Summary

As the nation begins to debate health care reform, welfare reform, and other major policy initiatives in which state and local governments are expected to play a key role, questions persist about the financial condition of these governments. GAO found that between 1985 and 1991, state and local governments faced myriad spending and revenue pressures. Most categories of programs were growing, but some programs grew more rapidly, such as Medicaid at the state level and public safety at the county level. Although jurisdictions tried to curb program growth, trim services, and raise revenues, spending continued to outpace revenues, bringing year-end budget surpluses down. Without such "budget cushions," jurisdictions had less flexibility to fund services, and some jurisdictions ended up with budget deficits. These trends may improve as the economy rebounds or as priorities change. But many cities beset with high poverty levels and low incomes face a more fundamental long-term problem. These jurisdictions have less capacity to finance day-to-day police, fire, and other services because of their relatively low tax bases. Overall, the decline in state and local budget surpluses could worsen the effects of the federal deficit on the economy, potentially reducing long-term growth. In GAO's view, the trends and the differences in state and local financial conditions should be a part of the discussions on major policy reforms now underway.