States in ‘Fairly Strong Position’ at FY '25 End But Challenges Loom

(Source: MIRS.news, Published 08/20/2025) (BOSTON) -- Thanks to strong revenue growth in the wake of the COVID-19 pandemic and robust rainy day funds, states are in a strong position coming out of Fiscal Year (FY) 2025, but they face looming challenges from the federal government and slower population growth, participants on a National Conference of State Legislatures (NCSL) panel said this month.

Erica MacKellar, a program principal with NCSL, said state legislative fiscal officers are reporting that June and July saw better-than-expected revenue growth over the past two years.

Revenues flowing to states have been on a "roller coaster" the last few years.

In the past few years, state revenue has been a “roller coaster.” States tended to see 2 to 4 percent increases in the years following the Great Recession, but states took a hit during the pandemic. It wasn't as bad as predicted, though, thanks to the federal stimulus dollars. The extra money, states realized, wasn't sustainable, so they planned for revenue totals more in line with what they are seeing now.

NCSL is predicting about a 1 percent revenue increase each fiscal year for states going forward.

On the spending side, she said states spent about 4 percent more in FY ‘25 than in FY ’24, making up the gap in spending and revenues with surplus stimulus funds.

She said the good news going into the slower growth period is that states have built their rainy day funds without making big withdrawals. She noted that there has been a decline in rainy day funds, though, as she's seen smaller closing balances.

MacKellar also said states have been budgeting conservatively, with many taking into account federal uncertainty as they passed their budgets earlier this year. They have also begun pulling back spending as revenue growth slows, with many states asking state agencies to flat fund or decrease their spending.

Among the challenges for states going forward are federal spending cuts as part of the “Big Beautiful Bill” passed by Congress and signed by President Donald TRUMP last month. MacKellar said states are still analyzing the impact of those cuts, not only for the current fiscal year but going forward, with the biggest programs affected being Medicaid and the Supplemental Nutritional Assistance Program (SNAP).

Goeffrey Buswick, a managing director at S&P Global Market Intelligence, outlined how ratings agencies determine credit ratings while heaping praise on states for their actions to maintain steady and solid ratings.

He said S&P is predicting the gross domestic product will slow down to about 1.7 percent and 1.6 percent in FY ‘26 and FY ’27, respectively, though he said there are provisions in the "One Big Beautiful Bill” that could lead to increases such as the ability to expense investments that could incentivize growth in businesses.

Buswick said they are not worried about the effect of tariffs on the global economy when looking at state budgets because of the various taxes that states rely on, and said state revenues have been holding steady despite slower growth.

On inflation, he said S&P is expecting it to get a little worse, but then it will come back down. He said the red line for inflation is higher than it was in the decade before the pandemic, and said it likely will not come back down to levels seen in 2015.

Among challenges for states, Buswick highlighted the national population peaking as it ages and then leading to a likely decline. That is one of the limiting factors that will keep growth around 2 percent in the future, he said.

He also pointed to what is coming out of Washington, including tariffs, immigration policy, climate hazards, and SNAP and Medicaid cuts in the One Big Beautiful Bill.

With the SNAP cuts, he said many of the changes are back-loaded, though there will be administrative costs up front. While the administrative costs could reach the tens of millions, it is not necessarily untenable for states, though it's an issue they will be watching.

He said there is also a “long runway” for states to deal with Medicaid cuts, though there will also be some increased administrative costs for states.

“I think there is some time here” where states can make decisions that will be able to control potential increases, Buswick said. He also said states are helped by their conservative budgeting in times of uncertainty, paying down debt, and strong reserves.

He said states are in one of the strongest, if not the best, positions they have ever been when entering a slower growth period.