What to expect as Northeast state budgets face pressure in new year

States and cities across the country are facing a tough budget year. 

With cuts to federal support and revenue slowing the states of the Northeast will have to juggle political and fiscal realities as they start writing their fiscal year 2027 budgets next month. 

"The inflation numbers came up again. So everything is increasing in cost," S&P Global Ratings analyst Geoff Buswick said. "Will revenues be able to keep up? We're saying probably not, in many instances."

Buswick expects that states will begin to tap their reserves, which grew to historic levels thanks to federal subsidies and revenue booms in the wake of the pandemic. 

If states do draw on their reserves, Buswick said he hopes they will view the spending as a "bridge" to a point "where you can get back to greater budget balance" in the future.

The states will also have to grapple with the One Big Beautiful Bill Act passed by congressional Republicans and signed by President Trump in July. 

Most states passed their current budgets before the OBBBA became law. Now, states know about the millions of people who are projected to lose healthcare and the billions of costs that have been shifted to the states.

The cuts in the OBBBA will phase in over time, so states won't have to bear the full brunt of the cuts this year. However, they may begin to adjust to a new relationship with the federal government, said Ana Champeny, vice president for research at the Citizens Budget Commission in New York. 

"I think it's not just a temporary decrease in federal funding," Champeny said. "This may be resetting the level of federal support to state and local governments."

Buswick said the country got a preview of this dynamic through the federal government shutdown earlier this year. States largely responded to the freeze to SNAP benefits by increasing funding to other food programs. He predicts that they'll take a similar approach to long-term SNAP and Medicaid cuts. 

The OBBBA was also a tax bill, Fitch Ratings analyst Eric Kim noted. It extended tax cuts from 2017 and added cuts to the corporate tax rate. Many states' corporate tax rates conform to the federal rates. 

"We're seeing states report hundreds of millions of dollars of potential revenue losses if they pass through these federal changes," Kim said. "We think states should be thinking [about] whether they actually will conform to all the federal tax code changes, and what that does in a revenue forecast."

Uncertainty around infrastructure, driven by the White House, will likely hang over states' budget seasons, according to John Hallacy, president of John Hallacy Consulting. The Trump administration has tried to pull funding for the Gateway rail tunnel project linking New York and New Jersey, and the Francis Scott Key bridge in Maryland, and revoked approval for major wind energy projects. The president has also voiced a desire to pull back Federal Emergency Management Agency funding, or eliminate the agency altogether. 

The sectors that drive the Northeast's economy — medicine, technology, pharmaceuticals, and higher education — are a mixed bag at the moment, Evercore's Howard Cure said. Many higher education institutions have been attacked by the federal government and medical research funds have been cut. 

New York

The finance world is hotly anticipating New York City Mayor-elect Zohran Mamdani's first budget. The democratic socialist's most dramatic campaign promises — raising taxes on the rich, universal childcare, free buses — cannot be accomplished without state government support. 

Mamdani's expensive goals — and New York City's perennial budget problems — make finding efficiencies in government even more important, Champeny said. 

Mamdani has said he wants to fix the city's property tax system, which Champeny said would be an ambitious but worthy goal. 

""Property tax reform is really difficult, but would be so beneficial to New York City to do," Champeny said. "It is an incredibly complicated and unfair system that has withstood many attempts at reform."

Property tax reform would also aid Mamdani's goal to boost housing production, Champeny noted. She also highlighted his goals for procurement reform in the Department of Education, which she said would free up significant money in the budget. 

Champeny said she also hopes Mamdani will address the city's long-standing practices of underbudgeting certain expenses, such as police overtime and housing vouchers. The CBC projects that CityFHEPS, a rental assistance program, will exceed the city's allocation by more than $1 billion this year. 

New York state will have more challenges than the city, Champeny said, as it grapples with the lost federal funding. 

"What does the state do if you lose Medicaid, then you have New York City Health + Hospitals and other safety net hospitals seeing more uncompensated care? That is a fiscal stress for the safety and hospitals, which are already struggling," Champeny said. "Does the state step in and provide some kind of coverage?"

Gov. Kathy Hochul, a Democrat, is running for reelection in 2026.

Hochul endorsed Mamdani during his mayoral campaign, but has clarified that she doesn't support much of his agenda. The one area where she's said they agree is universal childcare.  

In an election year, Buswick said, politicians are usually more cautious in their policy choices. They don't want to risk doing something unpopular or failing to enact their priorities. But Hochul may feel pressure to earn the support of the more than 1 million people who voted for Mamdani. 

Meanwhile, the governor and state lawmakers will battle new attempts from the president to pull funding from the state. Trump has targeted New York more directly than most states, attacking congestion pricing, the Gateway project, its energy plans, and more. 

Pennsylvania

The Keystone State barely passed its fiscal 2026 budget. 

