The decline in the sector’s operating balance over time is primarily driven by rising health-related costs. Because most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations suggest the fiscal pressures the sector faces and foreshadow the extent to which these governments will need to make substantial policy changes to avoid growing fiscal imbalances.....The primary driver of long-term fiscal challenges for the state and local government sector continues to be the projected growth in health-related costs. Specifically, state and local expenditures on Medicaid and the cost of health insurance for state and local retirees and employees are projected to grow more than GDP. The model’s simulations also show that the sector’s health-related costs will be about 3.7 percent of GDP in 2010 and 8.3 percent of GDP in 2060. In contrast, we found that other types of state and local government expenditures—including wages and salaries of state and local workers and investments in capital goods—are expected to grow slightly less than GDP. The model projects that the sector’s nonhealth-related costs will be about 10.9 percent of GDP in 2011 and 7.1 percent of GDP in 2060.