State, local governments face massive, growing budget gaps in 2015 and beyond

12/31/2014

By Eric Boehm  

As the calendar flips to 2015, fiscal pressures will continue to tax the budgets of state and local governments.

And that could mean higher taxes for many Americans.

Projections released this month by the Government Accountability Office show that state and local governments will see current gaps between revenues and expenditures continue to widen in 2015 and beyond. In aggregate, those governments are already underwater, and the amount of red ink will continue to grow over the next 50 years, unless changes are made, the GAO says.

Closing the gap will require aggregate budget cuts or tax increases of 18 percent.

Source: Government Accountability Office

WIDENING GAP: In the aggregate, state and local governments will need to close an 18 percent gap between revenues and expenditures.

“We calculated that closing the fiscal gap would require action to be taken today and maintained for each year equivalent to an 18 percent reduction in the state and local government sector’s current expenditures. Closing the fiscal gap through revenue increases would require action of similar magnitude through increases in state and local tax revenues,” the GAO found. “More likely, closing the fiscal gap would involve some combination of both expenditure reductions and revenue increases.”

Translation: governments will continue to stare down the question of cutting budgets or raising taxes.

The picture is growing bleaker almost by the minute. Less than two years ago, in a similar study, the GAO estimated tax increases and budget cuts would have to equal 14.2 percent of current budget over the next 50 years for balance to be maintained.

But many local and state governments have limited means to control their biggest area of cost growth. After years of underfunding, public pension debt is piling up on government budgets.

Because of the nature of retirement deals with public employees, most of those costs cannot be reduced in the near future. But changes like increasing employee contributions or reducing benefit promises for new hires can make a dent in long-term obligations.

“While most state and local government pension plans have assets sufficient to cover benefit payments to retirees for a decade or more, plans have experienced a growing gap between assets and liabilities,” the GAO reports.

According to the Pew Center on the States, pension liabilities at the state level are already $1 trillion higher than the funds set aside to pay for them.

Pew’s numbers use the state’s own sometimes-flawed projections for future investment returns. A more accurate accounting of obligations suggests pension funds could be as much as $4.7 trillion.

Divided evenly among all Americans, that works out to more than $15,000 owed by every man, woman and child, according to an analysis from State Budget Solutions, which advocates for state governments to rein in costs and address pension issues.

Health care costs — government spending on programs like Obamacare, Medicaid and Medicare — are another huge driver of long-term obligations at the state and local level. By the middle of the century, the GAO projects state and local governments will spend more money on health care costs than all other expenditures combined.

Source: Government Accountability Office

GOVERNMENT BECOMES A GLORIFIED OLD FOLKS HOME: Within 50 years, the majority of governmental expenditures will for health care costs.

While those obligations grow larger, other areas of government spending are unlikely to shrink in equal measure.

That’s a formula for bigger budgets that require more revenue to remain balanced.

source