Walking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?

Working Paper No. 13-18
by Bo Zhao and David Coyne
2013 Series

This paper develops a new measure of state and local fiscal sustainability called the "trend gap," which is based on socioeconomic and other fundamental factors and removes the short-term influence of the business cycle. The paper estimates the trend gap and finds that the nationwide per capita trend gap has been on a growing path over the past three decades, a different conclusion than found in previous studies. Social insurance and income maintenance programs have played a major role in the growth of the trend gap, while pension and other post-employment benefits (OPEB) plans have become increasingly important in driving it up. In addition, there are large and growing disparities in the trend gap across states.

Keywords: fiscal sustainability, state and local fiscal trends

JEL Classifications: H4, H7

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