NASBO: States face more challenging budget conditions ahead

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States face slowing revenue growth and increasing spending pressures, the National Association of State Budget Officers said in its fall Fiscal Survey of States.

The report found general fund spending growth was nearly flat in enacted fiscal 2026 budgets, due to fewer one-time expenditures from surplus funds and limited recurring spending increases. It also noted increasing reliance on strategies like targeted cuts and hiring freezes.

"States are facing a range of challenges and budget pressures, including rising health care costs, housing affordability concerns, and infrastructure needs, while also having to navigate recent and upcoming federal changes and their impacts on programs and the economy," NASBO President Alexis Sturm, who is director of the Illinois Governor's Office of Management and Budget, said in a statement.

The report, published Thursday, warned that slow growth in general fund revenue will likely continue in fiscal 2026. That marks the fourth year in a row of slowdown. And it comes after fiscal 2021 and 2022 became the two fastest growing years on record.

"We are seeing that for many states, ongoing spending demands are really outpacing revenue growth, and so those spending pressures — especially as you look into the out years beyond the current fiscal year — are requiring states to take steps now to limit any new spending increases," report author Kathryn Vesey White, director of budget process studies at NASBO, told The Bond Buyer.

The spending pressures are sharpest in areas like healthcare, housing and natural disaster spending, she said, and they coincide with the beginnings of a decrease in federal funding.

"The data in this report predates… the enactment of the One Big Beautiful Bill Act, for example," she said. "But certainly, even as they were enacting budgets, there were signals of a pullback."

A June 16 analysis by Pew Research Center found federal dollars comprised 36% of total state revenue in fiscal 2023, down from 36.4% in fiscal 2022. 

NASBO's report found fiscal 2022, 2023, 2024 and 2025 saw one-time investments largely driving spending growth for states.

Mid-year budget actions also caused general fund spending to come in higher than budgeted for many states, according to the report.

"Spending did come in higher in fiscal year 2025 than originally budgeted, and that's driven at least in part by sort of the impacts of one-time spending — one-time uses of surplus dollars, for example," White said. "That can in part be responsible for why you saw 23 states with declining spending compared to what they spent in fiscal year 2025."

In 2026, the report notes, there was an uptick in the number of states using targeted cuts. 

"We saw 24 states reported using targeted reductions, and that is double the number of states that reported use of that strategy this time last year," White said. "We also saw a number of states reporting hiring freezes or eliminating vacant positions, and so those strategies… can partially explain those spending declines."

The report also showed rainy day fund balances remain near all-time highs. White said states are largely choosing to maintain or increase the size of their reserves to guard against future uncertainty.

"Certainly the growth in reserves has slowed compared to what we saw in earlier years, after COVID, and we are seeing a small number of states turn to reserves to help manage their budgets," she said. "But most states continue to maintain or project slight increases in their rainy day funds for FY25, and (the same is) projected for FY26."