Privatization & Government Reform Newsletter

Reports Suggest Serious State and Local Fiscal Challenges Ahead

Despite some signs of a slow economic recovery, states and cities pressured by healthcare, other costs

Though we’re starting to hear more about an economic recovery in the wake of the 2008 recession (albeit a sluggish one), three recent reports suggest that states and local governments are going to face continued fiscal headwinds into the future—primarily driven by rising healthcare costs—that will put perpetual pressures on budgets and drive ongoing efforts to control spending and find new ways to drive innovation and efficiency in government.

In June, the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) issued their semiannual Fiscal Survey of the States (Spring 2013 edition), which found that while states are starting to see a fiscal recovery in the wake of the 2008 recession—with rising revenues and spending—inflation-adjusted spending in fiscal year 2013 remained below its 2008 peak, and they continue to face several specific fiscal headwinds into the future, including growth in Medicaid spending, declining transfers of federal funds to states, and addressing major liabilities in public employee pensions. The full NGA-NASBO report is available here.

In addition to the NGA-NASBO report discussed above, the Government Accountability Office (GAO) released an eye-opening report in April that found that state and local governments will continue to face both near-term and long-term fiscal challenges—with a growing gap between revenue and spending—through the year 2060, absent significant policy changes. GAO attributes the long-term fiscal challenges to “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,” and it estimates that taking steps to close the looming fiscal gap today would require reducing overall state and local government expenditures by 14.2 percent and then holding spending essentially flat (as a percentage of GDP) for decades to come. The full GAO report is available here.

Last, earlier this month the National League of Cities issued their latest report on city fiscal conditions, which found that after six straight years of declining general fund revenues, U.S. cities are projecting a slight increase in general fund revenues in 2013. While property tax revenues are expected to continue their multi-year slide this year, sales and local income taxes are up. Still, there are significant fiscal headwinds; the report cites a number of factors putting pressure on city budgets, including employee-related costs for health care, pensions, and wages; infrastructure costs; public safety costs; and cuts in state and federal aid. Among its many findings, the report suggests that, “[p]ension and health care costs will persist as a challenge to city budgets for years to come." The full NLC report is available here.

Together, these reports suggest that despite some signs of a slow economic recovery, we’re not out of the woods yet, by any means. On the downside, this means that state and local taxpayers can expect to see continued fiscal distress and occasional calls for higher taxes and service cuts. On the upside, the public’s almost visceral distaste for higher taxes and service cuts will put continued pressure on policymakers to keep moving forward on reforms to modernize antiquated bureaucracies, continue pursuing greater efficiency and technological innovation in government, and rethink public service delivery overall.

Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here.

Leonard Gilroy is Director of Government Reform





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