The majority of the most populous cities are facing budget gaps for fiscal year 2026. In fact, between December 2024 and April 25, Chicago, Los Angeles San Francisco and Washington all were confronted with budget rating downgrades.

Fundamentally, it’s up to the cities to deal with their fiscal woes, but an August report by Josh Goodman of the Pew Charitable Trusts looks into an important and pertinent question: How much have states contributed to these local problems?

Quite a lot, it turns out. For example, according to the report, “Much of Phoenix’s fiscal 2026 budget deficit stemmed from state tax cuts that reduced local revenue, including state-level income-tax cuts and the repeal of a tax on residential rents. In March, Phoenix’s City Council raised the local sales tax to compensate.”

Meanwhile New York State passed a law in 2022 limiting school class size. While this may be an estimable goal, it’s meant that New York City has been forced to hire thousands of additional teachers. “When fully phased in,” according to Pew, “the city comptroller estimates the mandate will cost more than $1 billion annually, adding to the city’s multibillion dollar annual deficits.” 

When cities turn to the states to help bail themselves out they generally don’t have much success. Last year, for example according to the report,  “Illinois Governor JB Pritzker firmly rejected Chicago Mayor Brandon Johnson’s request for more than $1 billion in additional funds for the city’s school system, which is facing a significant fiscal crisis.”

Similarly, “California provided funding to help Los Angeles rebuild after the January fires, but Governor Gavin Newsom has resisted calls from Mayor Karen Bass for broader state support. The budget that lawmakers enacted in June omitted much of what Bass and area state legislators requested.”

Going forward, there’s a real possibility that when states have their own fiscal stresses, they cut back on local aid. “States are going to balance their budgets,” Howard Cure, director of municipal bond research for Evercore Wealth Management, told Pew. “They’re going to have to make some tough decisions, and it could be on the backs of cities.”

As Goodman told us, “States are dealing with their own deficits, plus requests for help from other local governments such as school districts and transit systems that are often even worse off than cities. In that environment, states may not be able to provide cities with additional funding, but more money isn’t the only solution. States can offer cities relief from mandates and more power to raise revenue to allow them to close their own deficits”.

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