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The Government Accountability Office (GAO) issued its State and Local Government Fiscal Outlook Update this week and the details are quite grim. Absent policy changes, it found, state and local government’s fiscal position will “steadily decline” through 2060. Even worse, closing the gap to achieve fiscal balance over 50 years will require “action to be taken today and maintained for each year equivalent to a 14.2 percent reduction in the state and local government sector’s current expenditures.”

Medicaid and public employee healthcare compensation costs are the real drivers of the gap. Today, these healthcare costs take up 3.8 percent of GDP. Yet their growth is projected to outpace GDP to the point that they will equal 7.2 percent of GDP by 2060. In contrast, all other types of state and local spending are expected to decline as a percentage of GDP.

The report shows the need to take immediate action to slow growth in state and local health spending. This was obviously an intention of the Patient Protection and Affordable Care Act (PPACA), but it seems less and less likely.

The Medicaid portion of the Supreme Court’s PPACA ruling granted states remarkable flexibility to reject the federal government’s mandated Medicaid expansion, and this report makes ever clearer the need for states to do so.

The federal government remains in an even worse fiscal situation than state and local governments, but states still rely on federal dollars for a large portion of their general fund budgets. The promise to fund a program with exploding costs indefinitely into the future is tenuous at best. The alternatives, as GAO shows, are devastating.

The GAO’s report touched briefly on public pension funding. The report found that asset values had recovered slightly from their lows during the recession, but remained volatile through 2011 and had yet to reach their 2007 value of $3.2 billion. GAO may even be understating the size of the gap because it did not take market-valued unfunded public pension liabilities into account, and the state and local contributions that will be required to fund them,

Those two areas of expenditures by states are growing faster than states’ revenues. The gap that the GAO says will take 50 years to fix exists despite the fact that total revenues have recovered from the hit that they took in 2008 and 2009. Between the second quarter of 2009 and the third quarter of 2012, receipts grew 12 percent in nominal dollars. More specifically, income and sales tax collections increased 22 percent and 14 percent respectively, while property tax receipts took a hit and increased only 2 percent between the third quarters of 2011 and 2012.

In the long run, tax receipts are not expected to return to their 2007 historic high as a percentage of GDP, but are still expected to show moderate growth. This growth, however, will not be enough for states to keep pace with current expenditures and increasing healthcare costs.

Read the original article here.

photo by: 401(K) 2013

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