In recent years, state and local governments have largely remained in a fiscal holding pattern, continuing a slow recovery from the impacts of the Great Recession. Overall, state revenues have continued to slowly increase for the fifth straight year off of their FY 2010 lows, and relatively few states are currently contending with major budget deficits, in contrast to the years immediately following the onset of the recession. Local governments have lagged behind the states, with cities and counties only recently starting to see some recovery.
While the short-term fiscal trends now appear to be moving in a positive direction at both levels of government, the Government Accountability Office (GAO) offered a more dire long-term outlook in the December 2014 edition of its State and Local Governments’ Fiscal Outlook. The report found that states and local governments will continue to face 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 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 healthcare expenditures-which are rising at a faster rate than GDP-will exceed non-healthcare expenditures as a percentage of GDP between 2055 and 2060. In other words, healthcare spending is projected to increasingly dwarf all other state and local spending in the coming decades. The report cites unfunded pension liabilities as another key fiscal concern for state and local governments in the coming decades.
GAO estimates that taking steps to close the looming fiscal gap today would require reducing overall state and local government expenditures by 18 percent and then holding spending essentially flat as a percentage of GDP for decades to come. The magnitude of needed expenditure reductions is up from 14.2 percent, as reported in the 2013 edition of the GAO outlook.
Overall, the message to state and local policymakers should be, “We’re not out of the woods yet.” While short-term fiscal pressures slowly ease as we gain distance from the Great Recession, the GAO report suggests a significant likelihood of emerging fiscal challenges in the coming decades that will strain budgets and force difficult fiscal trade-offs if left unchecked. Thus, state and local policymakers should not rest on their laurels as recent fiscal woes continue to subside; rather, they should continue pushing greater fiscal restraint and pursuing new ways to control costs and increase government efficiency so that today’s warning signs do not become tomorrow’s emergency sirens.
Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here.