Each year the Government Accountability Office (GAO) publishes its outlook on the fiscal health of state and local governments, as compared to the nation as a whole. This year's report looks fifty years into the future, assessing the long-term prognosis of these states and localities. The GAO's findings are hardly encouraging. They just might, however, serve as the wake-up call that many lawmakers need, if adequate fiscal reforms are going to be embraced before it's too late.
At State Budget Solutions, we have long maintained that current budget-drafting methods are bringing states ever-closer to the financial cliff--and the new GAO findings illustrate just how close those states are to going over the edge. Without a doubt, the day of reckoning for America's cities and states is just around the corner, as the report makes clear:
GAO simulations of long-term fiscal trends in the state and local government sector--published since 2007--have consistently shown that state and local governments face long-term fiscal pressures. GAO's simulations 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. Absent any policy changes, the state and local government sector faces a gap between expenditures and receipts in future years. Closing this gap will require state and local governments to make policy changes to assure that receipts are at least equal to expenditures.
The report explains that at current rates, total tax revenues, as a percentage of gross domestic product, will not return to the historical highs we saw in 2007 until the year 2047.
On the spending side, the GAO notes that "public sector pensions, the rising health-related costs of state and local expenditures on Medicaid, and the cost of health care compensation for state and local government employees and retirees will be major factors contributing to the fiscal gap."
GAO defines the fiscal gap as "an estimate of actions that must be taken today and maintained for each year going forward [through 2064] to achieve fiscal balance during the next 50 years."
The report concludes that, in order to close their fiscal gaps, state and local governments would have to reduce their spending, equivalent to a five percent reduction from current expenditure levels--and then maintain those cuts for the next half-century. Alternatively, tax revenues would have to be raised by a similar degree. The GAO considers a combination of these measures to be the more likely course of action.
One solution is for governments to change how they draft budgets. Performance-based, outcome budgeting would focus on what taxpayers are getting in return for the money spent in their name, thus ensuring that governments will serve their citizens in a more cost-effective manner. In so doing, governments could then avoid future budget shortfalls, instead of kicking the proverbial can down the road to future generations.
Bob Williams is president of State Budget Solutions, a national organization focused on state and local governance. Senior policy fellow Sarah Curry co-authored this article.