prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.

Report 1: B anks play a critical role in the United States economy, channeling money from savers to borrowers and facilitating productive investment  Among other things, banks provide loans to businesses, help individuals finance purchases of cars and homes, and offer services such as checking and savings accounts, debit cards, and ATMs  In addition to occupying a central role in the American economy, the banking industry is a perennial subject of political interest  While the nature of lawmakers' interest in bank regulation has shifted over time, most bank regulations fall into one of three general categories  First, banks must abide by a variety of safety-and-soundness requirements designed to minimize the risk of their failure and maintain macroeconomic stability  Second, banks must comply with consumer protection rules intended to deter abusive practices and provide consumers with complete information about financial products and services  Third, banks are subject to various reporting , recordkeeping , and anti-money laundering requirements designed to assist law enforcement in investigating criminal activity  The substantive content of these requirements remains the subject of intense debate  However, the division of regulatory authority over banks between the federal government and the states plays a key role in shaping that content  In some cases, federal law displaces (or "preempts") state bank regulations  In other cases, states are permitted to supplement federal regulations with different, sometimes stricter requirements  Because of its substantive implications, federal preemption has recently become a "flashpoint" in debates surrounding bank regulation, with one commentator observing that preemption is "[t]he issue at the center of most disputes between state and federal banking regulators " This report provides an overview of banking preemption  First, the report discusses general principles of federal preemption  Second, the report provides a brief history of the American "dual banking system " Third, the report discusses the Supreme Court's decision in Barnett Bank of Marion County, N A  v  Nelson , where the Court held that federal law preempts state laws that "significantly interfere" with the powers of national banks  Fourth, the report reviews two Supreme Court decisions concerning the extent to which states may exercise "visitorial powers" over national banks  Fifth, the report discusses the Office of the Comptroller of the Currency's (OCC's) preemption rules and provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning the preemption of state consumer protection laws  Finally, the report outlines a number of current issues in banking preemption, including (1) the extent to which non-banks can benefit from federal preemption of state usury laws, (2) the OCC's decision to grant special purpose national bank charters to financial technology (FinTech) companies, and (3) proposals to provide legal protections to banks serving marijuana businesses that comply with state law  The doctrine of federal preemption is grounded in the Supremacy Clause of Article VI of the Constitution, which provides that "the Laws of the United States       shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding " The Supreme Court has explained that "under the Supremacy Clause       any state law, however clearly within a State's acknowledged power, which interferes with or is contrary to federal law, must yield " The Court has identified two general ways in which federal law can preempt state law  Federal law can expressly preempt state law when a federal statute or regulation contains explicit preemptive language—that is, where a clause in the relevant federal statute or regulation explicitly provides that federal law displaces certain categories of state law  The Employee Retirement Income Security Act, for example, contains a preemption clause providing that some of the Act's provisions "shall supersede any and all State laws insofar as they may now or hereafter relate to any [regulated] employee benefit plan " Federal law can also impliedly preempt state law "when Congress' command is       implicitly contained in" the relevant federal law's "structure and purpose " The Supreme Court has identified two subcategories of implied preemption  First, "field preemption" occurs "where [a] scheme of federal regulation is so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it " Second, "conflict preemption" occurs where "compliance with both federal and state regulations is a physical impossibility," or where state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress " In Crosby v  National Foreign Trade Council , for example, the Court held that a federal law imposing sanctions on Burma impliedly preempted a Massachusetts law that prohibited state entities from doing business with Burma  The Court reached this conclusion after determining that the state statute posed an obstacle to the federal statute's purposes of (1) providing the President with "flexible" authority over sanctions policy, (2) limiting economic pressure against the Burmese government to the specific range reflected in the federal statute, and (3) granting the President the ability to speak for the country "with one voice " Some federal banking laws expressly preempt state law  Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980, for example, expressly grants federally insured state banks the right to charge the highest interest rate allowed by the states in which they are located, even when lending to borrowers in other states with stricter usury laws  Other federal banking laws impliedly preempt state law  Specifically, the Supreme Court has held that the National Bank Act impliedly preempts state laws that "significantly interfere" with the powers of national banks  However, all banking preemption issues are heavily influenced by the regulatory architecture surrounding the banking system  The following section of the report accordingly outlines the development of the American "dual banking system " Disputes over the federal government's role in regulating the financial system have been a feature of American politics since the country's inception  In 1791, Congress approved the creation of the First Bank of the United States over fierce opposition from many of the nation's leaders, including James Madison and Thomas Jefferson  In addition to accepting deposits and making loans to the public, the First Bank acted as the federal government's fiscal agent by collecting tax revenues, securing the government's funds, and paying the government's bills  The First Bank's proponents argued that the Bank would facilitate economic growth by extending credit to private businesses and establishing a uniform national currency in the form of the Bank's notes  By contrast, the First Bank's critics argued that the concentration of financial power in a single federal institution threatened state sovereignty and undermined the operations of state-chartered banks  This debate culminated in a victory for the First Bank's critics when Congress refused to renew the Bank's charter by a single vote in 1811  But disputes over the federal government's role in the banking system did not end with the demise of the First Bank  After the War of 1812 generated significant economic turmoil, Congress chartered the Second Bank of the United States for a twenty-year term in 1816  The Second Bank performed many of the same functions as the First Bank and attracted similar criticism, eventually becoming the target of populist fury led by President Andrew Jackson  In 1832, President Jackson vetoed legislation to extend the Second Bank's charter, leading to its demise in 1836  After the Second Bank's charter expired, bank regulation was wholly entrusted to the states  Inspired by the Jacksonian attack on concentrated economic power, a number of states dispensed with the requirement that banks obtain a charter via a special act of the state legislature  Instead, banks in these states could obtain charters from state banking authorities as long as they met certain general conditions  During this "Free Banking era," the country lacked a uniform national currency and relied instead on notes issued by state banks, which circulated at a discount from their face value that reflected the issuing bank's location and credit quality  In some states, so-called "wildcat banks" in remote areas issued notes back by minimal specie (gold or silver), assuming that noteholders would be unlikely to travel long distances to redeem them  These wildcat banks failed at a far higher rate than their urban rivals  Economic historians continue to debate the merits and drawbacks of the Free Banking era  According to the standard narrative, Free Banking was largely a failure, resulting in a large number of bank failures, financial instability, and inefficiencies that accompanied a heterogeneous currency  However, a number of revisionist scholars have questioned this assessment, arguing that despite the high rate of bank failures during the Free Banking Era, total losses to bank noteholders during the period were in fact relatively small  Whatever its virtues and vices, the Free Banking Era came to an end during the Civil War  After the Treasury Department's efforts to finance the war by borrowing from Northern banks led to a shortage in specie, Congress enacted the National Currency Act in 1863 and the National Bank Act (NBA) in 1864  Under the Acts, banks were offered the opportunity to apply for a national charter from the newly created OCC, creating a "dual banking system" in which both the federal government and the states chartered and regulated banks  As a condition of obtaining a national charter, the Acts required banks to purchase United States government bonds, giving the federal government a new source of revenue to fight the war  Once national banks deposited those bonds with the federal government, they were allowed to issue national banknotes up to 90 percent of the market value of their bonds  These national banknotes functioned as a uniform national currency and gave the federal government significant control over the nation's money supply  The creation of a dual banking system was not intended by the proponents of the NBA, who assumed that all state-chartered banks would convert to national charters  In order to incentivize state-chartered banks to make this switch, Congress enacted a ten percent tax on state banknotes in 1865  But the tax did not accomplish its intended purpose  While the number of state-chartered banks fell significantly after the enactment of the NBA, state banks eventually skirted this tax by issuing paper checks in lieu of banknotes  And in the late 19th century, state banking authorities contributed to this regulatory arbitrage by offering their banks laxer regulations than the OCC  As a result, state-chartered banks have outnumbered national banks since 1895, and the dual banking system has survived to this day  Under the contemporary dual banking system, the OCC serves as the primary regulator of national banks and has broad powers to regulate their organization, examination, and operations  Section 24 of the NBA grants national banks a number of powers, including: (1) "discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt," (2) "receiving deposits," (3) "buying and selling exchange, coin, and bullion," (4) "loaning money on personal security," and (5) "obtaining, issuing, and circulating notes " Section 24 also grants national banks "all such incidental powers as shall be necessary to carry on the business of banking " Federal court and OCC decisions have identified roughly 80 activities that fall within the "incidental powers" of national banks, including the ability to broker annuities charge customers non-interest fees  By contrast, state banking authorities are the primary regulators of state-chartered banks  While state banking laws are by no means uniform, they typically provide state-chartered banks with the power to engage in activities similar to those listed in the NBA and activities that are "incidental to the business of banking " While the OCC and state banking authorities figure prominently in the dual banking system, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) also play important roles in the bank regulatory regime  Congress created the Federal Reserve in 1913 in response to a 1907 banking panic that highlighted the need for a "lender of last resort" to replenish banks' reserves when they experience liquidity shortfalls  Today, the Federal Reserve also conducts the nation's monetary policy, manages certain elements of the country's payment systems, and regulates bank holding companies, financial market utilities, and banks that join the Federal Reserve System (FRS)  The Federal Reserve Act requires all national banks to join the FRS and gives state banks the option of joining  The Federal Reserve accordingly serves as the principal federal regulator of state-chartered banks that become members of the FRS  The FDIC serves as the principal federal regulator of state-chartered banks that do not join the FRS  Congress created the FDIC in 1933 after a wave of bank failures generated a self-reinforcing cycle of "contagion," leading depositors to "run" from other banks and cause additional failures  In order to minimize the risk of these types of bank runs, the FDIC insures deposits at regulated institutions up to certain limits and regulates those institutions to ensure their safety and soundness  Because federal law requires national banks to obtain FDIC insurance and all states impose that same requirement on the banks they charter, the FDIC plays a key role in regulating the banking system  This complex regulatory architecture has resulted in "symbiotic system" with both state regulation of national banks and federal regulation of state banks  In the modern dual banking system, national banks are not wholly immune from generally applicable state laws, and state banks are not wholly immune from generally applicable federal laws  The Supreme Court has explained that "general state laws" concerning "the dealings and contracts of national banks" are valid as long as they do not "expressly conflict" with federal law, "frustrate the purpose for which national banks were created," or impair the ability of national banks to "discharge the duties imposed upon them" by federal law  National banks are accordingly "governed in their daily course of business far more by the laws of the State than of the nation" because their contracts, ability to acquire and transfer property, rights to collect debts, and liability to be sued for debts "are all based on State law " The OCC has attempted to synthesize the relevant case law as establishing a general principle that state regulations of national banks are valid as long as they "do not regulate the manner, content or extent of the activities authorized for national banks under federal law, but rather establish the legal infrastructure around the conduct of that business " Similarly, state-chartered banks are not wholly immune from federal law  Rather, state banks are subject to certain federal consumer protection, tax, and antidiscrimination laws, in addition to a range of Federal Reserve and FDIC regulations  A number of other legal developments have caused the regulatory treatment of national banks and state banks to converge  Beginning in the 1960s, many states passed so-called "wild card" statutes granting their banks the power to engage in any activities permitted for national banks  Statutes extending the powers of the Federal Reserve and the FDIC have also ensured competitive equality in the opposite direction  In 1980, Congress enacted legislation requiring all state-chartered banks—including those that do not join the FRS—to abide by reserve requirements set by the Federal Reserve, eliminating the competitive advantage conferred by lower state-law reserve requirements  Similarly, in 1991, Congress enacted legislation prohibiting FDIC-insured state banks from engaging as a principal in activities that are not permitted for national banks absent permission from the FDIC  Because all states require the banks they charter to obtain FDIC insurance, the legislation "had the ultimate effect of unifying the state and the federal banking systems " Finally, some federal statutes either explicitly or implicitly preempt state laws in ways that eliminate unequal regulatory treatment for national and state banks  In Marquette National Bank of Minneapolis v  First Omaha Services Corporation , the Supreme Court held that the NBA grants national banks the power to "export" the maximum interest rates allowed by their "home" states, even when lending to borrowers in other states with stricter usury laws  In that decision, the Court considered whether a national bank headquartered in Nebraska—which permitted banks to charge credit-card holders up to 18 percent interest per year on certain unpaid balances—could charge its Minnesota customers more than the 12 percent maximum interest allowable under Minnesota law  Specifically, the Court evaluated whether an NBA provision allowing national banks to charge interest rates allowed by the states "where the bank[s] [are] located" applies even when national banks extend credit to customers in other states with stricter usury laws  The Court held that the NBA provision indeed afforded national banks this power, concluding that the national bank was permitted to charge the maximum interest rate allowable under Nebraska law even when lending to Minnesota customers  Two years after the Marquette decision, Congress enacted legislation to extend the same power to federally insured state banks, preempting contrary state law and equalizing the regulatory treatment of national and state banks vis-à-vis "interest rate exportation " While the regulatory treatment of national and state banks has accordingly converged, federal preemption nevertheless confers certain unique benefits on national banks  Under the Supreme Court's decision in Barnett Bank of Marion County, N A  v  Nelson , federal laws that grant national banks the power to engage in specific activities impliedly preempt state laws that "significantly interfere" with the ability of national banks to engage in those activities  In Barnett Bank , the Court held that a federal law granting national banks the authority to sell insurance impliedly preempted a state law that prohibited banks from selling insurance, subject to certain exceptions  In reaching this conclusion, the Court explained that the state law posed an obstacle to the federal statute's purpose of granting national banks the authority to sell insurance "whether or not a State grants       similar approval " The Court inferred this purpose from the principle that "normally Congress would not want States to forbid, or to impair significantly, the exercise of a power that Congress explicitly granted " Lower courts have followed Barnett Bank 's rule that absent indications to the contrary, federal statutes and regulations that grant national banks the power to engage in specific activities preempt state laws that prohibit or "significantly