State Budgets "Sound" According to Fitch
State budgets are in a sound position entering fiscal 2025, according to Fitch Ratings. Revenue growth has stabilized, returning to a more typical, slower growth trajectory. U.S. states are adjusting spending to this slower trend, having enhanced budgets during a period of higher availability of state and federal revenues.
States Adjust to Slower Growth
With slower revenue growth, driven both by moderating economic conditions and tax policy changes, U.S. states are moderating spending expectations but continue to invest in a broad array of priorities. Spending drivers include rising Medicaid costs, employee retention efforts and the continuing effects of inflation. States are also focusing spending on education, climate response and housing affordability, as well as a number of other priorities.
Fewer Tax Policy Changes
The wave of significant tax policy changes appears to have peaked, with fewer states incorporating tax cuts into their budgets, although several notably do. As with increases in ongoing programmatic spending, permanent tax reductions that reflect prior temporary revenue surges or draws on accumulated balances pose a potential risk to financial resilience. A number of states have multiyear tax reductions incorporated from prior legislation. Few states are raising revenues, although California, New Jersey and Illinois are among the states increasing revenues on a temporary or permanent basis to provide operating budget support.
Budgets Remain Resilient
Most states built significant resilience into their financial operations during the period of extraordinary revenue growth that followed the pandemic recession. States continue to focus on maintaining fiscal resilience, including by paying down accumulated liabilities and maintaining robust reserves. Some states are dipping into accumulated balances for one-time spending, and a few states are tapping rainy-day funds for budget balancing. Fitch Ratings believes states are well positioned to weather economic turbulence in the current fiscal year.
