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GAO: Without draconian cuts, states face decades-long fiscal crisis

The economic recession that blasted huge holes in state and local government budgets and rapidly rising health care costs are combining to create a long-term budget crisis for states that is so bad it would require massive tax hikes or spending cuts, according to a new government watchdog report.

The Government Accountability Office said in a report issued Friday that tax revenues as a percentage of gross domestic product will not return to the historical high reached in 2007, just before the recession hit, until 2058, according to its models.

At the same time, rising health-related costs borne by state and local governments, especially those incurred by government employees and retirees, are putting pressure on state budgets. State and local Medicaid expenditures and employee-related costs both grow faster than the gross domestic product, the GAO said. It estimated health-related costs will grow from about 3.9 percent of GDP this year to 7.4 percent by 2060.


By that year, health-related costs will make up a greater proportion of state and local government expenditures than non-health-related costs, like wages and salaries.

“[S]tate and local governments face long-term fiscal pressures,” the GAO said in a statement accompanying the release, a bureaucratic understatement of epic proportions. “Absent any policy changes, the sector will face an increasing gap between expenditures and receipts in future years.”

Government pension assets have increased in value over the last year, but liabilities are growing at a faster pace, a sign of long-term trouble.

Bob Williams, a public policy analyst who runs the independent State Budget Solutions, said the GAO’s reports have forecast the same long-term shortfall since it was first released in 2007. But making the changes that bolster a state’s long-term health, at the short-term expense of taxpayers or beneficiaries of programs that would need to be cut, isn’t in a policymaker’s immediate interests.

“The major problem is that governors and legislators have a very short-term vision: Don’t rock the boat and don’t do anything that hurts their re-election chances. It is so much easier to kick the can forward than to take what is needed — raise taxes [and] cut spending or do a combination of both,” Williams said.

Even if legislatures and governors were to take action, they would need to implement draconian cuts and tax increases to close the gap. The GAO estimated state and local governments would have to reduce expenditures or raise revenue by a combined 18 percent — and likely more: The GAO’s models assume no economic impacts from spending cuts or tax hikes.

At present levels, tax receipts won’t grow nearly as fast as health-related costs. Property tax receipts are expected to increase from 2.7 percent of GDP to 2.8 percent over 50 years, which would still leave governments short of the 3 percent historical high reached in 2009. Sales tax receipts are expected to decline gradually as a percentage of GDP.

The GAO still says it cannot predict the impact of the Affordable Care Act on state budgets, given the different paths states are taking towards implementation. Some states have accepted federal money to expand Medicaid, though that federal money will decline over time. Others have refused to expand Medicaid. Further complicating the picture, government economists still don’t know how the controversial law will affect the growth of health care costs.