What’s the latest thinking regarding the fiscal health of state and local governments across the nation?

Overview. The 2019 update to the GAO’s annual outlook on the fiscal condition of states and localities suggests that state and local governments will have an increasingly tough time covering its bills over the next 50 years. Although the GAO model shows revenue will increase, spending will likely rise faster—driven largely by health care costs, including Medicaid spending. Revenues may be insufficient to sustain the amount of government service currently provided.

Fiscal sustainability. Fiscal sustainability presents a national challenge shared by all levels of government. Since 2007, GAO has published simulations of long-term fiscal trends in the state and local government sector, which have consistently shown that the sector faces long-term fiscal pressures. While a great majority of states have requirements related to balancing their budgets, deficits can arise for reasons including planned annual revenues are not generated at the expected rate, demand for services exceeds planned expenditures, or both, resulting in a near-term operating deficit.

This report updates GAO’s state and local fiscal model to simulate the fiscal outlook for the state and local government sector. This includes identifying the components of state and local expenditures likely to contribute to the sector’s fiscal pressures as well as the effects of revenue changes on the sector’s outlook.

GAO’s model uses the Bureau of Economic Analysis’s National Income and Product Accounts as the primary data source and presents the results in the aggregate for the state and local government sector as a whole. The model shows the expected level of receipts and expenditures for the sector until 2068, based on historical spending and revenue patterns. In addition, the model assumes that the current set of policies in place across state and local governments remains constant to show a simulated long-term outlook. Because the model covers the sector in the aggregate, the fiscal outcomes for individual states and localities cannot be identified.

GAO’s simulations suggest that state and local governments will likely face an increasing difference between expenditures and revenues during the next 50 years as reflected by the operating balance—a measure of the sector’s ability to cover its current expenditures out of its current revenues. While both expenditures and revenues are projected to increase as a percentage of United States’ gross domestic product (GDP), a difference between the two is projected to persist because expenditures are expected to grow faster than revenues throughout the simulation period. The sector would need to make changes to avoid fiscal imbalance and assure that revenues are at least equal to expenditures.

Visit the U.S. Government Accountability Office website to read the detailed fiscal outlook for states and localities.