As reported in Governing, the Governmental Accountability Office (GAO) recently released a report showing the fiscal challenges that state and local governments will face in coming years as costs increase and traditional revenue sources shrink.

To close the fiscal gap, governments would need to trim current expenditures by 14.2 percent and maintain that level of spending as a share of GDP in future budgets.

The report cites health care and pension costs as one of the main drivers of increasing expenses for state and local governments.

Most notably, the report cites rising health costs as the primary driver of the sector’s long-term fiscal challenges. Medicaid expenditures, along with health insurance costs for public employees and retirees, are expected to rise sharply.

A slow economic recovery and weakening tax returns present a difficulty in making up the needed budget.

On the revenue side, eroding tax bases have “buried” states, Boyd said. The economy has slowly shifted from goods to services, which governments traditionally are reluctant to collect taxes on. Furthermore, the rise of the Internet made it difficult to collect sales tax, particularly with the growth of downloadable music and e-Books.

For more information, including additional data and a graphical illustration, see the full story from Governing.