interfere" with those activities  In Wells Fargo Bank of Texas N A  v  James , for example, the Fifth Circuit held that an OCC rule granting national banks the power to "charge [their] customers non-interest charges and fees" preempted a state statute prohibiting banks from charging a fee for cashing checks in certain circumstances  Similarly, in Monroe Retail, Inc  v  RBS Citizens, N A  , the Sixth Circuit held that this rule preempted state law conversion claims brought against a class of national banks based on fees they charged for processing garnishment orders  Specifically, the Sixth Circuit reasoned that under Barnett Bank , "the level of 'interference' that gives rise to preemption under the NBA is not very high," and that the relevant conversion claims "significantly interfere[d]" with national banks' ability to collect fees  Finally, the Ninth Circuit employed similar reasoning in Rose v  Chase Bank USA, N A  , where it held that an NBA provision granting national banks the power to "loan money on personal security" preempted a state statute imposing various disclosure requirements on credit card issuers  In arriving at this conclusion, the Ninth Circuit reasoned that "[w]here       Congress has explicitly granted a power to a national bank without any indication that Congress intended for that power to be subject to local restriction, Congress is presumed to have intended to preempt state laws " Federal courts have also adopted broad interpretations of an NBA provision authorizing national banks to dismiss officers "at pleasure " In Schweikert v  Bank of America , N A  , the Fourth Circuit held that this provision preempted a state law claim for wrongful discharge brought by a former officer of a national bank  Similarly, the Ninth Circuit has held that this provision preempted a claim brought by a former officer of a national bank for breach of an employment agreement, reasoning that "[a]n agreement which attempts to circumvent the complete discretion of a national bank's board of directors to terminate an officer at will is void as against [federal] public policy " Finally, in Wiersum v  U S  Bank, N A  , the Eleventh Circuit relied on Barnett Bank and the Fourth Circuit's reasoning in Schweikert to conclude that this "at pleasure" provision preempted a wrongful-termination claim brought by a former officer of a national bank under a state whistleblower statute  While federal courts have accordingly adopted expansive views of the circumstances in which state laws "significantly interfere" with national banks' powers, they have also recognized certain general limits on the preemptive scope of federal banking statutes and regulations  In Gutierrez v  Wells Fargo Bank, NA , for example, the Ninth Circuit held that federal banking regulations did not preempt a generally applicable state law prohibiting certain types of fraud  The Gutierrez litigation involved a national bank's use of a bookkeeping method known as "high-to-low" posting for debit-card transactions, whereby the bank posted large transactions to customers' accounts before small transactions  In Gutierrez , customers of the bank brought a variety of state law claims based on the theory that the bank adopted high-to-low posting for the sole purpose of maximizing the overdraft fees it could charge customers  In response, the bank argued that OCC regulations preempted the state law claims  The Ninth Circuit held that the OCC regulations preempted some, but not all, of the customers' claims  Specifically, the court held that an OCC regulation authorizing national banks to establish the method of calculating noninterest charges and fees "in [their] discretion" preempted claims premised on the theory that high-to-low posting was an unfair business practice  The court also held an OCC regulation providing that national banks may exercise their deposit-taking powers "without regard to state law limitations concerning       disclosure requirements" preempted the customers' claims that the bank failed to affirmatively disclose its use of high-to-low posting  However, the court held that federal law did not preempt claims that the bank defrauded its customers by making misleading statements about its posting method  Specifically, the court reasoned that these claims survived preemption because they were based on "a non-discriminating state law of general applicability that does not conflict with federal law, frustrate the purposes of the [NBA], or impair the efficiency of national banks to discharge their duties " In reaching this conclusion, the court rejected the argument that federal law preempted the customers' fraud claims because those claims "necessarily touche[d] on" national banks' authority to provide checking accounts  The court rejected this argument on the grounds that such an expansive preemption standard "would swallow all laws " The Ninth Circuit accordingly allowed the customers' fraud claims to proceed because they did not "significantly interfere" with national banks' ability to offer checking accounts  While the implications of Barnett Bank have been fleshed out most thoroughly in the lower federal courts, the Supreme Court has also applied that decision's reasoning in two cases concerning an NBA provision prohibiting states from exercising "visitorial powers" over national banks  In Watters v  Wachovia Bank, N A  , the Court held that this provision—together with an OCC regulation providing that national banks may conduct authorized activities through operating subsidiaries—preempted state licensing, reporting, and visitation requirements for the operating subsidiaries of national banks  Specifically, the Court reasoned that the proper inquiry in analyzing whether state law interferes with federally permitted bank activities "focuse[s] on the exercise of a national bank's powers , not on its corporate structure " The Court accordingly concluded that the operating subsidiaries of national banks should be treated "as equivalent to national banks with respect to powers exercised under federal law " And because "duplicative state examination, supervision, and regulation would significantly burden" national banks' ability to engage in authorized activities, the Court held that those same regulatory burdens also unacceptably interfere with the ability of national bank subsidiaries to engage in those activities  However, as discussed later in this report, Congress has abrogated Watters 's holding that states may not examine or regulate the activities of national bank subsidiaries  While the Court adopted a broad view of preemption in Watters , it cabined the preemptive effect of the relevant NBA provision two years later in Cuomo v  C learing House Association, LLC  In that decision, the Court held that this NBA provision did not preempt an information request that the New York Attorney General (NYAG) sent to several national banks  Specifically, the NYAG had sent letters to several national banks requesting nonpublic information about their lending practices in order to determine whether the banks had violated state fair lending laws  In response, a banking trade group and the OCC argued that the relevant NBA provision—together with an OCC regulation interpreting that provision to mean that "[s]tate officials may not       prosecut[e] enforcement actions" against national banks, "except in limited circumstances authorized by federal law"—preempted the information request  The Supreme Court rejected this interpretation of the NBA's visitorial powers provision, drawing a distinction between (1) "supervision," or "the right to oversee corporate affairs," which qualify as "visitorial powers," and (2) "law enforcement " Because the Court concluded that the NYAG had issued the information requests in his "law enforcement" capacity—as opposed to "acting in the role of sovereign-as-supervisor"—it held that the NBA did not preempt the requests  As the above discussion makes clear, OCC regulations have figured prominently in litigation over the preemptive scope of federal banking law  While some commentators have contended that the NBA's text and legislature history implicitly provides the OCC with the authority to promulgate preemption rules, Congress formally recognized that the OCC has such authority in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act)  Specifically, Section 114 of the Riegle-Neal Act provides that "[b]efore issuing any opinion letter or interpretive rule       that concludes that Federal law preempts the application to a national bank of any State law" concerning certain specified subjects, the OCC must give the public notice and an opportunity submit written comments  In the 1990s and early 2000s, the OCC exercised this authority in a number of interpretive letters and legal opinions  In these documents, the OCC took the position that federal law preempted state laws that limited the ability of national banks to: advertise; operate offices within a certain distance from state-chartered bank home offices; operate ATM machines; engage in fiduciary activities; finance automobile purchases; sell annuities; sell repossessed automobiles without an automobile dealer license; and conduct Internet auctions of certificates of deposit  In 2004, the OCC expanded upon these interpretive letters and legal opinions by issuing what one commentator has described as "sweeping" preemption rules  The OCC's 2004 preemption rules articulated a general preemption standard according to which "state laws that obstruct, impair, or condition a national bank's ability to fully exercise" its federally authorized powers "are not applicable to national banks" except "where made applicable by Federal law " This general standard accordingly expanded on Barnett Bank 's "significant interference" test in two ways  First, the OCC's 2004 standard omitted the intensifying phrase "significantly" from the Barnett Bank test  Second, the 2004 standard by its terms required that national banks be able to "fully" exercise their authorized powers—a phrase that does not appear in Barnett Bank   However, despite these facial differences with the Barnett Bank test, the OCC explained that it intended the phrase "obstruct, impair, or condition" to function "as the distillation of the various preemption constructs articulated by the Supreme Court, as recognized in Hines [ v  Davidowitz ] and Barnett Bank , and not as a replacement construct that is in any way inconsistent with those standards " Beyond this general preemption standard, the OCC's 2004 rules concluded that the NBA preempted certain categories of state laws  First, the rules provided that national banks "may make real estate loans       without regard to state law limitations concerning": licensing and registration (except for purposes of service of process); "[t]he ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements or risk mitigants, in furtherance of safe and sound banking practices"; loan-to-value ratios; terms of credit; "[t]he aggregate amount of funds that may be loaned upon the security of real estate"; escrow accounts; security property; access to and use of credit reports; disclosure and advertising; processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages; disbursements and repayments; rates of interest on loans; due-on-sale clauses, with certain exceptions; and "[c]ovenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan " Second, the rules provided that national banks "may make non-real estate loans without regard to state law limitations concerning" many of the same matters identified in the regulation concerning real estate lending  Finally, the rules provided that national banks "may exercise [their] deposit-taking powers without regard to state law limitations concerning": (1) abandoned and dormant accounts, (2) checking accounts, (3) disclosure requirements, (3) funds availability, (4) savings account orders of withdrawal, (5) state licensing or registration requirements (except for purposes of service of process), and (6) special purpose savings services  The OCC's 2004 rules also identified general categories of state law that the agency interpreted as surviving preemption  Specifically, the rules provided that the NBA does not preempt state laws that are consistent with federal law and involve (1) contracts, (2) torts, (3) criminal law, (4) rights to collect debts, (5) the acquisition and transfer of property, (5) taxation, (6) zoning, and, with respect to real estate lending, (7) certain homestead laws  According to the OCC's 2004 rules, such laws survive preemption so long as they "do not regulate the manner, content or extent of the activities authorized for national banks under federal law " The OCC's 2004 preemption rules proved controversial  In 2008, the United States experienced a financial crisis caused in part by reckless subprime mortgage lending and a collapse in the real estate market  In the wake of the crisis, commentators debated the role that federal preemption of state predatory lending laws played in generating the pre-2008 housing bubble  Some commentators contended that national banks played a significant role in the predatory lending that preceded the crisis, and that federal preemption "effectively gut[ted] states' ability to legislate against predatory lending practices " By contrast, others rejected the contention that preemption played a significant role in causing the crisis, arguing that national banks and their subsidiaries accounted for only a small share of subprime mortgage lending  In 2010, Congress responded to concerns over federal preemption of state consumer protection laws in Section 1044 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)  Section 1044 provides that federal law preempts such laws only if: (A) application of a State consumer financial law would have a discriminatory effect on national banks, in comparison with the effect of the law on a bank chartered by that State; (B) in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in [ Barnett Bank ], the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers; and any preemption determination under this subparagraph may be made by a court, or by regulation or order of the Comptroller of the Currency on a case-by-case basis, in accordance with applicable law; or (C) the State consumer financial law is preempted by a provision of Federal law other than title 62 of the Revised Statutes  Beyond this general preemption standard, Section 1044 contains a number of other provisions narrowing the OCC's preemption authority  First, Section 1044 provides that courts reviewing OCC preemption determinations should accord those determinations only Skidmore deference, under which courts assess an agency's interpretation of a statute "depending upon the thoroughness evident in the consideration of the agency, the validity of the reasoning of the agency, the consistency with other valid determinations made by the agency, and other factors which the court finds persuasive and relevant to its decision " Before the enactment of Dodd-Frank, certain courts had afforded OCC preemption determinations a more permissive form of deference known as Chevron deference, according to which courts defer to agency interpretations as long as they are reasonable  Section 1044 accordingly requires that courts take a less deferential posture toward OCC preemption determinations  Second, Section 1044 provides that no OCC preemption determination "shall be interpreted or applied so as to invalidate, or otherwise declare inapplicable to a national bank, the provision of the State consumer financial law, unless substantial evidence, made on the record of the proceeding, supports the specific finding regarding the preemption of such provision in accordance with the legal standard" established by Barnett Bank   This "substantial evidence" standard is often used in cases involving the Administrative Procedure Act, which provides that courts shall hold unlawful an agency's formal rules and other determinations made on the basis of a formal hearing when they are "unsupported by substantial evidence " The Supreme Court has explained that "substantial evidence" entails "more than a mere scintilla" of evidence, and requires "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion " Third, Section 1044 provides that the OCC shall (1) "periodically conduct a review, through public notice and comment, of each determination that a provision of Federal law preempts a State consumer financial law," (2) "conduct such review within the 5-year period after prescribing or otherwise issuing such determination, and at least once during each 5-year period thereafter," and (3) "[a]fter conducting the review of, and inspecting the comments made on, the determination,       publish a notice in the Federal Register announcing the decision to continue or rescind the determination or a proposal to amend the determination " Fourth, Section 1044 provides that the OCC must submit to Congress a report addressing its decision to continue, rescind, or propose an amendment to any preemption determination  Finally, Section 1044 abrogated the Supreme Court's decision in Watters , providing that "State consumer financial laws" apply to the subsidiaries and affiliates of national banks "to the same extent" that they apply "to any person, corporation, or other entity subject to such State law " After Dodd-Frank's enactment, commentators debated the meaning of Section 1044's general preemption standard  As discussed, Section 1044's preemption standard provides that federal law preempts "State consumer financial laws" that "prevent[] or significantly interfere[]" with the powers of national banks "in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in [ Barnett Bank ] " Some commentators have argued that this language simply codifies the Barnett Bank standard and was not intended to significantly modify pre-existing law  However, others have argued that Section 1044 was intended to pare back the OCC's 2004 preemption rules, which interpreted the NBA as preempting state laws that "obstruct, impair, or condition" the powers of national banks  According to this latter group of commentators, the OCC's "obstruct, impair, or condition" standard was more expansive than Barnett Bank 's "significant interference" test, meaning that a codification of that test would modify pre-existing law  In 2011, the OCC responded to the enactment of Section 1044 by issuing a notice of proposed rulemaking that reaffirmed its pre-Dodd-Frank preemption decisions while deleting the "obstruct, impair, or condition" language from its preemption rules  While the OCC acknowledged that this language "created ambiguities and misunderstandings regarding the preemption standard that it was intended to convey," it maintained that the specific preemption determinations reflected in its 2004 rules were nevertheless consistent with Barnett Bank   The OCC accordingly proposed reaffirming the specific preemption determinations in its 2004 rules while removing the "obstruct, impair, or condition" standard  The OCC's proposal quickly generated controversy  After the OCC issued the notice, the Treasury Department's General Counsel wrote a letter to the Comptroller of the Currency arguing that the OCC's proposed