The picture is not getting any better for state governments. How best to govern in an age where health care and pension costs are the major drivers of the fiscal challenges ahead.
David Walker, comptroller of the United States, writing in the preface to the release of a GAO report today:
The findings of these new simulations indicate that the state and local government sector faces fiscal challenges that in many ways mirror those of the federal government. In particular, GAO has found that in the absence of policy changes, large and recurring fiscal challenges for the state and local sector will begin to emerge within a decade. For example, the analysis suggests that state and local governments will need to somewhat increase their pension contributions to fully fund pension costs for their employees. Additionally, there is increasing concern that investment in the nation’s infrastructure is not sufficient to maintain its condition and to accommodate the increased demand of a growing economy. Moreover, as in the federal sector, the growth in health-related costs serves as the primary driver of the fiscal challenges facing the state and local government sector. In particular, two types of state and local expenditures will likely rise quickly because of escalating medical costs. The first is Medicaid expenditures, and the second is the cost of health insurance for state and local employees and retirees. At the same time, most revenue growth is expected to remain roughly flat as a percentage of Gross Domestic Product. As such, the projected rise in health-related costs is the root of the fiscal difficulties these simulations suggest will occur.
Addressing the nation’s long-term fiscal imbalances constitutes a major challenge for all levels of government. There are no “quick fixes,” and all levels of government need to work in tandem to address the complex and interrelated reforms that need to be made. Continuing on this unsustainable path will gradually erode, and ultimately damage, our economy, our standard of living, and potentially our domestic tranquility and national security. This is a challenge that needs to be addressed with a greater sense of urgency by policymakers since time is currently working against us.
Simply raising taxes won’t solve the problem; it could make it worse by dragging down economic growth. Can Massachusetts proceed without controlling its public expenditures? Will Governor Patrick succeed in getting state workers to pay more of their health insurance?
Full text in PDF here: http://www.gao.gov/cgi-bin/get…