State and local governments have continued a slow, but steady, recovery from the impact of the Great Recession the last few years, and a recent report suggests that the long-term fiscal picture, while challenging, is improving somewhat.
The Government Accountability Office (GAO) recently released the 2015 edition of its annual State and Local Governments’ Fiscal Outlook series. The report found that states and local governments will continue to face long-term fiscal imbalances, with a growing gap between revenue and spending through the year 2064, absent significant policy changes.
The GAO estimates that taking steps to close the looming fiscal gap today would require reducing overall state and local government expenditures by 5% and then holding spending essentially flat as a percentage of GDP for decades to come. While the gap is indeed significant, that figure is down significantly from the 18% needed reduction cited in the 2014 edition of the GAO Fiscal Outlook, indicating an improving forecast.
The GAO attributes the long-term fiscal challenges primarily 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.” In fact, the report projects that state and local health care expenditures are likely to increase at a faster rate than GDP through 2064. State and local pension obligations-and the growing mismatch between pension assets and liabilities over the past decade-are another factor cited by the GAO as a potentially important factor that could impact the state and local fiscal outlook.
While the improved forecast may be a relief to policymakers, it is important to remember two things. First, the forecast of a long-term fiscal imbalance may be less severe than it seemed in previous years, but there’s still a mismatch. Second, given the history of the last several decades, we are likely closer to the next recession than we are to the end of the last one, so the picture could worsen again in the event of another economic downturn. Hence, state and local policymakers would do well to be vigilant, maintaining a focus on fiscal restraint and seeking new ways to deliver more cost-effective services.
Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here.