rule was "inconsistent with the plain language of [Dodd-Frank] and its legislative history " Specifically, the Treasury Department argued that interpreting Section 1044 as making no significant changes to existing preemption law conflicted with "basic canons of statutory construction" and legislative history indicating that the provision was intended to "revise[]" the OCC's preemption standard  Senator Carl Levin also expressed disagreement with the proposed rules in a letter to the Comptroller, arguing that "[i]f [Congress] had wanted to leave the OCC's purported federal preemptive powers unchanged, [it] could have engaged in a very simple exercise—do nothing " Other Senators expressed support for the OCC's proposed rules  Senators Tom Carper and Mark Warner criticized the Treasury Department's letter for "ignor[ing] the clear legislative history indicating that [Section 1044] is intended to codify the Barnett case " In responding to the Treasury Department's argument that Section 1044 was intended to "revise" the OCC's preemption standards, Senators Carper and Warner argued that the OCC's proposed rules would effectuate the contemplated revision by removing the potentially troublesome "obstruct, impair, or condition" language from the agency's 2004 rules  The OCC ultimately agreed with Senators Carper and Warner  In July 2011, the OCC published a final regulation revising its preemption rules  In the final rule, the OCC concluded that "the Dodd-Frank Act does not create a new, stand-alone 'prevents or significantly interferes' preemption standard, but, rather, incorporates the conflict preemption legal standard and the reasoning that supports it in the Supreme Court's Barnett decision " The OCC's 2011 rule also deleted the phrase "obstruct, impair, or condition" from the relevant preemption standard, noting that preemption determinations based "exclusively" on that language "would need to be reexamined to ascertain whether the determination is consistent with the Barnett conflict preemption analysis " However, the rule indicated that the OCC had not identified any preemption determinations that in fact relied "exclusively" on the relevant language  The final rule also noted that all future OCC preemption determinations would be subject to Section 1044's requirement concerning "case-by-case" determinations  Since the enactment of Dodd-Frank, a number of courts have interpreted Section 1044 as codifying the Barnett Bank standard  Some courts have accordingly concluded that Barnett Bank demarcates the boundaries of the OCC's 2011 preemption rules, reasoning that those rules do not preempt any state laws that would survive preemption under the Barnett Bank test  One court has also addressed the appropriate level of judicial deference towards the OCC's 2011 preemption determinations  As discussed, Section 1044 provides that courts "shall" assess OCC preemption determinations "depending upon the thoroughness evident in the consideration of the agency, the validity of the reasoning of the agency, the consistency with other valid determinations made by the agency, and other factors which the court finds persuasive and relevant to its decision"—a standard commonly known as " Skidmore deference " In 2018, the Ninth Circuit concluded that the OCC's 2011 preemption determinations are "entitled to little, if any, deference" under Skidmore   Specifically, the Ninth Circuit reasoned that because the OCC's 2011 preemption determinations represent the agency's "articulation of its legal analysis" under Barnett Bank (as opposed to being grounded in expert factual findings), those determinations would not warrant significant deference even in the absence of Section 1044  Whether other federal circuit courts will follow the Ninth Circuit in affording minimal deference to the OCC's 2011 preemption rules remains to be seen  As the debates over Section 1044 of Dodd-Frank make clear, a number of banking preemption issues remain the subject of active debate  This final section of the report discusses three additional current issues involving banking preemption and related federalism questions  A number of recent judicial decisions have generated debate over the circumstances in which non-bank financial companies can benefit from banks' ability to "export" the maximum interest rates of their "home" states  As discussed, the Supreme Court has held that national banks may charge any interest rate allowable under the laws of their home states even when lending to borrowers in other states with stricter usury laws  After this decision, Congress extended the power to export maximum interest rates to federally insured state banks  Recently, courts have grappled with whether this exportation power extends to non-bank financial companies and debt collectors that purchase loans originated by federally insured banks  That is, courts have addressed the circumstances in which loans originated by federally insured banks remain subject to the usury laws of the banks' home states even when the loans are (1) made to borrowers in other states with stricter usury laws, and (2) subsequently purchased by non-banks, which do not possess the exportation power when they originate loans themselves  A number of courts have concluded that in certain contexts, a loan that is non-usurious when originated remains non-usurious irrespective of the identity of its subsequent purchasers—a principle that some commentators have labeled the "valid when made" doctrine  However, in 2015, the Second Circuit rejected the application of this rule in Madden v  Midland Funding , holding that non-bank debt collectors that had purchased debt originated by a national bank could not benefit from the bank's exportation power  In Madden , a New York resident brought a putative class action under New York usury law against debt collectors that had purchased her credit card debt from a Delaware-based national bank  In response, the debt collectors argued that federal law preempted the New York usury claims because the credit card debt had been originated by a Delaware-based national bank and was not usurious under Delaware law  The Second Circuit rejected this argument, reasoning that the application of New York usury law to the debt collectors did not "significantly interfere" with the national bank's powers under Barnett Bank   Specifically, the court reasoned that because the debt collectors were not national banks and were not acting "on behalf of" a national bank, the New York usury claims did not interfere with the national bank's power to export the maximum interest rates of its home state  The Second Circuit's decision in Madden has generated significant debate  In an amicus brief supporting the debt collectors' petition for re-hearing before the Second Circuit, industry groups argued that the decision threatened to seriously disrupt lending markets  Specifically, these groups argued that the court's decision would "significantly impair" banks' ability to manage their risk by selling loans in secondary credit markets—a result that would ultimately inhibit their capacity to originate loans  Similarly, in an amicus brief submitted to the Supreme Court, the OCC and the Office of the Solicitor General (OSG) argued that the Second Circuit's decision was "incorrect," reasoning that "[a] national bank's federal right to charge interest up to the rate allowed by [the NBA] would be significantly impaired if [a] national bank's assignee could not continue to charge that rate " In response, the plaintiff in Madden argued that the Second Circuit's decision is unlikely to significantly affect credit markets  Specifically, the Madden plaintiff argued that the court's decision will not disrupt credit markets because non-banks that purchase loans originated by banks retain the right to collect the balances of those loans within applicable state law usury limits  While the Second Circuit ultimately denied the debt collectors' petition for re-hearing and the Supreme Court denied their petition for a writ of certiorari, the Madden decision has attracted congressional interest  The Financial CHOICE Act—comprehensive regulatory reform legislation that passed the House of Representatives in June 2017 but did not become law—would have codified the "valid when made" doctrine and abrogated Madden   A more limited bill directed solely at codifying the "valid when made" doctrine ( H R  3299 ) also passed the House in February 2018 but did not become law  Echoing the arguments made by industry groups, the bill's sponsor contended that the Second Circuit's decision will harm credit markets and impede financial innovation  By contrast, the bill's critics argued that it would facilitate predatory lending by allowing non-banks to evade state usury laws  These proposals have not been re-introduced in the 116th Congress  In a number of cases involving the scope of the exportation doctrine, non-bank financial companies have played a more active role in the origination process than the debt collectors in Madden   Specifically, a number of these cases have involved arrangements in which a non-bank financial company solicits borrowers, directs a partner bank to originate a high-interest loan, and purchases the loan from the bank shortly after origination in order to benefit from the bank's exportation power  Some courts have held that non-banks employing these so-called "rent-a-charter" schemes are not eligible for federal preemption, reasoning that preemption depends on a transaction's economic realities rather than its formal characteristics  Specifically, these courts have concluded that non-banks do not assume their partner banks' exportation power when the economic realities surrounding a transaction indicate that the non-banks are the "true lenders " According to this "true lender" doctrine, non-banks that have established these types of relationships qualify as the "true lenders" when they possess the "predominant economic interest" in the relevant loans when the loans are originated  In these circumstances, some courts have concluded that the non-banks are not entitled to the benefits of federal preemption  Like the Second Circuit's decision in Madden , these "true lender" decisions have attracted Congress's attention  In the 115th Congress, H R  4439 would have abrogated this line of decisions by making clear that a loan's originator is always the "true lender" for purposes of the exportation doctrine  The bill's supporters argued that the "true lender" decisions threaten to undermine partnerships between banks and FinTech companies —a broad category of businesses offering digital financial products that some commentators have hailed for their innovative potential  The bill's opponents, by contrast, contended that the legislation would allow non-banks to circumvent state usury laws and questioned the value of bank-FinTech partnerships designed with that purpose in mind  H R  4439 was referred to the House Committee on Financial Services during the 115th Congress but has not been re-introduced in the 116th Congress  Congress is not alone in considering whether to extend the benefits of federal preemption to FinTech companies  In July 2018, the OCC issued a Policy Statement announcing that it will begin accepting applications for "special purpose national bank charters" (SPNB charters) from FinTech companies that are engaged in "the business of banking" but do not take deposits  In the Policy Statement, the OCC explained that the NBA provides it "broad authority" to grant national bank charters to institutions that engage in the "business of banking"—a category that includes paying checks and lending money  The OCC accordingly concluded that it has the statutory authority to grant national bank charters to FinTech companies that engage in these core banking activities  According to the OCC, SPNB charters will help foster responsible innovation and promote regulatory consistency between FinTech companies and traditional banks  The OCC further explained that it will use its existing chartering standards and procedures to evaluate applications for SPNB charters, and that FinTech companies that receive such charters "will be supervised like similarly situated national banks, including with respect to capital, liquidity, and risk management " While the OCC touted the ability of SPNB charters to "level the playing field with regulated institutions" without explicitly mentioning federal preemption, commentators have observed that preemption represents "the central benefit" offered by such charters  The OCC's decision to accept applications for national bank charters from FinTech companies has generated debate  Critics of the policy have contended that FinTech companies' interest in such charters "is virtually entirely about avoiding state consumer protection laws," and that "[f]ederal chartering should not be a move to eviscerate" such laws  State regulators have also filed lawsuits challenging the OCC's authority to charter non-depository FinTech companies  In the spring of 2017, the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS) responded to an early OCC proposal to charter FinTech companies by filing suits in the U S  District Court for the District of Columbia and the U S  District Court for the Southern District of New York, respectively  The CSBS and NYDFS made substantially similar claims, arguing that (1) the NBA does not give the OCC the authority to charter non-depository institutions, (2) the Administrative Procedure Act requires the OCC to follow notice-and-comment rulemaking procedures before issuing SPNBs, (3) the OCC's decision was arbitrary and capricious, and (4) the OCC's decision violated the Tenth Amendment by invading states' sovereign powers  Both district courts dismissed the lawsuits on jurisdictional grounds, reasoning that the organizations failed to identify any imminent injuries to their members and that the case was not ripe for resolution because the OCC had not issued any SPNBs  However, after the OCC issued its Policy Statement in July 2018, both organizations filed new lawsuits that remain pending  Policymakers have also turned their attention to how federal law affects traditional banks' responses to changes in state law—namely, state-level efforts to legalize marijuana  While a number of states have legalized marijuana for medical or recreational use, federal law criminalizes the drug's sale, distribution, and possession, in addition to the aiding and abetting of such activities  Federal law also criminalizes money laundering, making it unlawful to: conduct a financial transaction involving the proceeds of a specified unlawful activity —a category that includes the sale or distribution of marijuana—"knowing that the transaction is designed       to conceal or disguise the nature, the location, the source, the ownership or the control of the proceeds       or to avoid a transaction reporting requirement under State or Federal law"; or knowingly engage in a monetary transaction in criminally derived property of a value greater than $10,000 that is derived from specified unlawful activity   Finally, the Bank Secrecy Act (BSA) and associated regulations require that financial institutions report illegal and suspicious activities to the Financial Crimes Enforcement Network (FinCEN) and maintain programs designed to prevent money laundering  Federal banking regulators have broad powers to discipline banks for violations of these laws  The Federal Reserve regularly conducts examinations of member banks that include evaluations of BSA compliance, and the FDIC has the authority to terminate a bank's deposit insurance for violations of law  Because of marijuana's status under federal law, many banks have refused to serve marijuana businesses even when those businesses operate in compliance with state law  While some small banks have offered accounts to marijuana businesses, an estimated 70 percent of marijuana businesses remain unbanked  Because of this inability to access the banking system, many marijuana businesses reportedly operate entirely in cash, raising concerns about tax collection and public safety  These perceived problems have attracted congressional interest  In March 2019, the House Committee on Financial Services approved legislation intended to minimize the legal risks associated with banking the marijuana industry  The proposed bill— H R  1595 , the SAFE Banking Act of 2019—would create a "safe harbor" under which federal banking regulators could not take various adverse actions against depository institutions for serving marijuana businesses that comply with applicable state laws ("cannabis-related legitimate businesses")  The legislation would also provide that for purposes of federal anti-money laundering law, the proceeds from transactions conducted by cannabis-related legitimate businesses shall not qualify as the proceeds of unlawful activity "solely because the transaction[s] [were] conducted by a cannabis-related legitimate business " Finally, H R  1595 would require FinCEN to issue guidance concerning the preparation of suspicious activity reports for cannabis-related legitimate businesses that is "consistent with the purpose and intent" of the bill and "does not significantly inhibit the provision of financial services" to cannabis-related legitimate businesses  Variations on some of the SAFE Banking Act's provisions have been incorporated into broader marijuana-related legislation  The Responsibly Addressing Marijuana Policy Gap Act of 2019 ( S  421 and H R  1119 ) would eliminate federal criminal penalties for persons who engage in various marijuana-related activities in compliance with state law and create a "safe harbor" from adverse regulatory action for depository institutions that serve marijuana businesses  Another Senate bill— S  1028 , the STATES Act—would provide that the Controlled Substances Act's (CSA's) marijuana-related provisions do not apply to persons acting in compliance with state marijuana regulation s, subject to certain exceptions  While the bill does not have the type of "safe harbor" for depository institutions in H R  1595 , S  421 , or H R  1119 , it contains a "Rule of Construction" clarifying that conduct in compliance with the legislation shall not serve as the basis for federal money laundering charges or criminal forfeiture under the CSA 


