A recent report by the Government Accounting Office titled, “State and Local Government Fiscal Outlook,” found that state and local governments will continue to face near-term and long-term fiscal challenges through 2060 unless policy changes are made.

The study identified the following short and long-term challenges:  flattened property tax receipts, reductions in federal assistance, and increases in health related expenditures.  From the study:

…property tax receipts, which had grown more than 3 percent from the second quarter of 2009 to the third quarter of 2010, flattened in 2011, increasing less than 1 percent from 2010 to 2011 as real estate values remained depressed. In addition, as most outlays from the American Recovery and Reinvestment Act of 2009 (Recovery Act) have already occurred, the state and local government sector will continue to adjust to a reduced level of federal assistance provided by the Recovery Act. This April 2012 update to our model incorporates these near-term changes for both revenues and expenditures but focuses primarily on the long-term fiscal outlook for state and local governments as a sector

In the long term, the decline in the sector’s operating balance is primarily driven by the rising health-related costs of state and local expenditures on Medicaid and the cost of health care compensation for state and local government employees and retirees.