Dire out­look for states’ fis­cal sus­tain­abil­ity

The Review - - FRONT PAGE - By Bethany Blank­ley Watch­dog.org

The U.S. Gov­ern­ment Ac­count­abil­ity Of­fice’s year-end re­view of the fis­cal health of states and lo­cal gov­ern­ments paints a grim pic­ture for 2019.

The GAO says states “will have [an] in­creas­ingly tough time cov­er­ing their bills over the next 50 years. Fis­cal sus­tain­abil­ity presents a na­tional chal­lenge shared by all lev­els of gov­ern­ment.”

Its cal­cu­la­tion is based on the oper­at­ing bal­ance — a mea­sure of the sec­tor’s abil­ity to cover its cur­rent ex­pen­di­tures out of its cur­rent re­ceipts.

Up­dated ev­ery year since 2007, the re­port, “State and Lo­cal Gov­ern­ments’ Fis­cal Out­look: 2018 Up­date, GAO-19-208SP,” cap­tures rev­enue and spend­ing pat­terns and how they are im­pacted by gov­ern­ment poli­cies. Since 2007, GAO has pub­lished sim­u­la­tions of long-term fis­cal trends in the state and lo­cal gov­ern­ment sec­tor, which have con­sis­tently re­vealed longterm fis­cal pres­sures and near-term oper­at­ing deficits.

In 2018, the re­port sur­veyed rev­enue and spend­ing pat­terns and sug­gests that rev­enues “may be in­suf­fi­cient to sus­tain the amount of gov­ern­ment ser­vice cur­rently pro­vided.”

Although GAO’s longterm out­look is based on his­tor­i­cal spend­ing and rev­enue data as well as the Con­gres­sional Bud­get Of­fice’s Gross Do­mes­tic Prod­uct pro­jec­tions, the fac­tors that in­flu­ence the long-term can also have near-term ef­fects, Michelle Sager, di­rec­tor of Strate­gic Is­sues at GAO, told Watch­dog.org.

In 2019, the CBO ex­pects real GDP to con­tinue to grow at a rate of 2.4 per­cent, less than 2018’s rate of 3.1 per­cent.

Sager points to key fac­tors to watch in 2019, in­clud­ing over­all eco­nomic trends na­tion­wide, costs of health care growth, ef­fects of fed­eral tax changes, and a U.S. Supreme Court rul­ing on state sales taxes. GAO also iden­ti­fied fed­eral pol­icy changes that could af­fect the state and lo­cal gov­ern­ment sec­tor’s fis­cal out­look, specif­i­cally the ef­fects of the re­cently en­acted Tax Cuts and Jobs Act and how states will ad­just their tax poli­cies as a re­sult.

“In the midst of th­ese ex­ter­nal fac­tors, most states do have re­quire­ments re­lated to bal­anc­ing their bud­gets,” Sager said. “None­the­less, deficits can arise be­cause the 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.” The big­gest ex­penses lo­cal gov­ern­ments and states face stem pri­mar­ily from Med­i­caid costs, GAO notes, in ad­di­tion to health ben­e­fit ex­penses for state and lo­cal gov­ern­ment em­ploy­ees and re­tirees. Med­i­caid ex­pen­di­tures are ex­pected to rise by at least 1 per­cent more on av­er­age than the GDP ev­ery year.

Rates of re­turn on pen­sion as­sets could also shift fu­ture fis­cal out­comes for the sec­tor, GAO states. Th­ese ex­pen­di­tures are pro­jected to grow as a share of GDP while rev­enues from per­sonal in­come taxes and fed­eral grants to states and lo­cal­i­ties will also in­crease dur­ing the same time pe­riod, GAO states.

In ad­di­tion to their own 2019 spend­ing and rev­enue de­ci­sions, state and lo­cal gov­ern­ments’ fis­cal out­look will fluc­tu­ate depend­ing on how state in­come taxes are ad­justed to com­ply with fed­eral in­come tax rules.

The U.S. Supreme Court’s June 2018 de­ci­sion in South Dakota v. Way­fair, Inc. could af­fect states’ abil­i­ties to col­lect rev­enue. The court ruled that states could re­quire out-of-state sell­ers to col­lect and re­mit sales taxes on pur­chases even if the seller does not have a sub­stan­tial phys­i­cal pres­ence in the tax­ing state. States’ tax rev­enue will be im­pacted by the ex­tent to which their laws and en­force­ment ef­forts are re­vised in re­sponse to the rul­ing.

The re­port re­lied on data from the Bureau of Eco­nomic Anal­y­sis’s Na­tional In­come and Prod­uct Ac­counts and recorded re­sults in the ag­gre­gate.

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