The budget, which came in November, months after the July 1 start of its fiscal year, made few changes from the one before. The impasse prompted an outlook cut from S&P. 

To broker a compromise in the commonwealth's divided legislature, Gov. Josh Shapiro made very few changes from the prior year's budget. That means many of Pennsylvania's problems will surface once again in the 2027 budget negotiations. 

This year's budget spent nearly $4 billion of the general fund surplus. Pennsylvania has a $7.5 billion rainy day fund, Fitch analyst Tammy Gamerman said, reversing the commonwealth's history of weak reserves. 

Pennsylvania's general fund surplus will fall to around $200 million as it heads into FY 2027. That means lawmakers will have to either raise taxes or cut expenses. 

"The commonwealth has a host of tax revenues that it levies," Gamerman said. "It has a number of options if it wants to increase revenue. It's just been very challenging politically to do anything."

Pennsylvania will be enduring hotly contested midterm elections next year, and Shapiro is positioning himself for a 2028 presidential run. That's not a good environment for compromise. 

In the fiscal 2026 budget process, the commonwealth punted on transit funding, creating a short-term agreement that Pittsburgh and Philadelphia's transportation agencies can use their capital budgets to plug their budget gaps. That covered two years, so lawmakers may avoid allocating any new transit spending in fiscal 2027, but it would set up yet another impasse in 2028. 

In Philadelphia, resilience has improved thanks to pandemic-era assistance, leading to the city's highest combination of bond ratings in 40 years. 

Now, Philadelphia's financial performance has started to wane, Fitch's Michael Rinaldi said; it's projecting deficits of more than $100 million. The city's current operating budget is $6.84 billion. 

"I think the crux of many of the issues that we're seeing for large cities is that they experienced significant spending growth post-pandemic, and now it's difficult to pull back from that spending a bit, and those programs that are really important to constituents," he said.

Rinaldi said Philadelphia has the benefit of strong reserves, which it can lean on, if necessary, as it decides how to balance its budget. 

New Jersey

New Jersey's incoming governor, Mikie Sherill, ran on an affordability platform. But New Jersey's fiscal realities mean the Democrat will likely have to enact that platform while raising taxes or cutting services. 

Sherill will inherit a legacy of unfunded pension liabilities and a high debt burden. Departing Gov. Phil Murphy put a dent in the pension liabilities and beefed up the state's reserves, earning nine rating upgrades in just over three years. 

But New Jersey still had a structural imbalance in its budget, and the cuts in the OBBBA may add $1 billion to its budget gap, Fairleigh Dickinson University professor Dan Cassino told Gothamist. 

Kim said he expects that affordability will continue to be a talking point, but lawmakers will mostly pursue it outside of the budget process.  

"[Sherill] said over and over again that day one, she's going to declare an emergency regarding utility costs," Kim said. "There's no spending associated with that."

Budgets are "going to be constrained by what the revenue picture is like," Kim said. But lawmakers can find other avenues to constrain the cost of living. 

Massachusetts

Massachusetts benefits from being a big financial center, Cure said, but much of its economy is reliant on education and medicine. Its educational institutions have faced more federal attacks than most. 

Like Pennsylvania, Massachusetts has a somewhat troubled transit system, which is also vulnerable to federal cuts and scrutiny, Cure said.

Massachusetts' wealth tax, called the Fair Share tax, has performed much better than expected thanks to strong stock market performance over the past few years, noted Kim. 

Maryland

Maryland is facing a deficit of around $1.2 billion in fiscal 2027, Kim said. 

The state's financial picture isn't rosy: Moody's Ratings downgraded Maryland to Aa1 from Aaa earlier this year because of slowing economic performance. 

The lagging economy is largely because many federal workers lost their jobs; the state's governor and legislative leaders called the Moody's decision a "Trump downgrade."

Kim said Maryland's challenges are not insurmountable. 

"it's an important thing to remember: if you go back to pre-pandemic, most state governments, as they forecast their fiscal situation, they did anticipate deficits in the out-years," Kim said. "The budget cycle was usually about [asking], 'how do we close this gap?'"

Maryland Gov. Wes Moore has said he doesn't want to raise taxes, Kim said, noting that the state increased taxes in its fiscal 2026 budget. 

Other states

Connecticut, Maine and New Hampshire all passed biannual budgets last year.

The new SNAP costs are likely to have a big impact on those states' budgets, Buswick said.

"But would [the impact] expand beyond the powers that they have in a biennial budget to make an adjustment? I'm not sure," Buswick said. 

Rhode Island, Delaware and Vermont have largely the same challenges as the rest of the states, Buswick said. 

Delaware has been trying to address a longstanding issue with other post-employment benefits, Buswick said, and is also dealing with challenges from other states to its Chancellery Court advantages. Rhode Island, meanwhile, is closely tied to Massachusetts' economy, and is therefore facing similar advantages and disadvantages.