Report: States, Local Governments Face Huge Budget Challenges

Published February 26, 2015

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, but health care costs will create a growing problem in the near future.

Local governments have lagged behind the states, with cities and counties only recently starting to experience some recovery.

Sounding the Alarm

Although the short-term fiscal trends now appear to be moving in a positive direction at both levels of government, the Government Accountability Office (GAO) offers a dire long-term outlook in the most recent edition of its State and Local Governments’ Fiscal Outlook report.

The study found states and local governments will continue to face long-term fiscal challenges, with a growing gap between revenue and spending through the year 2060, unless they implement significant policy changes.

Key Concerns for Governments

The report projects state and local health care expenditures will exceed non-health-care expenditures as a percentage of GDP between 2055 and 2060.

GAO estimates closing 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 size of needed expenditure reductions is up from 14.2 percent as reported in the 2013 edition of the GAO report.

Not Out of the Woods’

Overall, the message to state and local policymakers should be, “We’re not out of the woods yet.” Although 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 tradeoffs if left unchecked.

State and local policymakers should not rest on their laurels as recent fiscal woes subside. Instead, they should continue pushing for greater fiscal restraint and pursue new ways to control costs and increase government efficiency so today’s warning signs do not become tomorrow’s emergency sirens.

Leonard Gilroy ([email protected]) is director of government reform at Reason Foundation. An earlier version of this story appeared at Reason’s Out of Control Policy Blog at Reprinted with permission.