Uncertainty clouds Southwest states' fiscal 2027 spending plans

Bloomberg News

Southwest states are facing an uncertain environment, particularly on the economic and federal policy fronts, as officials roll out fiscal 2027 spending proposals. 

Delays in the release of key economic data due to the federal government shutdown, tariffs, federal spending shifts onto states, an immigration crackdown, and the impact of federal tax cuts under H.R. 1, the massive tax and spending One Big Beautiful Bill Act, are among the uncertainties confronting states.

In Colorado, Greg Sobetski, chief economist with the Legislative Council, added a caveat to a forecast that included an 8.6% revenue growth projection for the upcoming fiscal year.

"The level of forecast error this year is likely to be higher than normal because of what we've told you about economic uncertainty and (One Big Beautiful Bill Act) uncertainty," he said in a Dec. 19 presentation to the legislature's Joint Budget Committee. 

Gov. Jared Polis' Office of State Planning & Budgeting estimated general fund revenue growth of 6.2% and reported that the primary risks to Colorado's economy are "federal trade policy, which increases costs to consumers and businesses alike, and the sustainability of strength in the labor market, which supports wage and salary growth and consumer spending."

For fiscal 2027, the Democratic governor proposed a $50.67 billion all-funds budget at the end of October that includes $18.625 billion in general fund spending, warning his state faces "new and serious challenges" due to recent federal policy and a tightening revenue picture.

"These federal actions — including H.R. 1, onerous tariffs, and the attempted impoundment of Congressionally appropriated funds to Colorado — have had immediate negative impacts on Colorado residents and businesses and the state's fiscal health," Polis said in his budget letter. "Since this new federal administration took office, Colorado has seen a loss of $207 million in federal funds, from programs ranging from key climate change initiatives to public safety."

A month after unveiling the budget plan for the fiscal year that begins July 1, Polis extended until Feb. 28 fiscal 2026 spending cuts he ordered in the wake of H.R. 1, which reduced state revenue by more than $1.2 billion, eliminated the state's (Taxpayer's Bill of Rights) surplus, and put an $800 million funding gap in the current budget, according to a statement from his office.

In their 2026 outlooks, bond rating agencies said state governments face looming headwinds.

Moody's Ratings pointed to persistent uncertainty at the federal level in its stable outlook for states.  

"While the reconciliation bill narrowed Medicaid eligibility, it preserved the federal match for enrolled participants, giving states greater budgetary stability on their largest expenditure," the report said. "However, policy risks are rising in other areas, such as federal support for approved infrastructure projects, where shortfalls could create unfunded mandates for states."

Policy uncertainty in the areas of trade and immigration adds another layer of risk, according to Moody's. 

"Tariffs will weigh on manufacturing-heavy states, while restrictive immigration policies would exacerbate labor shortages, limiting economic and revenue growth," Moody's said. "These pressures, combined with modest revenue gains, would challenge states' ability to maintain structural balance if they persist."

Fitch Ratings, which has a neutral outlook, said a federal governmental push of more fiscal responsibilities and risks onto states could have negative rating implications "if fiscal demands accelerate rapidly, such as during an economic downturn or following stress events such as a major natural disaster."

Officials in triple-A-rated Utah acknowledged a budget pinch ahead of the unveiling of Gov. Spencer Cox's proposed $30.7 billion operating and capital budget for fiscal 2027 last month. 

State of Utah

Sophia DiCaro, executive director of the Governor's Office of Planning & Budget, told reporters individual and corporate income tax changes in H.R. 1 are expected to lower Utah's revenue by about $300 million in fiscal 2026 and $200 million in fiscal 2027. 

"What you're going to see is a very, very tight budget, and it's one that continues to build on some of the investments and policy priorities that we've launched over the last few years with the legislature," she told reporters.

She also said Utah is in "a great position" to withstand the revenue loss. The state's rainy day fund is projected to hit a record-high $1.6 billion this fiscal year. 

"Since 2021, Utah has paid down 66% of its general obligation debt, and the state has more in rainy day savings than in total outstanding GO debt," according to the governor's office. DiCaro said Cox is not recommending new bond issuance given high interest rates. 

New Mexico's financial cushion fueled by oil and natural gas severance tax revenue was highlighted by Democratic Gov. Michelle Grisham Lujan when she proposed an $11.3 billion fiscal 2027 budget last week that would maintain $3.4 billion in reserves. 

"Even as we confront unprecedented federal funding challenges, we remain in the strongest financial position in state history," she said in a statement. "This budget puts that strength to work for families, students and communities across New Mexico." 

The spending plan calls for bond issuance. The state transportation department will seek legislative approval for a $1.5 billion bond package to support sustained state road maintenance and major infrastructure improvements statewide, while $444.2 million of severance tax bonds and $380.3 million in GO bonds were requested. 

New Mexico has $558.7 million of GO bonds, $1 billion of severance tax bonds, and nearly $498 million of  highway bonds outstanding, according to budget documents. 

Oklahoma will have $12 billion to spend in fiscal 2027, down $694 million from fiscal 2026, according to initial projections released in December. Reserves, including unspent cash, are expected to total $3.7 billion when fiscal 2026 ends on June 30.

"The projections show the real-time impact of recent tax cuts," said Republican state Sen. Chuck Hall, who chairs the chamber's appropriations committee.

"Oklahoma's economy remains strong, but revenue collections are slowing," he said in a statement. "Although these are early budget estimates and subject to change in the coming months, all signs indicate that state revenues will remain relatively flat, which will limit the legislature's ability to make major new investments next year."

The state, which has been reducing its personal income tax rates, could learn in January if the U.S. Supreme Court will hear a dispute over whether certain Native Americans in Oklahoma are exempt from state income taxes.

Republican Gov. Kevin Stitt said revenue is on a stable path, while the state has a strong savings account. 

"When we cut taxes, our economy grows, and we're all better off," he said in a statement.