Report 2: Our simulations suggest that the sector will likely continue to face a difference between revenue and spending during the next 50 years  This long-term outlook is measured by the operating balance—a measure of the sector’s ability to cover its current expenditures out of current receipts  While both expenditures and revenues are projected to increase as a percentage of gross domestic product (GDP) during the simulation period, a difference between the two is projected to persist because expenditures are generally expected to grow at a faster rate than revenues  (see figure 1)  Absent any policy changes by state and local governments, revenues are likely to be insufficient to maintain the sector’s capacity to provide services at levels consistent with current policies during the next 50 years  Our simulations suggest that state and local governments will need to make policy changes to avoid fiscal imbalances before then and assure that revenues are at least equal to expenditures  We simulated the state and local government sector’s operating balance (the difference between the sector’s operating revenues and operating expenditures) in order to understand the sector’s long-term fiscal outlook  The sector’s operating expenditures were 15 1 percent of GDP in 2017  As shown in figure 2, these state and local government sector operating expenditures are comprised of employee compensation, social benefit payments, interest payments, capital outlays, and other expenditures  The sector’s operating revenues were 13 8 percent of GDP in 2017  As shown in figure 3, these state and local government sector operating revenues are comprised of taxes, transfer receipts, and other types of revenues  One way of measuring the long-term fiscal challenges faced by the state and local government sector is through an indicator known as the “fiscal gap ” The fiscal gap is an estimate of actions—such as revenue increases or expenditure reductions—that must be taken today and maintained for each year going forward to achieve fiscal balance during the simulation period  While we measured the gap as the amount of reductions in expenditures needed to prevent negative operating balances, increases in revenues, reductions in expenditures, or a combination of the two of sufficient magnitude would allow the sector to close the fiscal gap  Our simulations suggest that the fiscal gap is about 14 7 percent of total expenditures or about 2 4 percent of GDP  That is, assuming no change in projected total revenues, eliminating the difference between the sector’s expenditures and revenues during the 50-year simulation period would likely require action to be taken today, and maintained for each year equivalent to a 14 7 percent reduction in the sector’s total expenditures (see figure 4)  Alternatively, assuming no change in projected total expenditures, closing the fiscal gap by increasing revenue would also likely require actions of similar magnitude  More likely, eliminating the difference between expenditures and revenues would involve some combination of spending reductions and revenue increases  Our simulations suggest that growth in the sector’s overall spending is largely driven by health care expenditures  As shown in figure 5, these expenditures are projected to increase from about 4 1 percent of GDP in 2018 to 6 3 percent of GDP in 2067  Two types of health care expenditures—Medicaid spending and spending on health benefits for state and local government employees and retirees—will likely constitute a growing expenditure for state and local governments during the simulation period  Medicaid expenditures are expected to rise, on average, by 1 percentage point more than GDP each year  According to CBO, growth in Medicaid spending reflects growth in both the number of people receiving Medicaid benefits and the cost of Medicaid benefits each person receives  Specifically, CBO reported that between 2019 and 2028, Medicaid spending is projected to grow at an average rate of 5 5 percent per year—nearly 5 percentage points of this growth is due to an increase in per capita costs and about 1 percentage point of this growth is due to an increase in enrollment  Data from CBO and the Centers for Medicare & Medicaid Services (CMS) also suggest that growth in Medicaid spending per capita is generally expected to outpace GDP growth in the future—referred to as excess cost growth  Our estimates of Medicaid excess cost growth using CMS data suggest that Medicaid spending per capita will grow, on average, about 0 5 percent faster than GDP per capita for the period from 2018 through 2067  Our simulations also suggest that health benefits for state and local government employees and retirees—a type of employee compensation spending—are likely to rise, on average, by 0 9 percentage points more than GDP each year  Growth in these health benefits also reflects growth in the projected number of employees and retirees and growth in the projected amount of health benefits for each employee and retiree  Growth in spending by states and local governments on health care per capita, which includes spending on employee and retiree health benefits, is generally expected to outpace GDP per capita  Data from CMS suggest that national health expenditures per capita are likely to grow on average about 0 8 percent faster than GDP per capita each year during the simulation period from 2018 through 2067  If employee and retiree health benefits follow trends in overall national health spending, they will likely make up an increasingly large share of total employee compensation going forward (see figure 6)  While state and local government contributions to employee pension plans—another type of employee compensation spending—will likely decline as a percentage of GDP, as shown in figure 6, our simulations nonetheless suggest that state and local governments may need to take steps to manage their pension obligations in the future  From 1998 through 2007, state and local governments’ pension contributions amounted to about 8 percent of wages and salaries on average  In addition, for the period from 2008 through 2017, pension contributions amounted to about 12 3 percent of wages and salaries on average  Our simulations suggest that those pension contributions will need to be about 12 9 percent of wages and salaries for state and local governments to meet their long-term pension obligations  This is the case even though pension asset values have increased in recent years, from about $2 4 trillion in 2008 to about $4 2 trillion in 2017 (adjusted for inflation and measured in 2012 dollars)  This suggests that state and local governments may need to take additional steps to manage their pension obligations by reducing benefits or increasing employees’ contributions  Along with pension contributions, other types of state and local government expenditures are projected to grow more slowly than GDP  For example, in 2017, wages and salaries of state and local government employees constituted a large expenditure for the sector  However, these expenditures are projected to decline as a percentage of GDP during the simulation period  Our simulations also suggest that state and local governments’ capital outlays—which include spending on infrastructure, such as buildings, highways and streets, sewer systems, and water systems, as well as equipment and land— will grow more slowly than GDP if state and local governments continue to provide current levels of capital per resident  Our simulations suggest that federal grants overall will increase as a share of GDP, while Medicaid grants will likely grow more quickly than other types of federal grants (see figure 7)  Thus, Medicaid grants will likely make up an increasing share of revenues in the future  Since Medicaid is a matching formula grant program, the projected increase in federal Medicaid grants, therefore, reflects expected increased Medicaid expenditures that will be shared by state governments  Our simulations also suggest that federal investment grants (i e , grants intended to finance capital infrastructure investments) and other federal grants unrelated to Medicaid (i e , grants intended to finance education, social services, housing, and community investment) are likely to decline as a share of GDP  Further, our simulations suggest that if historical relationships between state and local governments’ tax revenues and tax bases persist, total tax revenues for the state and local government sector will increase from 8 8 percent of GDP in 2018 to 9 4 percent of GDP by the end of the simulation period  This increase is driven largely by the growth in personal income taxes, as shown in figure 8  Specifically, our simulations suggest that personal income tax revenues will increase as a share of GDP by about 1 percentage point during the simulation period  Sales taxes and property taxes, on the other hand, are projected to remain relatively constant as a share of GDP during the simulation period through 2067  While our long-term simulations do not account for pending or future federal policy changes that will result in changes to expenditures and revenues, an understanding of several recent federal policy changes related to taxes and health care are important to note because they present sources of uncertainty for the state and local government sector’s long-term fiscal outlook  In addition, as is the case in any model that is reliant on historical data to simulate a long-term outlook, other considerations, such as economic growth and rates of return on pension assets, could shift future fiscal outcomes  These policy changes and uncertainties are discussed below and may help federal policy makers and state and local governments consider how these changes could affect the long-term outlook  Recently enacted legislation, such as Public Law 115-97, commonly referred to by the President and administrative documents as the Tax Cuts and Jobs Act (TCJA), could affect the sector’s revenues over the long-term  Enacted in December 2017, TCJA included significant changes to corporate and individual tax law, with implications for state and local government tax collections  In particular, for individual taxpayers, for tax years 2018 through 2025, tax rates were lowered for nearly all income levels, some deductions from taxable income were changed (personal exemptions were eliminated, while the standard deduction was increased), and certain credits, such as the child tax credit, were expanded  The effect of TCJA on the long-term state and local fiscal outlook is still evolving, and will likely depend on how states incorporate the law’s changes into their state income tax rules  That is, because some states link their state income taxes to federal income tax rules, states must decide whether to let the changes from TCJA flow through to their state income tax systems, or establish new state income tax rules  For example, some states have adopted the federal definition of taxable income as a starting point for state tax calculations, while other states use the federal definition of adjusted gross income as a starting point  The choices states make to continue to link to these definitions could have long-term implications for their state tax revenues  In addition, under TCJA, the amount of the federal itemized deductions allowed for all state and local income, sales, and property taxes (commonly referred to as the state and local tax (SALT) deduction) is now capped at $10,000 for tax years 2018 to 2025  The magnitude or net effect of these changes is uncertain in that states are still working to understand the impact of the tax laws on their revenues  It remains to be seen whether and how states will see changes in their revenues in the future  Moreover, a recent U S  Supreme Court decision involving state sales taxes could have implications for states’ ability to collect revenue  Specifically, the court’s ruling in June 2018 in South Dakota v  Wayfair, Inc  held that states could require out-of-state sellers to collect and remit sales taxes on purchases made from those out-of-state sellers, even if the seller does not have a substantial physical presence in the taxing state  Prior to this ruling, a seller that did not have a substantial physical presence in a state could not be required to collect and remit a sales tax on goods sold into the state  Instead, a purchaser may have been required to pay a use tax (i e , a tax levied on the consumer for the privilege of use, ownership, or possession of taxable goods and services) in the same amount to his or her state government  In 2017, we reported that states could realize between an estimated $8 5 billion and $13 4 billion in additional state sales tax revenue across all states if all sellers were required to collect taxes on all remote sales at current rates  The extent to which states realize changes in sales tax revenue will likely depend on how they revise their state laws and enforcement efforts in response to this June 2018 ruling  Enacted health care legislation could also affect the long-term fiscal position of state and local governments  As we have reported in prior work, the effect of the Patient Protection and Affordable Care Act (PPACA) on the long-term state and local fiscal outlook could depend on how states implement PPACA, and on future rates of health care cost growth  For example, consider the states that have opted, under PPACA, to expand Medicaid program coverage to millions of lower income adults  While the federal government is expected to cover a large share of the costs of the Medicaid expansion, these states are ultimately expected to bear some of the costs  Specifically, the federal government reimbursed 100 percent of the costs of the expanded population beginning in 2014  This reimbursement rate will decline from the 2018 reimbursement rate of 94 percent to 90 percent by 2020  As such, the reduced federal reimbursement rate may affect those states that expanded their Medicaid populations in recent years  As discussed earlier in this report, our simulations suggest that Medicaid spending will make up an increasing share of the state and local government sector’s operating expenditures in the future  A weakening of the economy could add to the fiscal pressures states face in funding these Medicaid obligations  As our prior work has shown, past recessions in 2001 and 2007 hampered states’ ability to fund increased Medicaid enrollment and maintain their existing services  Specifically, Medicaid enrollment increased during these recessions, in part due to increased unemployment, which led more individuals to become eligible for the program  We have also reported on the use of Medicaid demonstrations, which allow states to test new approaches to coverage to improve quality and access, or generate savings or efficiencies  Specifically, CMS may waive certain Medicaid requirements and approve new types of expenditures that would not otherwise be eligible for federal Medicaid matching funds  For example, under demonstrations, states have extended coverage to certain populations, provided services not otherwise eligible for Medicaid, and made payments to providers to incentivize delivery system improvements  We previously reported that, as of November 2016, nearly three-quarters of states have CMS- approved demonstrations  In fiscal year 2015, federal spending under demonstrations represented a third of all Medicaid spending nationwide  We also reported that in 10 states, federal spending on demonstrations represented 75 percent or more of all federal spending on Medicaid  Joint financing of Medicaid is a fixture of this federal-state partnership  Demonstration waivers hold the potential for changing state Medicaid spending  However, as we have reported, these demonstrations are required, under HHS policy, to achieve budget neutrality and not raise costs for the federal government  In addition to federal tax- and health-related policy changes, a number of other factors could affect the state and local government sector’s long- term fiscal outlook  Specifically, we developed simulations using alternative assumptions of the growth of key model variables—which include economic growth, health care excess cost growth, and the rate of return on pension assets  We determined that changes in the growth projections of these key variables could affect the operating balance of state and local governments, thereby shifting future fiscal outcomes for the sector  Future trends in GDP growth could affect the state and local government sector’s fiscal outlook  Data from CBO and the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI Trustees) project real GDP to grow by 1 9 percent per year on average from 2018 through 2028, and by 2 1 percent per year on average after 2028, respectively  Using these projections, our simulations suggest that maintaining current policies would cause the sector’s expenditures to exceed its revenues and that the difference between revenues and expenditures would become increasingly negative during the next several decades  However, simulations we developed using the OASDI Trustees’ alternative projections of real GDP growth suggest that the difference between revenues and expenditures would expand before narrowing toward the end of the simulation period if real GDP were to grow at a faster rate—2 8 percent per year on average—as shown in figure 9  Our simulations also show that if GDP were to grow at a slower rate—1 5 percent per year on average—the difference between revenues and expenditures would expand  This would result in an increasingly negative operating balance during the simulation period  As discussed earlier in this report, excess cost growth in health care is another key determinant of the sector’s fiscal balance  Data from CBO project Medicaid spending per capita to grow about 1 5 percent faster than GDP per capita on average for the period from 2019 through 2028  Data from CMS project Medicaid spending per capita to grow about 0 6 percent faster on average for the period from 2029 through 2067  Data from CMS also project national health expenditures per capita to grow about 0 8 percent faster than GDP per capita for the period from 2018 through 2067  Using these projections, our simulations suggest that maintaining current policies will cause the sector’s expenditures to exceed its revenues, and that the difference between revenues and expenditures will become increasingly negative during the next several decades  However, simulations developed using alternative projections of excess cost growth in Medicaid and national health expenditures suggest that the difference between revenues and expenditures may be reduced but not eliminated within the simulation period if excess cost growth in health care is zero  In the scenario where excess cost growth rises faster—0 7 percent on average for Medicaid for the period from 2029 through 2067 and 1 percent for national health expenditures for the period from 2018 through 2067—our simulations show that the difference between revenues and expenditures will persist for the remainder of the simulation period (see figure 10)  The rate of return on pension assets could also affect the state and local government sector’s fiscal outlook  Based on an inflation-adjusted rate of return on pension assets of 5 percent, our simulations suggest that state and local governments will need to make pension contributions equivalent to about 12 9 percent of their wages and salaries to meet their long-term pension obligations  However, this estimate is sensitive to the rate of return on state and local governments’ pension assets  Simulations we developed using a higher rate of return—7 5 percent—suggest that pension contributions needed to meet pension obligations would be about 3 percent of state and local government employees’ wages and salaries  In addition, under this scenario, our simulations suggest that the difference between revenues and expenditures will be reduced, but not eliminated within the simulation period  Alternatively, we estimated that if the rate of return on pension assets is relatively low—at 2 5 percent— required pension contributions would need to