Fiscal woes to last decades for U.S. states, cities: GAO

WASHINGTON (Reuters) – The fiscal conditions of U.S. state and local governments will steadily decline through 2060 because of rising healthcare costs, a federal watchdog agency said on Wednesday, but it added that short-term pressures have eased over the last year.

“Although the sector’s near-term fiscal picture has improved slightly since our March 2010 update, the economic downturn has created an unprecedented fiscal situation for states as revenues declined in tandem with the economy,” the Government Accountability Office said in a report.

The housing market downturn, financial crisis and recession created a collapse in state and local revenues, which caused many states, cities and counties to raise taxes, slash spending and turn to the federal government for help.

Investors in the $2.9 trillion municipal bond market have been spooked by the budget crisis and have been pulling their money out of muni mutual funds for nearly five months.

Total tax receipts declined nearly 5 percent from 2008, when the recession first hit most states and local governments, to 2009, GAO said.

In 2010, total tax receipts grew marginally, GAO said.

Even with the anemic increase, though, revenues remain below 2008 levels and state and local governments still have a bleak outlook, it added.

“The decline in the sector’s operating balance over time is primarily driven by rising health-related costs,” it said.

Almost all state and local governments must end their fiscal years with balanced budgets. As their costs rise in one area, they will have to cut spending in another or raise taxes to cover the new demands.

Medicaid, the healthcare program for the poor that states operate with federal reimbursements, takes up about a third of state budgets. The Medicaid spending will likely grow as the federal healthcare plan encourages more people to enroll.

Meanwhile, health insurance costs for state and local retirees and employees are projected to grow more than the national Gross Domestic Product. The GAO anticipates that their health-related costs will be about 8.3 percent of GDP in 2060 — more than double the share in 2010.

(Reporting by Lisa Lambert; Editing by Jan Paschal)

Fiscal woes to last decades for U.S. states, cities: GAO