With widespread spending demands, a new report from the National Association of State Budget Officers (NASBO), examines a variety of factors that suggest total state spending growth in Fiscal Year 2026 could be near long-term historical levels. 

The 2025 State Expenditure Report, released by NASBO on December 30^th, focuses attention on fiscal years 2024 and estimated figures for 2025. As in other recent reports, state fiscal year trends continue to be significantly influenced by federal pandemic assistance (and its withdrawal), the impact of one-time spending that stemmed from large state surpluses, the effect of inflation and the pandemic itself. 

While spending demands exist across categories, the report especially points to transportation and Medicaid spending as showing the highest growth trends over the last two fiscal years. Spending growth in transportation was 15.5 percent higher in FY 2024 than the previous year – the highest of any area in terms of total state and federal funds, and 2025 spending growth was 7 percent higher than that. 

Total state expenditures for Medicaid showed estimated 8.4 percent growth in FY 2025 and a 5.3 percent increase in 2024. That data includes federal funds, which have been diminishing based on the expiration of enhanced federal funding connected to the pandemic in 2024, as well as the continued more general dwindling down of federal money from the American Rescue Plan and other pandemic related sources of funding. With those changes, state’s own spending on Medicaid rose 17.5 percent in fiscal 2024 and 13.2 percent the following year. 

Looking to the future, a slew of spending pressures particularly bedevil states’ Medicaid programs, given the rise of healthcare spending generally, rate increases, as well as rising healthcare needs and long-term care costs that have come with an aging population. Meanwhile, the budget bill that was signed by President Trump on July 4, 2025 introduced more changes to Medicaid financing, which will be phased in over time, “and will begin impacting state expenditures in future fiscal years.” 

In addition to the details on spending pressures, the expenditure report provides a fascinating assortment of state spending trends, as well as information about the changing weight carried by state general funds and federal dollars. For less savvy readers, it also provides a clear view of the spending categories that make up the bulk of state budgets. 

Looking at the totals of 2025 estimated spending that came both from the federal government and the states themselves, Medicaid takes up 30.7 percent of the total; K-12 education is 18.2 percent; higher education is 8.8 percent; transportation, 7.8 percent, and corrections is 2.5 percent. A large category of other state spending (including public assistance, which was listed separately until this year) is combined into an “all other” category, representing 31.9 percent of the total in FY2025. (Note that in the 2024 report, public assistance took up a small 1 percent of the total.)

The picture is quite different in terms of state general fund spending, which shows  K-12 education as the most dominant area of spending, taking up 33,2 percent of the total, compared to 20 percent for Medicaid; 9.4 percent for higher education; 5.6 percent for corrections, 1.4 percent for transportation and 29.8 percent for “all other” areas. 

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