be about 23 percent of state and local government employees’ wages and salaries during the simulation period  Under this scenario, our simulations show that the sector’s negative operating balance will continue to grow larger throughout the simulation period  It follows therefore, that high rates of return on pension assets are associated with an improved outlook for state and local governments, and vice versa (see figure 11)  This report was prepared under the direction of Michelle A  Sager, Director, Strategic Issues, who can be reached at (202) 512-6806 or sagerm@gao gov, and Oliver M  Richard, Director, Center for Economics, who can be reached at (202) 512-8424 or richardo@gao gov if there are any questions  GAO staff who made key contributions to this report are listed in appendix IV  To simulate measures of fiscal balance for the state and local government sector for the long term, we used aggregate data on the state and local government sector and national data on other variables from the following sources: Agency for Healthcare Research and Quality; Board of Governors of the Federal Reserve System; Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI Trustees); Bureau of Economic Analysis (BEA); Bureau of Labor Statistics; Centers for Medicare & Medicaid Services (CMS); Congressional Budget Office (CBO); and Federal Reserve Bank of St  Louis  Our approach generally follows the approach used in GAO-08-317 and in subsequent updates of that report  Specifically, we developed a model that projects the levels of receipts and expenditures of the state and local government sector (henceforth, the sector) in future years based on current and historical spending and revenue patterns  We use table 3 3 of the National Income and Product Accounts (NIPA)—State and Local Government Current Receipts and Expenditures—prepared by BEA at the U S  Department of Commerce as an organizing framework for developing our model of the sector’s revenues and expenditures (see table 1)  In this table, current revenues are grouped in five main categories  Current tax receipts  These receipts are tax payments made by persons or businesses to state and local governments  They include income taxes, general sales taxes, property taxes, and excise taxes  Current taxes also include fees for motor vehicle licenses, drivers’ licenses, and business licenses  Social insurance contributions  These contributions finance the provision of certain social benefits to qualified persons, and include contributions from employers and employees for temporary disability insurance, worker’s compensation insurance, and other programs  Income receipts from government assets  These receipts include interest, dividends, and rental income, such as royalties paid on drilling on the outer continental shelf  Also, state and local governments earn interest and dividend income on financial assets  Current transfer receipts  Transfer receipts are receipts for which state and local governments provide nothing of value in return  Current transfer receipts include federal grants, fines, fees, donations, and tobacco settlements  Also included are net insurance settlements, certain penalty taxes, court fees, and other miscellaneous transfers  Current surplus of government enterprises  This surplus is a profit- type measure for state and local government enterprises, such as water, sewer, gas, and electricity providers; toll providers; liquor stores; air and water terminals; public transit; and state lotteries  Some types of enterprises, such as state lotteries, consistently earn surpluses which are used to fund general government activities  In contrast, many enterprises run deficits, which, in turn, reduce receipts  State and local governments also receive income from the sale of goods and services, such as school tuition  In the NIPAs, this income is treated as an offset against expenditures, not revenue  This income comes from voluntary purchases that might have been made from a private sector provider of such services  In addition to current receipts, state and local governments receive capital transfer receipts  These receipts include estate and gift taxes, and federal government investment grants for capital such as highways, transit, air transportation, and water treatment plants  State and local government current expenditures are grouped into four main categories  Consumption expenditures  Generally, spending for which some value is provided in return  State and local government consumption spending is the sum of inputs used to provide goods and services, including compensation of general government employees, consumption of general government fixed capital (depreciation), and intermediate goods and services purchased, less sales to other sectors and own-account investment  Current transfer payments  Payments for which nothing of value is provided in return  For state and local governments, current transfer payments consist primarily of social benefits, which are payments to persons to provide for needs that arise from circumstances such as sickness, unemployment, retirement, and poverty  There are two kinds of social benefits—benefits from social insurance funds, such as temporary disability insurance and workers’ compensation, and other social benefits, such as medical benefits from Medicaid and the state Children’s Health Insurance Program (CHIP), family assistance from Temporary Assistance to Needy Families, education assistance, and other public assistance programs  While NIPA table 3 3 also includes other current transfer payments to the rest of the world as part of current transfer payments, these amounts are generally equal to zero  Interest payments  These include actual and imputed interest and represent the cost of borrowing by state and local governments to finance their capital and operational costs  Subsidies  State and local government subsidies are largely payments to railroads  State and local government spending also includes gross investment, capital transfer payments, and net purchases of nonproduced assets  Gross investment is spending on capital goods like structures, equipment, and intellectual property—items that are called fixed assets or capital because of their repeated or continuous use in providing government services for more than 1 year  Structures include residential and commercial buildings, highways and streets, sewer systems, and water systems  State and local government capital transfer payments include disaster-related insurance benefits paid to the U S  territories and the Commonwealths of Puerto Rico and Northern Mariana Islands  Net purchases of nonproduced assets are composed of net purchases of land less oil bonuses (payments to states for the long-term rights to extract oil)  Our main indicator of the sector’s fiscal balance is its operating balance net of funds for capital expenditures (henceforth, operating balance), which is a measure of the sector’s ability to cover its current expenditures out of current revenues  The operating balance is defined as total receipts minus (1) capital outlays not financed by medium- and long-term debt issuance, (2) total current expenditures less depreciation, (3) current surplus of state and local government enterprises, and (4) net social insurance fund balance  Alternative indicators of fiscal balance include net saving and net lending or borrowing  Net saving is the difference between current receipts and current expenditures  Since current expenditures exclude capital investment but include a depreciation measure, net saving can be thought of as a measure of the extent to which governments are covering their current operations from current receipts  Net lending or borrowing is the difference between total receipts and total expenditures, and is analogous to the federal unified surplus or deficit  Total receipts differ from current receipts because they include capital transfer receipts  Total expenditures differ from current expenditures because they include capital investment, capital transfer payments, and net purchases of nonproduced assets  However, they exclude fixed capital consumption  The former three categories are cash expenditures, while the latter is a noncash charge  Net lending or net borrowing represents the governments’ cash surplus or borrowing requirement  This measure is normally negative because governments borrow to finance their capital investment (and sometimes to finance current operations as well)  The following equations describe how we simulated state and local government receipts and expenditures, as well as the intermediate variables used in those simulations  For this update, we started with historical data for 2017, or the most recent year available, and then simulated each variable for each year from 2018 through 2092 (the simulation period)  To simulate state and local government receipts and expenditures, we use simulations of various national-level demographic, macroeconomic, and health care variables derived from projections produced by CBO, CMS, and the OASDI Trustees, and otherwise derived using our own assumptions (see table 2)  This approach is similar to the approach we have used in prior model updates  To simulate state and local government spending on defined benefit pensions, we first estimate the contribution rate (as a fraction of state and local government general government wages and salaries) that state and local governments would need to make each year going forward to ensure that their pension systems are fully funded on an ongoing basis  Our goal is to estimate the financial commitments to employees that have been and are likely to continue to be made by the state and local sector to better understand the full fiscal outlook for the sector  As such, our analysis projects the liabilities that the sector is likely to continue to incur in the future based on simulations of future numbers of retirees receiving pension benefits and their benefit amounts; future numbers of employees, their wages and salaries, and their pension contributions; and assets in state and local government defined benefit pension funds  Although we are only interested in applying contribution rates over the simulation time frame, we actually have to derive the contribution rate for a longer time frame in order to find the steady-state level of necessary contributions  This longer time frame is required because the estimated contribution rate increases as the projection horizon increases and eventually converges to a steady state  If the projection period is of insufficient length, the steady-state level of contribution is not attained, and the necessary contribution rate is understated  We simulated variables used to estimate the pension contribution rate using the approach summarized in table 3  This approach is similar to the approach we have used in prior model updates  Future growth in the number of state and local government retirees— many of whom will be entitled to pension and health care benefits—is largely driven by the size of the workforce in earlier years  We simulated the number of state and local government retirees by assuming that the growth rate in the number of retirees is a weighted average of the growth rates in lagged general government and government enterprise employment  We estimated the weights using a regression of the percent change in the number of retirees on the percent change in employment 1, 6, 11, 16, 21, 26, 31, 36, and 41 years in the past  The coefficients on the past percentage changes in employment were constrained to be non- negative and to sum to 1  For this regression, we removed cyclical swings in employment using the Hodrick-Prescott filter  Similarly, future changes in the real amount of pension benefits will be a function of past changes in real wages and salaries  As indicated in table 3, we used a weighted average of past values of the state and local government employment cost index to simulate the employment cost index for state and local government retirees  We chose the weights to reflect changes in the share and average real benefit level of three subsets of the retiree population over time: (1) new retirees entering the beneficiary pool, (2) deceased retirees leaving the pool, and (3) continuing retirees from the previous year  We simulated the weight for new retirees in a year as the number of retirees less the number of continuing retirees divided by the number of retirees  We simulated the weight for deceased retirees as the mortality rate multiplied by last year’s retirees divided by this year’s retirees  We simulated the weight for continuing retirees as last year’s retirees divided by this year’s retirees  Finally, we simulated the employment cost index for state and local government retirees as the sum of the weight on new retirees multiplied by the state and local government employment cost index and the weight on continuing retirees multiplied by the state and local government employment cost index 8 years prior, less the weight on deceased retirees multiplied by the state and local government employment cost index 21 years prior  As discussed above, we started with historical data for 2017, or the most recent year available, simulated all of the variables in table 3 over the long run, and then used the consumer price index (CPI) and the real return on pension assets to calculate the total present value of wages and salaries for state and local government general government and government enterprise employees, the total present value of real pension benefits paid to state and local government retirees, and the total present value of state and local government employees’ pension contributions  Then, we calculated the total present value of state and local governments’ pension liabilities as the total present value of real pension benefits paid to state and local government retirees less the total present value of state and local government employees’ pension contributions, and the value of assets in state and local government defined benefit pension funds in 2017  Finally, we estimated state and local governments’ pension contribution rate as the ratio of the total present value of their pension liabilities to the total present value of wages and salaries for state and local government employees  Table 4 summarizes the approach we used to simulate interest rates on state and local government financial assets and liabilities  This approach is similar to the approach we have used in prior model updates  Table 5 summarizes our approach to simulating state and local government receipts  This approach is similar to the approach we have used in prior model updates  These variables track state and local government receipts in table 1 above as follows: State and local government personal income tax revenue is the sum of state personal income tax revenue and local personal income tax revenue; State and local government personal tax revenue is the sum of personal income tax revenue and other personal tax revenue; State and local government revenue from taxes on production and imports is the sum of general sales tax revenue, excise tax revenue, property tax revenue, and revenue from other taxes on production and imports; State and local government current tax revenue is the sum of personal tax revenue, revenue from taxes on production and imports, and corporate income tax revenue; State and local government current transfer receipts are equal to federal Medicaid grants minus Medicare Part D payments to the federal government, plus other federal grants (excluding investment grants), transfer receipts from businesses, and transfer receipts from persons; State and local government current receipts are the sum of current tax revenue, current transfer receipts, income on assets, social insurance contributions, and government enterprise surplus; State and local government capital transfer receipts are the sum of federal investment grants and estate and gift tax revenue; and State and local government total receipts are the sum of current receipts and capital transfer receipts  Our general approach to simulating state and local government expenditures is to assume that state and local governments maintain the current level of public goods and services provision per capita (see table 6)  Thus, we generally assume that expenditures keep up with U S  population growth and some measure of inflation, where the relevant rate of inflation varies depending on the specific type of expenditure  However, we use alternative approaches—described below—to simulate depreciation, interest payments, and social benefits for health care  This approach is similar to the approach we have used in prior model updates  These variables correspond to state and local government expenditures in table 1 as follows: Employee compensation is the sum of wages and salaries, pension contributions, health benefits for current employees, health benefits for retirees, and other compensation, for state and local government general government employees  Consumption expenditures are the sum of employee compensation, general government fixed capital consumption, and other general government consumption expenditures  Social benefit payments are the sum of Medicaid benefits, non- Medicaid health benefits, and non-health social benefits  Current expenditures are the sum of consumption expenditures, social benefit payments, interest payments, and subsidy payments  Total expenditures are the sum of current expenditures, gross investment, capital transfer payments, and purchases of nonproduced assets, minus general government and government enterprise fixed capital consumption  Table 7 summarizes our approach for simulating state and local government financial assets and liabilities  This approach is similar to the approach we have used in prior model updates  Our method for simulating the sectors’ short-term debt outstanding leverages the fact that for any entity, there is a direct relationship between budget outcomes and changes in financial position  Specifically, if expenditures exceed receipts, the gap needs to be financed by some combination of changes in financial assets and changes in financial liabilities  If governments spend more than they take in, they must pay for it by issuing debt, cashing in assets, or some combination of the two  Conversely, if receipts exceed expenditures and the sector is a net lender, its net financial investment (the net change in financial assets minus the net change in financial liabilities) must equal the budget surplus  The relationship between budget outcomes and the sector’s financial position is shown in the following accounting identity: total receipts – total expenditures = change in financial assets – change in financial liabilities  The sector’s financial liabilities include short-, medium-, and long-term debt; trade payables; and loans from the federal government, so the accounting identity can be rewritten as follows: total receipts – total expenditures = change in financial assets – change in medium- and long-term debt – change in trade payables – change in federal government loans – change in short term debt  For a given difference between total receipts and total expenditures, various combinations of changes in financial assets and changes