NASBO’s Fiscal Survey of the States for 2025, released on November 20, offers mostly positive revenue news about the way FY2025 turned out, but provides details of a tightening budget environment in the current fiscal year, which started for 46 states (all but Alabama, Michigan, New York and Texas) on July 1.

In the still early and preliminary look at FY2026, the report points to states using more targeted cuts, vacant position eliminations and hiring freezes “to control spending and manage their enacted budgets.”

In contrast to FY2025, when preliminary actual revenues exceeded estimates “early collections data for FY2026 indicates more mixed revenue performance compared to forecast,” the report explains. At the same time, spending demands are greater than the forecast of revenue growth. Those demands include “medical inflation, housing, natural disasters, the impacts of school choice and decreasing federal funds,” according to the report. Meanwhile, the report also points to more pressures that will come in 2027 and over the next decade based on the budget bill that was signed by President Trump in July, and a general emphasis on shifting funding responsibility from the federal government to the states.

An article on this website last week covered city fiscal conditions, as reported by the National League of Cities. That also focused on growing spending pressures, with similar areas mentioned (for example, natural disasters and housing), but with additional concerns about employee compensation and public safety. Cities also tend to have more budget issues than states due to fewer taxing options and the limitations that states have imposed on property taxes, which provide critical funding for city services and school systems.

For states, rainy day funds and yearend general fund balances remain high, but NASBO’s new report points to a number of factors that show a changing fiscal environment in the next few years. 

• Revenue growth has been slowing since the plush revenue years of FY2021 and FY2022, with the next three years producing between 1 and 3 percent growth on a median basis and only a 0.3 percent rise projected for FY2026. The report attributes the shrinkage in median revenue growth to slower economic growth, lower inflation and the impact of tax cuts in some states.

•  While six states told NASBO that they had closed $7.1 billion of general fund budget gaps in FY2025, 12 states reported projected budget gaps that total $25.3 billion for FY2027 among those able to report for that year. [A cautionary note provided by NASBO indicates that definitions of budget gaps vary from one state to another and that, in any case, budget gaps are moving targets. See a NASBO explainer, published on November 14 to learn more about how various terms relating to budget gaps are used,] 

• It looks like the number of states providing across the board employee compensation increases is also declining to 25 in FY2026 from 39, 40, and 37 in FY 2025, FY2025, and FY2023 respectively.

One additional note: NASBO also provides basic information in the report introduction, explaining that 30 states currently operate on an annual budget cycle and the other 20 “operate primarily” on a biennial cycle. For 17 of the biennial states, the current biennium covers FY2026 and FY2027. The biennial budgets for Wyoming, Kentucky and Virginia covered FY2025 and FY2026. 

NASBO’s Fiscal Survey of the States, which has been published for 46 years, comes out twice annually (in the spring and in the fall) and focuses on state general funds. The association’s State Expenditure Report is issued annually, usually at the end of the calendar year, providing information on total state spending, including all fund sources.

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