Risk & Compliance

State and Local Government Deficits Soar: GAO

U.S. watchdog agency sees a $131b shortfall for 2009 and $181b for 2010 — sharply up from total $100b-200b two-year range projected as recently as ...
Stephen TaubJanuary 27, 2009

Projected operating deficits of state and local governments have sharply risen, and now are estimated to total $312 billion over a two-year period, the Government Accountability Office says in a new calculation. The operating deficit will be about $131 billion for 2009 and $181 billion for 2010, the GAO says.

The projection is sharply higher than the projected range of  $100 billion to $200 billion that the independent, nonpartisan federal agency estimated as recently as November. The GAO says the earlier forecast was consistent with estimates reported by the National Conference of State Legislatures, the National Governors Association, the Urban Institute, and others.

Since most state and local governments are required to balance their operating budgets, the declining fiscal conditions suggest that, without intervention, these governments would need to make “substantial policy changes” to avoid growing fiscal imbalances, the GAO warned in a letter to Max Baucus, chairman of the Senate Finance Committee. This is because any combination of state and local government revenue increases or spending cuts to address the operating deficit is complicated by the current recession, the GAO asserted.

“The recession contributes to declining state and local revenues in the midst of increased demand for state and local services, many of which are provided to disadvantaged populations,” the letter said. “Recent financial market turmoil places additional limitations on attempts to address this imbalance as state and local governments face increased borrowing costs and reduced access to capital.”

The GAO explains it looks at operating balance net of funds for capital expenditures, which it deems to be a measure of the ability of the sector to cover its current expenditures out of current receipts. It notes that the operating balance measure has historically been positive most of the time, ranging from about zero to about 1 percent of gross domestic product . As a result, the sector generally has been able to cover its current expenses with incoming receipts.

The GAO does add that in July 2007 the model initially suggested that the sector would face increasing fiscal stress in just a few years. The GAO says that more recent simulations with its model suggest that the onset of the sector’s fiscal stress has accelerated. The report was prepared at the request of the Senate Finance Committee, which asked for information on the fiscal pressures facing state and local governments and principles to consider in determining how to effectively target and time temporary assistance to states, especially for Medicaid. This information is intended to inform ongoing congressional deliberations regarding fiscal relief to state and local governments as a component of an economic recovery initiative to respond to the current recession.