in financial liabilities can satisfy this identity  However, we assumed that financial assets grow at the same rate as U S  GDP, that medium- and long-term debt outstanding is determined using the historical relationship described in table 7, that federal government loans to state and local governments are determined using the historical relationship described in table 7, and that trade payables grow at the same rate as other state and local government consumption spending  If the first four terms on the right hand side of the identity are already determined, then only the fifth term— the change in short-term debt—is free to satisfy this identity  As discussed above, our indicators of fiscal balance are operating balance, net saving, and net lending or borrowing  This approach is similar to the approach we have used in prior model updates  Recall that we defined operating balance as follows: operating balance = total receipts – (gross investment + capital transfer payments + net purchases of nonproduced assets – medium- and long-term debt issuance) – (current expenditures – consumption of general government fixed assets) – current surplus of state and local government enterprises – net social insurance fund balance  By substituting for total receipts and current expenditures using the relationships described above and rearranging terms, we can also calculate operating balance using a formula that more easily identifies its revenue components—the items in the first set of parentheses—and expenditure components—the items in the second set of parentheses: operating balance = (current tax revenues + estate and gift tax revenues + social insurance fund contributions + income receipts from assets + current transfers + federal investment grants + medium- and long-term debt issuance) – (compensation of general government employees + social benefit payments + interest payments + gross investment + capital transfer payments + net purchases of nonproduced assets + other general government consumption expenditures + subsidy payments + net social insurance fund balance)  Some of our simulations are based on estimated historical relationships between pairs of variables: Elasticity of real personal consumption expenditures less food and services with respect to real wages and salaries; Elasticity of the real U S  market value of real estate with respect to Relationship between effective interest rates on financial assets and Relationship between state and local government bond yields and 10- year Treasury rates; Relationship between effective interest rates on long-term state and local government debt and federal government loans and state and local government bond yields; Elasticity of real state personal income tax revenue with respect to Elasticity of real state and local government excise tax revenue with respect to real wages and salaries; Relationship between long-term debt issuance as a fraction of gross investment and nonproduced asset purchases in excess of federal investment grants and the change in state and local government bond yields; and Relationship between real federal government lending to state and local governments and real U S  GDP  To estimate each of these historical relationships, we used the following approach: first, we assessed the order of integration of both variables using unit root tests of the levels and the first differences, where a variable is integrated of order 0 (I(0) or stationary) if we rejected the null hypothesis of a unit root in the levels at standard significance levels, and is integrated of order 1 (I(1) or first-order nonstationary) if we could not reject the null hypothesis of a unit root in the levels but we could do so for the first differences  For relationships between variables that were both stationary, we estimated an autoregressive distributed lag model, where y is the dependent variable, x is the independent variable, and ε is an independent, identically distributed error term  The long-run impact on y of a one unit change in x is given by ∑   We initially chose the number of lags based on the Bayesian Information Criteria and then added additional lags of the dependent variable, if needed, until the residuals were consistent with a white noise process at standard significance levels  For relationships between variables that were both first-order nonstationary, we used the same approach but also used the Pesaran, Shin, and Smith bounds test for the existence of a cointegrating (long-run equilibrium) relationship  We concluded that the variables were cointegrated if we rejected the null hypothesis of no relationship at standard significance levels  Tables 8 and 9 summarize the estimated regression models as well as the results of the unit root, white noise, and cointegration tests  We simulated the model for the 75-year period from 2018 through 2092, and we used the results to calculate the operating balance for the state and local government sector as a percentage of U S  GDP  Our results suggest that if the sector maintains current policy and continues to provide current per capita levels of public goods and services, then its operating balance will decline from about -1 percent of U S  GDP to about -3 percent of U S  GDP over the next 50 years  To shed light on how maintaining the operating balance at or above zero would affect the state and local government sector, we used the model to simulate the level of total expenditures that would keep the operating balance greater than or equal to zero  We then calculated the difference between the present value of total expenditures simulated assuming the sector maintains balance, and the present value of total expenditures simulated assuming the sector maintains current policies, both as a percentage of the present value of total expenditures assuming the sector maintains current policies, and as a percentage of the present value of U S  GDP  We calculated all of the present values for the 50-year period from 2018 through 2067, and we used a discount rate equal to the average of the 3-month Treasury rate and the 10-year Treasury rate for each year  Our results suggest that the difference between the present value of total expenditures that maintain balance and the present value of total expenditures that maintain current policies is about -14 7 percent of the present value of total expenditures that maintain current policies, or about -2 4 percent of the present value of U S  GDP  That is, our simulations suggest that maintaining balance would require the sector to spend about 14 7 percent less than it would spend each year to maintain current policies  We note that a similar exercise based on simulating total revenues required to maintain the operating balance at or above zero would generate a similar result  Our approach has a number of limitations and the results should be interpreted with caution: The state and local government fiscal model is not designed for certain types of analyses  The simulations are not intended to provide precise predictions  Even though we know that these governments regularly make changes to tax laws and expenditures, the model essentially holds current policy in place and analyzes the fiscal future for the sector as if those policies were maintained because it would be highly speculative to make any assumptions about future policy adjustments  Fiscal outcomes, as related to the state and local government sector’s financial position and solvency, may not reflect all aspects of the sector’s fiscal health  Other indicators include economic indicators that go beyond the sector’s financial position to include economic growth, income, or distributional equity, as well as indicators of the quality of services provided by the sector, including education, health care, infrastructure, and other public goods and services  Our unit of analysis is the state and local government sector as a whole, so our results provide an assessment of the sector’s fiscal outlook  However, individual state and local governments likely exhibit significant heterogeneity in their expenditure and revenue patterns, so their fiscal outlooks will likely differ from that for the sector  Nevertheless, it is informative to assess the overall fiscal outlook of the sector because doing so reveals the outlook for the average state or local government  In addition, aggregate data on the sector are available on a more timely basis than data for individual state and local governments  This allows for a better assessment of the sector’s current fiscal outlook  Our results for the sector also provide a baseline from which to view the experiences of individual state and local governments  Finally, assessing the fiscal outlook of the sector as a whole can help mitigate the tendency to extrapolate from the most visible, but potentially not representative, experiences of individual states or localities  Our baseline approach to simulating the fiscal outlook for the state and local government sector is described in appendix I  As part of our simulation approach, we used five variables with values for the simulation period—the period from 2018 through 2092—that are projected outside the model and that do not rely on maintaining historical relationships: U S  population, real U S  gross domestic product (GDP) growth, national health care excess cost growth, Medicaid excess cost growth, and the real rate of return on pension assets  U S  population  For our baseline simulations, we used the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds’ (OASDI Trustees) intermediate population projections  Real U S  GDP  For our baseline simulations, we projected real U S  GDP to grow at the same rate as Congressional Budget Office (CBO) projections for the period from 2018 through 2028 and to grow at the same rate as the OASDI Trustees’ intermediate projections of real U S  GDP growth for the period from 2029 through 2092  National health expenditures excess cost growth  For our baseline simulations, we used Centers for Medicare & Medicaid Services’ (CMS) baseline projection of national health expenditures excess cost growth  Medicaid excess cost growth  For our baseline simulations, for the period from 2029 through 2092, we used Medicaid excess cost growth derived from CMS’s baseline projections  Real rate of return on state and local government pension assets  For our baseline simulations, we assumed a 5 percent real rate of return on state and local government pension assets  To assess the sensitivity of our results to changes in these baseline projections, we selected two alternative projections of each of these variables, one associated with a faster growth rate or rate of return and one associated with a slower growth rate or rate of return  U S  population  For our alternative simulations, we used the OASDI Trustees’ high cost and low cost population projections  Real U S  GDP  For our alternative simulations, we used the OASDI Trustees’ high cost and low cost projections of real U S  GDP growth  National health expenditures excess cost growth  For our alternative simulations, we used CMS’s alternative projection of national health expenditures excess cost growth  As another alternative, we simulated the model assuming excess cost growth for national health expenditures is zero  Medicaid excess cost growth  For our alternative simulations, for the period from 2029 through 2092, we used Medicaid excess cost growth derived from CMS’s alternative projections for the period from 2029 through 2092  As another alternative, we simulated the model assuming Medicaid excess cost growth is zero for the period from 2029 through 2092  Real rate of return on state and local government pension assets  For our sensitivity analysis, we used real rates of return of 2 5 percent and 7 5 percent  Table 10 shows the average annual growth rate or rate of return associated with the baseline and alternative projections of each variable for the simulation period  For our simulations based on alternative assumptions about U S  population growth and real U S  GDP growth, as well as simulations based on alternative assumptions about real pension asset returns, we simulated the model changing one variable at a time and leaving the others fixed at their baseline values  For example, for one simulation we used the slower assumption for real U S  GDP growth and the baseline assumptions for all other variables  For our simulations based on alternative assumptions about excess cost growth for national health expenditures and for Medicaid, we changed both variables in the same direction and left the others fixed at their baseline values  For example, for one simulation we used zero excess cost growth for both national health expenditures and for Medicaid, and made the baseline assumption for the other variables  Thus, our sensitivity analysis is in the spirit of a partial equilibrium comparative statics analysis that sheds light on how each of the individual variables may affect the state and local government sector’s fiscal outlook  However, these variables are likely to be correlated so future changes in one would likely be associated with changes in others  State and Local Governments’ Fiscal Outlook: December 2016 Update, GAO-17-213SP  Washington, D C : Dec  8, 2016  State and Local Governments’ Fiscal Outlook: December 2015 Update, GAO-16-260SP  Washington, D C : Dec  16, 2015  State and Local Governments’ Fiscal Outlook: December 2014 Update, GAO-15-224SP  Washington, D C : Dec  17, 2014  State and Local Governments’ Fiscal Outlook: April 2013 Update, GAO-13-546SP  Washington, D C : Apr  29, 2013  State and Local Governments’ Fiscal Outlook: April 2012 Update, GAO-12-523SP  Washington, D C : Apr  5, 2012  State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability, GAO-12-322  Washington, D C : Mar  2, 2012  State and Local Governments’ Fiscal Outlook: April 2011 Update, GAO-11-495SP  Washington, D C : Apr  6, 2011  State and Local Governments: Knowledge of Past Recessions Can Inform Future Federal Fiscal Assistance, GAO-11-401  Washington, D C : Mar  31, 2011  State and Local Governments: Fiscal Pressures Could Have Implications for Future Delivery of Intergovernmental Programs, GAO-10-899  Washington, D C : July 30, 2010  State and Local Governments’ Fiscal Outlook: March 2010 Update, GAO-10-358  Washington, D C : Mar  2, 2010  Update of State and Local Government Fiscal Pressures, GAO-09-320R  Washington, D C : Jan  26, 2009  State and Local Fiscal Challenges: Rising Health Care Costs Drive Long- term and Immediate Pressures, GAO-09-210T  Washington, D C : Nov  19, 2008  State and Local Governments: Growing Fiscal Challenges Will Emerge during the Next 10 Years, GAO-08-317  Washington, D C : Jan  22, 2008  Our Nation’s Long-Term Fiscal Challenge: State and Local Governments Will Likely Face Persistent Fiscal Challenges in the Next Decade, GAO-07-1113CG  Washington, D C : July 18, 2007  State and Local Governments: Persistent Fiscal Challenges Will Likely Emerge within the Next Decade, GAO-07-1080SP  Washington, D C : July 18, 2007  In addition to the contacts listed above, Brenda Rabinowitz and Courtney LaFountain (Assistant Directors), David Aja, Brett Caloia, Ann Czapiewski, Joe Silvestri, Stewart Small, Andrew J  Stephens, Frank Todisco, Walter Vance, and Chris Woika made significant contributions to this report 

ground_truth: Banks play a critical role in the United States economy, channeling money from savers to borrowers and facilitating productive investment. While the nature of lawmakers' interest in bank regulation has shifted over time, most bank regulations fall into one of three general categories. First, banks must abide by a variety of safety-and-soundness requirements designed to minimize the risk of their failure and maintain macroeconomic stability. Second, banks must comply with consumer protection rules intended to deter abusive practices and provide consumers with complete information about financial products and services. Third, banks are subject to various reporting, recordkeeping, and anti-money laundering requirements designed to assist law enforcement in investigating criminal activity. The substantive content of these requirements remains the subject of intense debate. However, the division of regulatory authority over banks between the federal government and the states plays a key role in shaping that content. In some cases, federal law displaces (or "preempts") state bank regulations. In other cases, states are permitted to supplement federal regulations with different, sometimes stricter requirements. Because of its substantive implications, federal preemption has recently become a flashpoint in debates surrounding bank regulation. In the American "dual banking system," banks can apply for a national charter from the Office of the Comptroller of the Currency (OCC) or a state charter from a state's banking authority. A bank's choice of chartering authority is also a choice of primary regulator, as the OCC serves as the primary regulator of national banks and state regulatory agencies serve as the primary regulators of state-chartered banks. However, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) also play an important role in bank regulation. The Federal Reserve supervises all national banks and state-chartered banks that become members of the Federal Reserve System (FRS), while the FDIC supervises all state banks that do not become members of the FRS. This complex regulatory architecture has resulted in a "symbiotic system" with both federal regulation of state banks and state regulation of national banks. In the modern dual banking system, national banks are often subject to generally applicable state laws, and state banks are subject to both generally applicable federal laws and regulations imposed by their federal regulators. The evolution of this system during the 20th century caused the regulation of national banks and state banks to converge in a number of important ways. However, despite this convergence, federal preemption provides national banks with certain unique advantages. In Barnett Bank of Marion County, N.A. v. Nelson, the Supreme Court held that the National Bank Act (NBA) preempts state laws that "significantly interfere" with the powers of national banks. The Court has also issued two decisions on the preemptive scope of a provision of the NBA limiting states' "visitorial powers" over national banks. Finally, OCC rules have taken a broad view of the preemptive effects of the NBA, limiting the ways in which states can regulate national banks. Courts, regulators, and legislators have recently confronted a number of issues involving banking preemption and related federalism questions. Specifically, Congress has considered legislation that would overturn a line of judicial decisions concerning the circumstances in which non-banks can benefit from federal preemption of state usury laws. The OCC has also announced its intention to grant national bank charters to certain financial technology (FinTech) companies—a decision that is currently being litigated. Finally, Congress has recently turned its attention to the banking industry's response to state efforts to legalize and regulate marijuana.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.

