From the U.S. Government Accountability Office, www.gao.gov Transcript for: 2018 Update to GAO's State and Local Government Fiscal Outlook Model Description: In this podcast, we discuss the 2018 update to GAO's annual report on state and local governments' fiscal outlook. Related GAO Work: GAO-19-208SP: State and Local Governments' Fiscal Outlook: 2018 Update Released: December 2018 [ Background Music ] [ Michelle Sager: ] The goal of fiscal sustainability presents a national challenge. [ Matt Oldham: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. I'm Matt Oldham. GAO has been reporting on the fiscal outlook for state and local governments every year since 2007. It looks at some of the long-term trends and challenges these sectors may face. I'm with Michelle Sager, a Strategic Issues director at GAO, who's here to talk about this year's findings. Michelle, in years past the theme has been that state and local governments face long-term fiscal pressures. Any changes this year? [ Michelle Sager: ] The overall message in 2018 is consistent with prior updates to GAO's state and local fiscal model. The message is that state and local governments continue to face long-term fiscal pressures. And GAO's simulations suggest that the state and local sector will face an increasing difference between revenues and expenditures during the next 50 years. Although both expenditures and revenues are expected to increase as a percentage of gross domestic product or GDP, expenditures are expected to grow faster than revenues throughout the simulation period. I should mention that one new addition this year is a more robust sensitivity analysis and a discussion of federal policy changes that could affect the state and local government sectors' fiscal outlook. For example, the effects of the recently enacted Tax Cuts in Jobs Act will likely depend on how states incorporate the Act into their state income tax rules. [ Matt Oldham: ] So over the past decade plus that GAO has been doing this reporting, have there been trends throughout that time? [ Michelle Sager: ] There are. And so one kind of perennial challenge is the essence of budgeting which is that particularly for state and local governments, they have an ongoing effort to try and maintain balance of expenditures and revenues. So our simulations show that policy changes will likely be required to maintain long-term fiscal balance. And exacerbating this challenge is the dynamic nature of revenues and expenditures in response to policy changes, service demands, and economic trends. So this interconnectiveness of federal, state, and local governments in an always changing economy, it's not a problem area per se but it is a defining factor of our federal system and that contributes to the complexity of trying to balance expenditures and revenues. One thing that we've consistently found is that in terms of fiscal pressures, growth in the sector's overall spending is largely driven by healthcare expenditures. This includes Medicaid spending as well as spending on health benefits for state and local government current employees and retirees. [ Background Music ] [ Matt Oldham: ] It sounds like as we've seen with some consistency in previous updates, state and local governments are seeing growth in healthcare expenditures. And while tax revenues will likely increase, growth in expenditures is poised to outpace those revenue gains. Is there a way to reverse these trends? [ Michelle Sager: ] You've identified a key finding in our simulations which is that if policy remains the same, revenues are likely to be insufficient to main the sector's capacity to provide services consistent with current policy. So consequently our simulation suggests that state and local governments will need to make policy changes to avoid fiscal imbalance. One choice could be to change the current level of services. Alternatively and perhaps more likely to maintain the current level of services, state and local governments face policy choices and tradeoffs. These policy choices include reducing expenditures, increasing revenues, or more likely choosing some combination of expenditure reductions and revenue increases that would together be of sufficient magnitude to maintain that balance between expenditures and revenues. [ Matt Oldham: ] So finally, Michelle, what do you believe is the bottom line of this report? [ Michelle Sager: ] In a bite-sized nugget in one sentence, the bottom line is that GAO simulations suggests that the state and local sector will likely face an increasing difference between expenditures and revenues during the next 50 years. And the key takeaway for policy makers is that the goal of fiscal sustainability presents a national challenge and that is shared by all levels of government. [ Matt Oldham: ] Michelle Sager is a Strategic Issues director with GAO and she was talking about the 2018 update to the state and local governments' fiscal outlook. Thank you for your time Michelle. [ Michelle Sager: ] Thank you. [ Background Music ] [ Matt Oldham: ] And thank you for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple Podcasts. [ Background Music ] [ Matt Oldham: ] For more from the congressional watchdog, the U.S. Government Accountability Office, visit us as gao.gov.