States and Cities to Face Huge Deficits, Says GAO

State and local governments will face a financial crisis over the next decade requiring them to either raise taxes by 17 percent or cut spending by 14 percent, according to a new report from the Government Accountability Office (GAO).

Why are states and cities heading for fiscal disaster? According to the GAO, it is largely because of the same problem facing the entire nation: health care costs.

"As is true for the federal sector, it is the growth in health-related costs that is a primary driver of the fiscal challenges facing the state and local government sector," stated the GAO in its report. State and local expenditures for both Medicaid, and health insurance for state and local government employees and retirees are predicted by GAO analysts to rise quickly in the next few years.

According to GAO's simulations, barring significant policy changes, state and local average deficits and spending will begin to exceed revenue by 2017 and just grow worse from there. In a worse-case scenario, GAO projects a combined state and local government deficit of $11.5 trillion in today's dollars by 2050. What can state and local governments do? Greatly increase taxes, greatly reduce spending, or both.

Don't look to federal government for help
Speaking at a health care roundtable on July 18, President Bush offered little hope that the federal government would step in and help with health care costs. "I believe government cannot provide affordable health care," he said. " I believe it would cause -- it would cause the quality of care to diminish. I believe there would be lines and rationing over time."

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