Report 1: Since 2001, the United States has made a commitment to building Afghanistan’s security and governance in order to prevent the country from once again becoming a sanctuary for terrorists  To achieve its security objectives, the United States currently has two missions in Afghanistan: a counterterrorism mission that it leads and the NATO-led Resolute Support train, advise, and assist mission, which it participates in with other coalition nations  The objective of Resolute Support, according to DOD reporting, is to establish self-sustaining Afghan security ministries and forces that work together to maintain security in Afghanistan  The United States is conducting these missions within a challenging security environment that has deteriorated since the January 2015 transition to Afghan-led security  The United Nations reported nearly 24,000 security incidents in Afghanistan in 2017—the most ever recorded—and, despite a slight decrease in the overall number of security incidents in early 2018, the United Nations noted significant security challenges, including a spike in high-casualty attacks in urban areas and coordinated attacks by the insurgency on ANDSF checkpoints  DOD provides both personnel and funding to support its efforts in Afghanistan  DOD documents indicate that the United States contributes more troops to Resolute Support than any other coalition nation  As of May 2018, the United States was contributing 54 percent of Resolute Support military personnel, according to DOD reporting  Of the approximately 14,000 U S  military personnel in Afghanistan as of June 2018, about 8,500 were assigned to Resolute Support to train, advise, and assist the ANDSF, according to DOD reporting  For fiscal year 2018, Congress appropriated about $4 67 billion for the Afghanistan Security Forces Fund—the primary mechanism of U S  financial support for manning, training, and equipping the ANDSF  Other international donors provided about $800 million, and the Afghan government committed to providing about $500 million, according to DOD reporting  Under Resolute Support and the International Security Assistance Force mission that preceded it, CSTC-A is the DOD organization responsible for (1) overseeing efforts to equip and train the ANA and ANP; (2) validating requirements, including equipment requirements; (3) validating existing supply levels; (4) submitting requests to DOD components to contract for procurement of materiel for the ANDSF; and (5) ensuring that the Afghan government appropriately uses and accounts for U S  funds provided as direct contributions from the Afghanistan Security Forces Fund  OSD-P is responsible for developing policy on and conducting oversight of the bilateral security relationship with Afghanistan focused on efforts to develop the Afghan security ministries and their forces  In August 2017, we reported that the United States had spent almost $18 billion on equipment and transportation for the ANDSF from fiscal years 2005 through April 2017, representing the second-largest expenditure category from the Afghanistan Security Forces Fund  In that report, we identified six types of key equipment the United States funded for the ANDSF in fiscal years 2003 through 2016, including approximately: 600,000 weapons, such as rifles, machine guns, grenade launchers, shotguns, and pistols; 163,000 tactical and nontactical radios, such as handheld radios and 76,000 vehicles, such as Humvees, trucks, recovery vehicles, and mine resistant ambush protected vehicles; 30,000 equipment items for detecting and disposing of explosives, such as bomb disposal robots and mine detectors; 16,000 equipment items for intelligence, surveillance, and reconnaissance, such as unmanned surveillance drones and night vision devices; and 208 aircraft, such as helicopters, light attack aircraft, and cargo airplanes  The Ministry of Defense oversees the ANA, and the Ministry of the Interior oversees the ANP  According to DOD reporting, the authorized force level for the ANDSF, excluding civilians, as of June 2018 was 352,000: 227,374 for the Ministry of Defense and 124,626 for the Ministry of Interior  The ANA includes the ANA corps, Afghan Air Force, Special Mission Wing, ANA Special Operations Command, and Ktah Khas (counterterrorism forces)  The ANP includes the Afghan Uniformed Police, Afghan Anti-Crime Police, Afghan Border Police, Public Security Police, Counter Narcotics Police of Afghanistan, and General Command of Police Special Units  The ANA Special Mission Wing, Ktah Khas, ANA Special Operations Command, and ANP General Command of Police Special Units are collectively referred to as the Afghan Special Security Forces  In this report, we refer to the Afghan Air Force and the Afghan Special Security Forces as specialized forces, and the other components of the ANDSF as conventional forces  According to DOD reporting, the combined authorized force level for the specialized forces as of June 2018 was approximately 34,500, or about 10 percent of the ANDSF’s total authorized force level of 352,000, compared with the conventional forces, which make up about 74 percent of the total authorized force level for the ANDSF  Figure 1 shows the ANDSF’s organization  U S  and coalition advisors from Resolute Support focus on capacity building at the Ministry of Defense, Ministry of Interior, and ANDSF regional headquarters, according to DOD reporting  Ministerial advisors are located at Resolute Support headquarters in Kabul  At the ministerial level, advisors provide assistance to improve institutional capabilities, focusing on several functional areas  Table 1 summarizes the indicators of effectiveness that ministerial advisors are to use to measure ministerial progress in developing functioning systems that can effectively execute each of the functional areas  Regional Resolute Support advisors from seven advising centers located throughout Afghanistan provide support to nearby ANA corps and ANP zone headquarters personnel, according to DOD reporting  Some advisors are embedded with their ANDSF counterparts, providing a continuous coalition presence, while others provide less frequent support, based on proximity to and capability of their ANDSF counterparts  Regional advisors are to track ANDSF capability development by assessing the progress of the ANA corps and ANP zone headquarters based on five capability pillars (see table 2)  DOD and other Resolute Support advisors are to document the results of these assessments each quarter in an ANDSF Assessment Report  According to DOD reporting, in addition to ministerial and regional advising, two tactical-level advisory commands provide continuous support for the ANDSF’s specialized forces: Train, Advise, and Assist Command–Air (TAAC-Air) advises the Afghan Air Force down to the unit level, and NATO Special Operations Component Command–Afghanistan (NSOCC-A) primarily provides tactical-level special operations advising for the Afghan Special Security Forces  TAAC-Air and NSOCC-A assess capabilities at the headquarters level based on the five capability pillars described above in table 2, and these assessments are included in the quarterly ANDSF Assessment Report  Figure 2 shows the levels of advising each Resolute Support advisory command type provides for the ANDSF conventional forces and specialized forces  Since Resolute Support began, the ANDSF have improved some capabilities related to the functional areas and capability pillars described above, but face several capability gaps that leave them reliant on coalition assistance, according to publicly available DOD reporting  DOD defines capability as the ability to execute a given task  A capability gap is the inability to execute a specified course of action, such as an ANDSF functional area or a capability pillar (see tables 1 and 2 above)  According to DOD guidance, a gap may occur because forces lack a materiel or non-materiel capability, lack proficiency or sufficiency in a capability, or need to replace an existing capability solution to prevent a future gap from occurring  According to DOD reporting on the Afghan security ministries, ANA corps, and ANP zones, the ANDSF generally have improved in some capability areas since Resolute Support began, with some components performing better than others  For example, DOD has reported that the Afghan ministries have improved in operational planning, strategic communications, and coordination between the Ministry of Interior and Ministry of Defense at the national level  In general, the ANA is more capable than the ANP, according to DOD reporting  According to DOD officials and SIGAR reporting, this is due, in part, to the ANA having more coalition advisors and monitoring than the ANP  DOD officials also noted that the Ministry of Interior, which oversees the ANP, and Afghanistan’s justice system are both underdeveloped, hindering the effectiveness of the ANP  Corruption, understaffing, and training shortfalls have also contributed to the ANP’s underdevelopment, according to DOD and SIGAR reporting  The Afghan Special Security Forces are the most capable within the ANDSF and can conduct the majority of their operations independently without coalition enablers, according to DOD reporting  DOD and SIGAR reports have attributed the Afghan Special Security Forces’ relative proficiency to factors such as low attrition rates, longer training, and close partnership with coalition forces  The Afghan Air Force is becoming increasingly capable, and can independently plan for and perform some operational tasks, such as armed overwatch and aerial escort missions, according to DOD reporting  However, DOD has reported that the ANDSF generally continue to need support in several key areas  For example, as of December 2017, DOD reported several ministerial capability gaps, including force management; logistics; and analyzing and integrating intelligence, surveillance, and reconnaissance information  DOD also reported that, as of December 2017, the ANA and ANP continued to have capability gaps in several key areas, such as weapons and equipment sustainment and integrating fire from aerial and ground forces  The ANDSF rely on support from contractors and coalition forces to mitigate capability gaps in these key areas  For some capability areas, such as aircraft and vehicle maintenance and logistics, the ANDSF is not expected to be self- sufficient until at least 2023, according to DOD reporting  According to DOD officials and SIGAR reporting, coalition and contractor support helps mitigate ANDSF capability gaps in the immediate term but may make it challenging to assess the ANDSF’s capabilities and gaps independent of such support  For example, vehicle and aircraft maintenance contractors are responsible for sustaining specific operational readiness rates for the equipment they service  While this helps ensure that ANDSF personnel have working equipment to accomplish their mission, thereby closing an immediate capability gap, it may mask the ANDSF’s underlying capabilities and potentially prolong reliance on such support, according to DOD officials and SIGAR reporting  DOD and the ANDSF have begun implementing plans and initiatives that aim to strengthen ANDSF capabilities  These include the following, among others: ANDSF Roadmap  In 2017, the Afghan government began implementing the ANDSF Roadmap—a series of developmental initiatives that seek to strengthen the ANDSF and increase security and governance in Afghanistan, according to DOD reporting  The Roadmap is structured to span 4 years, but DOD has reported that its full implementation will likely take longer than that  According to DOD reporting, the Roadmap aims to improve four key elements: (1) fighting capabilities; (2) leadership development; (3) unity of command and effort; and (4) counter-corruption efforts  Under the Roadmap’s initiative to increase the ANDSF’s fighting capabilities, DOD and the ANDSF have begun implementing plans to increase the size of the specialized forces  Specifically, DOD reports that the ANDSF plans to nearly double the size of the Afghan Special Security Forces by 2020 as an effort to bolster the ANDSF’s offensive reach and effectiveness  The Afghan Special Security Forces are to become the ANDSF’s primary offensive force, the conventional ANA forces are to focus on consolidating gains and holding key terrain and infrastructure, and the conventional ANP forces are to focus on community policing efforts  In addition, to provide additional aerial fire and airlift capabilities, the ANDSF began implementing an aviation modernization plan in 2017  The aim is to increase personnel strength and the size of the Afghan Air Force and Special Mission Wing fleets by 2023  Enhanced vehicle maintenance efforts  To help improve the ANDSF’s vehicle maintenance abilities, DOD awarded a National Maintenance Strategy Ground Vehicle Support contract, which, according to DOD officials, became fully operational in December 2017  The National Maintenance Strategy Ground Vehicle Support contract consolidated five separate vehicle maintenance and training contracts into a single contract and contains provisions for building the capacity of ANDSF and Afghan contractors to incrementally take control of vehicle maintenance over a 5-year period  Additional U S  military personnel  As part of the South Asia strategy, the United States committed 3,500 additional military personnel to increase support to its missions in Afghanistan  According to DOD reporting, most of the additional personnel will support the Resolute Support mission, providing more advising and combat enabler support to the ANDSF  Additionally, in March 2018, the United States began deploying a Security Force Assistance Brigade—a new type of unit made up of U S  Army personnel with expertise in training foreign militaries—to Afghanistan  The Security Force Assistance Brigade will advise conventional and specialized forces at and below the corps and zone levels and will accompany and support ANA conventional forces at the battalion level in ground operations as needed, according to DOD and SIGAR reporting  DOD collects some reliable information about the operation and maintenance abilities of ANDSF specialized forces, in part because advisors are embedded at the tactical level with the specialized forces, according to DOD officials  Specifically, U S  and coalition forces advise specialized forces at the tactical level under Resolute Support because building ANDSF aviation and special operations abilities are considered particularly important, according to DOD reporting  DOD officials told us that since U S  and coalition forces are embedded at the tactical level for specialized forces, they can monitor, assess, and report on tactical abilities, including the ability to operate and maintain equipment  Our analysis of information provided by DOD about the Afghan Air Force’s ability to operate and maintain MD-530 helicopters illustrates that DOD has some detailed information about specialized forces  TAAC-Air advisors help train Afghan pilots and maintainers and collect information on their tactical abilities  For example, TAAC-Air advisors track the percentage of maintenance performed by Afghan Air Force maintainers and aircraft operational readiness rates, according to DOD officials  According to DOD reporting and officials, as of December 2017, the Afghan Air Force could independently conduct MD-530 helicopter operations for short intervals without contractor support but relied on contractors to perform the majority of maintenance and sustainment activities  See appendix II for more information on the Afghan Air Force’s ability to operate and maintain MD-530 helicopters  U S  and coalition forces perform high-level assessments of the ANDSF conventional forces’ capabilities at the corps and zone levels but do not assess their tactical abilities, such as the ability to operate and maintain equipment, according to DOD officials  For example, U S  and coalition forces assess the ANA and ANP conventional forces in quarterly ANDSF Assessment Reports, but these reports are at the corps and zone headquarters levels, and are not meant to provide an evaluation of the entire ANDSF, according to DOD reporting  DOD officials stated that other U S - and coalition-produced reports and assessments, such as DOD’s semiannual Section 1225 reports to Congress, semiannual periodic mission reviews, and annual Afghanistan Plans of Record, provide some information on the ANDSF’s high-level capabilities  However, according to DOD officials, these reports do not routinely assess the conventional forces’ ability to operate and maintain equipment  According to DOD officials, DOD does not assess conventional forces’ tactical abilities because advisors have had little or no direct contact with conventional units below the corps and zone levels, and thus do not collect such information on conventional forces  Specifically, under Resolute Support, U S  and coalition forces have not embedded with the conventional forces below the corps and zone levels except in limited circumstances  Since U S  and coalition forces do not collect firsthand information on the conventional units’ tactical abilities, they rely on those units’ self-reporting for information on ANDSF abilities below the corps and zone levels, which, according to DOD officials, may be unreliable  ANDSF reporting is not verified by U S  officials and can be unreliable in its consistency, comprehensiveness, and credibility, according to DOD officials and SIGAR  For example, the ANDSF produce a monthly tracker on vehicle availability, maintenance backlog, repair times, and personnel productivity, but DOD officials told us that the trackers are of questionable accuracy


