State and Local Fiscal Sustainability: The Challenges

At the state and local level, fiscal sustainability is the long‐run capability of a government to consistently meet its financial responsibilities. It reflects the adequacy of available revenues to ensure the continued provision of the service and capital levels that the public demands. After examining separate revenue and expenditure trends for state and local governments, this article identifies three specific sets of pressures that affect subnational fiscal sustainability—cyclical, structural, and intergovernmental. It then presents three specific examples of these pressures: Medicaid, pensions and retiree health benefits, and infrastructure. The author asserts that without changes in the fiscal system—in both revenues and expenditures—state and local fiscal sustainability will disappear. It concludes with some potential solutions but argues that the most difficult reform is to ensure that the public understands that there is no such thing as a free lunch.