GAO report profiles state and local finances for Congress.

• Author: Spain, Cathy
• Position: General Accounting Office - Federal Focus

A major study of state and local finances has been completed for House Majority Leader Richard A. Gephardt by the U.S. General Accounting Office (GAO). Not since a 1985 report to the President and the Congress on federal-state-local fiscal relations by the U.S. Treasury Department have state and local finances received such high-level attention. The 1985 report was used to justify the termination of the general revenue sharing program by pointing to state-local surpluses and comparing them to mounting federal deficits. This new study should have a decidedly different policy impact.

In requesting the study two years ago, Majority Leader Gephardt sought a better understanding of the conditions of state and local governments in the face of economic downturn and changing federal policies that shifted funding responsibilities from the federal level to the state and local levels. The specific questions the congressman posed for researchers were:

1. What is the current fiscal condition of states and localities? What has been the magnitude of the budget cuts and tax increases that have been necessary in recent years?

2. What proportion of the state-local fiscal crisis can be attributed to the economic recession? Does this differ by region of the country?

3. What proportion of the state-local fiscal crisis can be attributed to the changed relationship between the federal government and state and local governments? How have cuts in grants in aid, new mandates and conditions of aid, and changes in tax laws contributed to the fiscal crisis?

4. What proportion of the state-local fiscal crisis can be attributed to policy actions taken at the state or local level, such as tax changes or discretionary program expansions?

5. What proportion of the state-local fiscal crisis can be attributed to each of the following:

* inflation of costs in the Medicaid program,

* court-induced spending (or spending to avoid court-ordered expenditures, such as prison expansion or education equalization) and

* critical maintenance or replacement of deteriorating physical infrastructure.

In congressional testimony following the release of the report, State and Local Finances: Some Jurisdictions Confronted by Short-Term and Long-Term Problems, in October, Majority Leader Gephardt pledged to develop a comprehensive legislative agenda for economic growth and fiscal capacity.

General Approach of Study

The objectives of the report were to analyze 1) short-term financial conditions of...