Report 2:  Our analysis of information provided by DOD about the ANDSF’s ability to operate and maintain tactical and nontactical radios illustrates the limited amount of information DOD has on ANDSF conventional forces’ tactical abilities  Specifically, DOD officials could not say how well ANDSF personnel on the front lines operate radios in the field and had only limited information on the ANDSF’s ability to maintain radios  For example, the officials noted that the ANA conventional forces can perform some unit-level radio repairs but that complex ANA radio maintenance and all ANP radio maintenance is conducted by contractors  DOD officials at Resolute Support headquarters told us that they provide ministerial- level advising on how to manage ANDSF radio systems and do not provide tactical advising or inventory control for radios  See appendix III for more information on the ANDSF’s ability to operate and maintain radios  Our analysis of information provided by DOD about the ANDSF’s ability to operate and maintain Mobile Strike Force Vehicles (MSFV) highlights the limited amount of information DOD has on ANDSF conventional forces’ tactical abilities compared with specialized forces  DOD officials were able to provide operation and maintenance information for MSFVs that had transferred to the specialized forces as of January 2018 but were unable to provide operation and maintenance information for any other MSFVs  The ANDSF began transferring one of the ANDSF’s two MSFV brigades from the conventional to specialized forces in August 2017, according to DOD officials  As part of this transfer, NSOCC-A advisors—who provide tactical-level advising for the Afghan Special Security Forces—assumed oversight for the first brigade from Resolute Support headquarters advisors  DOD officials stated that the ANDSF’s ability to operate and maintain MSFVs in this brigade prior to the transfer was unknown, as neither Resolute Support headquarters nor the ANA had assessed this  The operation and maintenance abilities of the second brigade, which is still in the conventional forces, remains unknown  DOD officials at NSOCC-A were able to provide information such as inventory and mission capability rates for the MSFVs that had transferred, but only for the short period of time the vehicles had been under the control of the specialized forces  DOD officials told us that NSOCC-A plans to collect more information on the specialized forces’ ability to operate and maintain MSFVs as they are transferred  See appendix IV for more information on the ANDSF’s ability to operate and maintain MSFVs  In the absence of embedded advisors at the tactical level, DOD has not implemented alternative approaches to collect reliable information about the conventional forces’ ability to operate and maintain equipment  Federal internal control standards state that U S  agencies should obtain and process reliable information to evaluate performance in achieving key objectives and assessing risks  DOD officials acknowledged that some of the plans described above that DOD and the ANDSF have begun implementing to address capability gaps may provide opportunities for DOD to collect more reliable information on the conventional forces’ ability to operate and maintain U S -purchased equipment  For example, the National Maintenance Strategy Ground Vehicle Support contract requires that contractors regularly report the total work orders received, work in progress, and completed maintenance work performed by ANDSF personnel as well as vehicle availability rates, which may be more reliable than the ANDSF’s monthly report on vehicle availability  In addition, the Security Force Assistance Brigade may be able to collect and report on the tactical abilities of units they advise and accompany on missions since they are being deployed at or below the corps and zone levels  However, as of June 2018, DOD officials had not decided which, if any, of these options to pursue  Without reliable information on the equipment operation and maintenance abilities of ANDSF conventional forces, which represent nearly 75 percent of the ANDSF, DOD may be unable to fully evaluate the success of its train, advise, assist, and equip efforts in Afghanistan  The United States invested nearly $84 billion in Afghan security in the 17- year period spanning fiscal years 2002 through 2018, but DOD continues to face challenges to developing a self-sustaining ANDSF  While DOD has reported the ANDSF have improved in several capability areas, they continue to face critical capability gaps, impeding their ability to maintain security and stability in Afghanistan independent of U S  and coalition forces  Moreover, DOD lacks reliable information about the degree to which conventional forces—which make up about three-quarters of the ANDSF—are able to operate and maintain U S -purchased equipment  This limits DOD’s ability to fully evaluate the success of its train, advise, assist, and equip efforts in Afghanistan  The Secretary of Defense should develop and, as appropriate, implement options for collecting reliable information on the ANDSF conventional forces’ ability to operate and maintain U S -purchased equipment  (Recommendation 1) We provided a draft of this report to DOD and State for comment  DOD declined to provide written comments specifically on this public version of the report, but DOD’s comments on the sensitive version of this report are reprinted in appendix V  The sensitive version of this report included two recommendations, which DOD cited in its comments on the draft of the sensitive report  One of those recommendations related to information that DOD deemed to be sensitive and that must be protected from public disclosure  Therefore, we have omitted that recommendation from DOD’s comment letter in appendix V  This omission did not have a material effect on the substance of DOD’s comments  In its comments, DOD concurred with the recommendation we made in this version of the report and stated it will take steps to implement it  DOD also provided technical comments, which we incorporated as appropriate  The Department of State had no comments  We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and the Secretary of State  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff has any questions about this report please contact me at (202) 512-7114 or farbj@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix VI  House Report 114-537 associated with the National Defense Authorization Act for Fiscal Year 2017 included a provision for us to review the Afghan National Defense and Security Forces’ (ANDSF) capability and capacity to operate and sustain U S -purchased weapon systems and equipment  This report is a public version of a sensitive report that we issued on September 20, 2018  Our September report included three objectives, including one on the extent to which DOD considers ANDSF input and meets their needs when identifying equipment requirements  DOD deemed the information related to that objective to be sensitive, which must be protected from public disclosure  Consequently, we removed that objective and a related recommendation from this public report  This version includes information on the other two objectives: (1) what has been reported about ANDSF capabilities and capability gaps and (2) the extent to which DOD has information about the ANDSF’s ability to operate and maintain U S -purchased equipment  Although the information provided in this report is more limited, the report uses the same methodology for the two objectives as the sensitive report  To identify what has been reported about ANDSF capabilities and capability gaps, we reviewed North Atlantic Treaty Organization (NATO) and DOD documents and reports, such as DOD’s semiannual Section 1225 reports to Congress, produced after the start of the NATO-led Resolute Support mission on January 1, 2015  To determine what steps DOD and NATO have taken to try to address gaps, we reviewed reports the Center for Naval Analyses produced for DOD, as well as DOD and NATO documents and reports produced after January 1, 2015, and reports from GAO, the Special Inspector General for Afghanistan Reconstruction (SIGAR), and the DOD Inspector General  We also interviewed Center for Naval Analyses representatives and DOD officials in the United States and Afghanistan, including DOD officials at the Combined Security Transition Command–Afghanistan (CSTC-A) and in the Office of the Undersecretary of Defense for Policy (OSD-P) who helped create the DOD reporting we reviewed  To determine the extent to which DOD has information about the ANDSF’s ability to operate and maintain U S -purchased equipment, we reviewed DOD documents and reports and interviewed DOD officials in the United States and Afghanistan, including DOD officials who advise the ANDSF  We also reviewed federal internal control standards to determine what responsibilities agencies have specifically related to information collection  To provide illustrative examples of information DOD has about the ANDSF’s ability to operate and maintain U S - purchased equipment and what that information indicates about the ANDSF’s abilities and challenges, we interviewed and analyzed written responses from DOD officials, including DOD officials who provide procurement and lifecycle management for some ANDSF aircraft and vehicles, about three equipment types—MD-530 helicopters, Mobile Strike Force Vehicles (MSFV), and radios  We selected these three equipment types from a list that we developed, for an August 2017 report, of key ANDSF equipment the United States purchased from fiscal years 2003 through 2016  We made our selections after reviewing DOD documentation and interviewing DOD officials regarding a number of considerations, such as (1) how critical the equipment is to the ANDSF’s ability to achieve its mission; (2) which ANDSF component uses the equipment (i e , Afghan National Police, Afghan National Army, or both); (3) whether DOD intends to continue procuring the equipment for the ANDSF; and (4) whether the equipment had been in use at least 5 years  We collected detailed information about the ANDSF’s ability to operate and maintain MD-530 helicopters, MSFVs, and radios, as well as other key statistics DOD provided about the equipment, such as inventory, average lifespan, average cost, role, and training  This information was based mainly on DOD responses collected from January 2018 to February 2018 as well as DOD documents and reports produced after January 1, 2015  The total amount of MD-530s and radios authorized for procurement was based on DOD data that we collected for our August 2017 report on key ANDSF equipment the United States purchased in fiscal years 2003 through 2016, which we supplemented with additional data DOD provided on U S -purchased equipment from October 1, 2016, through December, 31, 2017  The performance audit upon which this report is based was conducted from August 2016 to September 2018 in accordance with generally accepted government auditing standards  Those standards require that we plan and perform the audit to obtain sufficient, appropriate, evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives  We subsequently worked with DOD from September 2018 to October 2018 to prepare this public version of the original sensitive report for public release  This public version was also prepared in accordance with those standards  Manufacturer: MD Helicopters, Inc  U S  Program Management Office: U S  Army, Non-Standard Rotary Wing Aircraft Project Management Office Program Advising: Train Advise Assist Command–Air (TAAC-Air) The United States originally procured 6 unarmed MD-530s for the AAF for rotary wing training in 2011  In 2014, the United States purchased 12 armed MD-530s and began retrofitting the 5 remaining trainer helicopters with armament for operational missions to address a close air attack gap  MD- 530s were chosen to fill the gap over other aircraft, in part because they could be delivered relatively quickly as the AAF awaited A-29 light attack aircraft that were experiencing procurement delays, according to Department of Defense (DOD) officials  The United States procured additional MD-530s in 2015, 2016, and 2017 because of the aircraft’s positive impact on the battlefield, according to DOD officials (see fig  3)  Key Statistics Variants: All can be armed with  50-cal machine gun pods and/or 2 75 inch rocket pods  Total Authorized for Procurement: 60 as of December 31, 2017 Inventory: 25 as of January 2018 (30 are scheduled for delivery; attrition of 5 due to crashes and enemy fire) Average Lifespan: Absent mishaps, and with good maintenance, there is no defined lifespan limit for MD-530s, according to DOD officials  National Army and Afghan National Police, depending on the mission, in all but one region of Afghanistan, which is supported by other aircraft  MD-530s are typically tasked two at a time for missions, according to DOD officials  An MD-530 crew consists of a pilot and co-pilot, according to DOD  Average cost: $6 3 million per aircraft, including all electronic devices, weapons management systems, and weapons (excluding ordnance), according to DOD officials  o Division of labor is based on the individual crew members' capabilities, with one pilot handling navigation and communication while the other identifies targets and operates the weapon systems  Army pilot advisors at Kandahar Air Field, according to DOD officials  o MD-530 pilot training takes about 3 years (see fig  4)  1  The GAO report number cited in DOD’s letter refers to a draft of the sensitive version of this report, which we issued on September 20, 2018  Prior to issuing that version, we changed its report number to GAO-18- 662SU to reflect its sensitive nature  That version of this report included two recommendations  The second recommendation has been omitted from DOD’s letter in this public version because it was related to information that DOD deemed to be sensitive  In addition to the contact named above, Joyee Dasgupta (Assistant Director), Kara Marshall, Katherine Forsyth, and Bridgette Savino made key contributions to this report  The team also benefitted from the expert advice and assistance of David Dayton, Neil Doherty, Justin Fisher, Ashley Alley, Cary Russell, Marie Mak, James Reynolds, Sally Williamson, Ji Byun, and J  Kristopher Keener 

ground_truth: Fiscal sustainability presents a national challenge shared by all levels of government. Since 2007, GAO has published simulations of long-term fiscal trends in the state and local government sector, which have consistently shown that the sector faces long-term fiscal pressures. While most states have requirements related to balancing their budgets, deficits can arise because the planned annual revenues are not generated at the expected rate, demand for services exceeds planned expenditures, or both, resulting in a near-term operating deficit. This report updates GAO's state and local fiscal model to simulate the fiscal outlook for the state and local government sector. This includes identifying the components of state and local expenditures likely to contribute to the sector's fiscal pressures. In addition, this report identifies considerations related to federal policy and other factors that could contribute to uncertainties in the state and local government sector's long-term fiscal outlook. GAO's model uses the Bureau of Economic Analysis's National Income and Product Accounts as the primary data source and presents the results in the aggregate for the state and local sector as a whole. The model shows the level of receipts and expenditures for the sector until 2067, based on current and historical spending and revenue patterns. In addition, the model assumes that the current set of policies in place across state and local government remains constant to show a simulated long-term outlook. GAO's simulations suggest that the state and local government sector will likely face an increasing difference between revenues and expenditures during the next 50 years as reflected by the operating balance--a measure of the sector's ability to cover its current expenditures out of its current receipts. While both expenditures and revenues are projected to increase as a percentage of gross domestic product (GDP), a difference between the two is projected to persist because expenditures are expected to grow faster than revenues throughout the simulation period. GAO's simulations also suggest that growth in the sector's overall spending is largely driven by health care expenditures--in particular, Medicaid spending and spending on health benefits for state and local government employees and retirees. These expenditures are projected to grow as a share of GDP during the simulation period. GAO's simulations also suggest that revenues from personal income taxes and federal grants to states and localities will increase during the simulation period. However, revenues will grow more slowly than expenditures such that the sector faces a declining fiscal outlook. GAO also identified federal policy changes that could affect the state and local government sector's fiscal outlook. For example, the effects of the recently-enacted Tax Cuts and Jobs Act will likely depend on how states incorporate the Act into their state income tax rules. In addition, other factors, such as economic growth and rates of return on pension assets, could shift future fiscal outcomes for the sector.