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GAO Projects Worrisome Long-Term Fiscal Outlook for State, Local Budgets

In my story on state policy activity we could see in 2015, I reported that a vast majority of states approved spending increases in public schools for fiscal 2015, and that it's fair to expect a similar trend in spending as states work on their fiscal 2016 budgets. But a new report from the federal Government Accountability Office (GAO) signals that not everything looks rosy for state and local government budgets.

In a fiscal outlook for state and local governments published on Dec. 17, the GAO states that using 45-year projections based on current fiscal conditions, the deficit for state and local operating budgets as a percentage of gross domestic product is slated to grow from about 2 percent of GDP to close to 4 percent of GDP by 2060. Capital-related expenditures are excluded from this calculation, as are funds used for transportation projects. (The report, unfortunately, doesn't break out state and local budget projections separately.)

While tax receipts have grown by 9 percent in real dollars from 2009 to 2014, over the same period, property tax receipts have shrunk. More recently, the report states that "from the second quarter of 2013 to the second quarter of 2014, total tax receipts declined 1 percent and income tax receipts declined 8 percent in real dollars."

"Since most state and local governments are required to balance their operating budgets," the GAO report states, "the declining fiscal conditions indicated by our simulations continue to suggest that the sector would need to make substantial policy changes to avoid fiscal imbalances that would likely grow in the future."

Education isn't mentioned specifically in this GAO report. But a major factor in the long-term picture is the growth in health care expenditures, including health benefits for state and local employees and retirees. Under present conditions, state and local governments' health care costs will grow from the current figure of 3.9 percent in 2014 to 7.4 percent of GDP in 2060. Here's how that compares to non-health care costs for state and local governments, in a graph from the GAO:

GAOReport.PNG

You may not be surprised to learn that public-sector health benefits are a controversial issue in Illinois, separate from the whole fight over pension benefits that's now headed to the state Supreme Court. Last July, the court ruled in Kanerva v. Weems that current subsidies for certain public-sector retirees' health care costs were protected under the state constitution. That ruling invalidated a state law passed in 2012 that required new contributions from those retirees towards their health care benefits. 

A lot can, and will, happen in 45 years, to upend any budget projections. But the GAO's report could serve as a useful snapshot for state and other policymakers going forward. 

Read the full GAO report on state and local governments below: 

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