simulations also show that while the gap narrows and ultimately closes near the end of the simulation period, state and local governments would need to make policy changes to avoid fiscal imbalances before then.

Most Recent State and Local Fiscal Outlook Report

 

Policy Changes Would Be Required in the State and Local Government Sector to Close the Fiscal Gap

Since most state and local governments are required to balance their operating budgets, our simulations suggest that the sector would need to make policy changes to avoid negative operating balances (i.e. deficits) in the future. Our model estimates actions the sector must take today and maintain each year to close the “fiscal gap”— how much the government’s spending and debt obligations exceed its revenues over a specified period of time. We estimated that closing the fiscal gap would require spending reductions to be taken today and maintained each year equivalent to a 3.3 percent reduction in the state and local government sector’s expenditures. Closing the fiscal gap through revenue increases would require action of similar magnitude through increases in state and local tax revenues. More likely, closing the fiscal gap would involve some combination of both expenditure reductions and revenue increases.

Figure: State and Local Government Action Required to Maintain Balance - Expenditure Reductions as a Percentage of Gross Domestic Product (GDP)

Figure: State and Local Government Action Required to Maintain Balance - Expenditure  Reductions, as a Percentage of Gross Domestic Product (GDP)

State and Local Government Action Required to Maintain Balance - Expenditure Reductions as a Percentage of Gross Domestic Product (GDP): TXT | PDF

State and Local Governments Face Fiscal Challenges

Our simulations show that a key driver of short-term fiscal challenges for the state and local government sector continues to be the growth in health-related costs. State and local Medicaid expenditures and health care compensation costs for state and local government employees and retirees generally grow at a rate that exceeds GDP. In contrast, nonhealth, noninterest spending, which includes consumption expenditures such as compensation for state and local government workers; pension plan contributions; non-health related employee benefits; and purchases of intermediate goods, declines as a percentage of GDP.

Figure: Health and Nonhealth Expenditures of State and Local Governments as a Percentage of Gross Domestic Product (GDP)

Health and Nonhealth, Noninterest Expenditures of State and Local Governments as a Percentage of Gross Domestic Product (GDP)

Health and Nonhealth Expenditures of State and Local Governments as a Percentage of Gross Domestic Product (GDP): TXT | PDF

With regard to revenue growth over the long-term, our simulations suggest that state and local sector total revenues would remain largely constant as a percentage of GDP. As such, revenues will not be sufficient to allow the sector to avoid a negative operating balance.

Figure:  State and Local Government Receipts as a Percentage of Gross Domestic Product (GDP)

State and Local Government Receipts as a Percentage of Gross Domestic Product (GDP)

State and Local Government Receipts as a Percentage of Gross Domestic Product (GDP): TXT | PDF

 

Data Used in GAO's Simulations

Data from the Long Term State and Local Model can be downloaded using the links below.

File Name
Operating Balance Measures TXT PDF
Action Required to Maintain Balance TXT PDF
Health and Nonhealth Expenditures TXT PDF
Total Receipts TXT PDF

 

The 2017 State and Local Model Simulations – Data, Methodology, and Equation Updates document provides detailed information on the data and assumptions used in GAO’s simulations.

 

Since 2007 GAO has published simulations for the state and local sector. This is a list of those publications.

Past State and Local Fiscal Outlook Reports and Related Products

State and Local Governments' Fiscal Outlook: December 2016 Update

GAO-17-213SP: Published: Dec 8, 2016. Publicly Released: Dec 8, 2016.
State and Local Governments' Fiscal Outlook: December 2015 Update

GAO-16-260SP: Published: Dec 16, 2015. Publicly Released: Dec 16, 2015.
State and Local Governments' Fiscal Outlook: December 2014 Update

GAO-15-224SP: Published: Dec 17, 2014. Publicly Released: Dec 17, 2014.
State and Local Governments' Fiscal Outlook: April 2013 Update

GAO-13-546SP: Published: Apr 29, 2013. Publicly Released: Apr 29, 2013.
State and Local Governments' Fiscal Outlook: April 2012 Update

GAO-12-523SP: Published: Apr 5, 2012. Publicly Released: Apr 5, 2012.
State and Local Governments' Fiscal Outlook: April 2011 Update

GAO-11-495SP: Published: Apr 6, 2011. Publicly Released: Apr 6, 2011.
State and Local Governments' Fiscal Outlook: March 2010 Update

GAO-10-358: Published: Mar 2, 2010. Publicly Released: Mar 2, 2010.
Update of State and Local Government Fiscal Pressures

GAO-09-320R: Published: Jan 26, 2009. Publicly Released: Jan 26, 2009.
Looking for our recommendations? Click on any report to find each associated recommendation and its current implementation status.
Higher Education: State Funding Trends and Policies on Affordability

GAO-15-151: Published: Dec 16, 2014. Publicly Released: Dec 16, 2014.
Federal Assistance: Temporary State Fiscal Relief

GAO-04-736R: Published: May 7, 2004. Publicly Released: Jun 7, 2004.
Portrait of Triana McNeil

Triana McNeil
Acting Director, Strategic Issues
mcneilt@gao.gov
202-512-6806