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Key Trends and Issues Regarding State and Local Sector Finances United States Government Accountability Office A Report to Congressional Requesters March 2020 INTERGOVERNMENTAL ISSUES Key Trends and Issues Regarding State and Local Sector Finances Accessible Version GAO-20-437 March 2020 INTERGOVERNMENTAL ISSUES Key Trends and Issues Regarding State and Local Sector Finances Highlights of GAO-20-437, a report to congressional requesters Why GAO Did This Study What GAO Found State and local governments work During the past two decades, the state and local government sector experienced together with the federal government overall growth in spending and revenue. Specifically, inflation-adjusted spending to deliver a broad range of public increased from about $1.7 trillion in 1998 to about $2.8 trillion in 2018. Health services. GAO’s prior work has spending accounted for the largest increase. Inflation-adjusted revenues shown that the state and local increased from about $1.6 trillion in 1998 to about $2.6 trillion in 2018. Taxes government sector will likely face comprised the largest revenue category. fiscal pressures during the next 50 years due to a gap between From 1997 to 2017, state and local government expenditures and revenues grew spending and revenues. The fiscal faster than state gross domestic product in most states. On average, growth in sustainability of the state and local expenditures outpaced growth in revenues by 0.3 percentage points per year government sector is essential to during the period. Increases in public welfare spending drove spending growth effectively implement (spending largely for states’ share of Medicaid), while federal grants and user intergovernmental programs. charges drove revenue growth. GAO was asked to review recent trends in state and local government State and Local Government Expenditures and Revenues Grew Faster Than State expenditures and revenues, fiscal Gross Domestic Product (GDP) in Most States from 1997 to 2017 pressures for state and local governments with intergovernmental U.S. average annual Number of states with Number of states with implications, and the implications of growth rate growth exceeding state growth slower than federal policy for these pressures. (%) GDP growth state GDP growth This report (1) examines trends in Expenditures 2.8 43 8 state and local government 2.5 35 16 expenditures and revenues during Revenues 2.3 the past two decades; and (2) State GDP — — synthesizes expert views regarding the effects of federal policy on state Source: GAO analysis of U.S. Census Bureau and Bureau of Economic Analysis data. | GAO 20-437 and local government fiscal Note: “U.S.” indicates the aggregate value for the state and local government sector across all 50 states and the District of Columbia. conditions. For each state and the District of Columbia, we compared average annual compound growth in real (inflation-adjusted) expenditures or GAO analyzed data from the Bureau revenues, as appropriate, to average annual compound growth in inflation-adjusted state GDP. of Economic Analysis National Income and Product Accounts, the Experts identified a range of issues facing state and local governments that could U.S. Census Bureau and the affect the sector’s fiscal condition. Those most frequently mentioned included: National Association of State Budget Health care. Experts expressed concerns regarding their ability to meet future Officers. Medicaid enrollment demands in an economic downturn. GAO also interviewed a Federal budget uncertainty. Uncertainty in the future of federal assistance as nongeneralizable sample of experts well as the timing of federal appropriations, including federal government from organizations that represent state and local governments, shutdowns, affected state and local governments’ program planning. professionals who provide financial Physical infrastructure. Aging infrastructure costs and uncertainty in federal and credit risk information (credit funding sources placed pressure on the sector to identify alternative revenue rating agencies), and researchers sources for transportation projects. from think tanks to better understand how federal policies affect state and Tax policy. Provisions of the law known as the Tax Cuts and Jobs Act had local government fiscal conditions. varied effects on the sector, but most experts agreed it is still too early to assess the act’s full effects on state and local government revenues. Natural disasters. Experts acknowledged the important contribution of federal View GAO-20-437. For more information, financial support for disaster response and recovery and noted some states’ contact Michelle Sager at (202) 512-6806 or mitigation efforts to address the increasing frequency and cost of disasters. [email protected]. Credit rating firms are considering the effects of climate change in their credit analyses of state and local governments. United States Government Accountability Office Contents Letter 1 Background 3 State and Local Governments Experienced Overall Growth in Expenditures and Revenues during the Past 20 Years 4 Experts Identified Federal Policies and Other Considerations That Affect State and Local Governments’ Fiscal Conditions 22 Appendix I: Objectives, Scope, and Methodology 34 Appendix II: GAO Contact and Staff Acknowledgments 39 Appendix III: Accessible Data 40 Data Tables 40 Tables Table 1: State and Local Government Expenditures and Revenues Exceeded State Gross Domestic Product (GDP) Growth in the Majority of States from 1997 to 2017 9 Table 2: State and Local Government Expenditure Growth Relative to State Gross Domestic Product (GDP) Growth, 1997 to 2017 11 Table 3: State and Local Government Revenue Growth Relative to State Gross Domestic Product (GDP) Growth, 1997 to 201715 Table 4: Growth in Federal Grant Funding by Selected Categories, 1997 to 2017 18 Figures Figure 1: State and Local Government Expenditures, by Category, 1998 and 2018 5 Figure 2: State and Local Government Revenues, by Category, 1998 and 2018 6 Page i GAO-20-437 Intergovernmental Issues Figure 3: Federal Health Grants Reflected the Only Increase in State and Local Government Grants from 1998 to 2018 8 Figure 4: General Revenues Grew Slower than General Expenditures in Most States, 1997 to 2017 10 Figure 5: Federal Grant Revenues Grew Faster than Own-Source Revenue in Most States, 1997 to 2017 19 Figure 6: Median State Rainy Day Fund Balances as a Percentage of Total General Fund Expenditures, 1998 to 2018 20 Figure 7: State Rainy Day Fund Balances as a Percentage of Total General Fund Expenditures, 1998 to 2018 21 Data Table for Figure 1: State and Local Government Expenditures, by Category, 1998 and 2018 40 Data Table for Figure 2: State and Local Government Revenues, by Category, 1998 and 2018 40 Data Table for Figure 3: Federal Health Grants Reflected the Only Increase in State and Local Government Grants from 1998 to 2018 40 Data Tables for Figure 4: General Revenues Grew Slower than General Expenditures in Most States, 1997 to 2017 41 Data Tables for Figure 5: Federal Grant Revenues Grew Faster than Own-Source Revenue in Most States, 1997 to 2017 42 Data Table for Figure 6: Median State Rainy Day Fund Balances as a Percentage of Total General Fund Expenditures, 1998 to 2018 44 Data Table for Figure 7: State Rainy Day Fund Balances as a Percentage of Total General Fund Expenditures, 1998 to 2018 45 Abbreviations BEA Bureau of Economic Analysis Bureau Census Bureau CMS Centers for Medicare & Medicaid Services DRRA Disaster Recovery Reform Act of 2018 FPL Federal Poverty Level GDP gross domestic product HCERA Health Care and Education Reconciliation Act of 2010 NASBO National Association of State Budget Officers NCSL National Conference of State Legislatures NIPA National Income and Product Accounts PPACA Patient Protection and Affordable Care Act SALT State and Local Taxes TCJA Tax Cuts and Jobs Act Page ii GAO-20-437 Intergovernmental Issues This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page iii GAO-20-437 Intergovernmental Issues 441 G St. N.W. Washington, DC 20548 Letter March 23, 2020 The Honorable Jim Jordan House of Representatives The Honorable Gary Palmer House of Representatives State and local governments work together with the federal government to deliver a broad range of public services. Federal funds for government programs implemented in partnership with states and localities support health care, education, public safety, infrastructure, and other policy goals. Successful implementation of federal policy goals in these areas is therefore contingent on state and local governments’ fiscal stability. Consequently, the fiscal health of state and local governments is an issue of critical interest to federal policymakers. You asked us to provide information on and analyze trends in state and local government expenditures and revenues, fiscal pressures facing state and local governments, and the implications of federal policy actions on state and local governments’ fiscal health.1 This report (1) examines recent trends in state and local government expenditures and revenues; and (2) synthesizes expert views regarding the effects of federal policy on state and local government fiscal conditions. To describe recent trends in state
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