State Budgets Set to Fall in 2025

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The end of the fiscal year for most U.S. states has passed after a period of healthy growth and public spending. However, as COVID-19 relief funding winds down amid other financial uncertainty, many states will now be forced to cut their budgets in 2025.

The National Association of State Budget Officers (NASBO) recently published “Overview – Spring 2024.” The report collates data from all 50 U.S. states, three territories, and the District of Columbia. It factors in all the past year’s revenue, general fund spending, rainy day funds, and state year-end balances.

Spending Growth Set to End

“Aggregate annual general fund spending growth in recent years has been considerably affected by significant fluctuations in several large states, writes NASBO staff contact Kathryn White. She believes some of the spending growth is down to “several large states” committing to one-off expenditures.

While general fund spending will grow 14.4% in 2024, the same can’t be said of the new year. Some Americans can expect rougher seas in 2025, as total spending will fall by 6.2% or $1.22 trillion.

A Post-Pandemic Economy

Liz Farmer of Pew Charitable Trusts writes that the “post-pandemic era of surging revenue, record spending, and historic tax cuts” is coming to an end. America is now officially in a post-pandemic economy, set to inherit a more austere outlook, at least for a while.

To others, this situation may seem illogical. The last fiscal year’s state revenues topped $1.3 trillion, even after accounting for inflation. Furthermore, state governors have agreed to reduce net tax by 0.2% of the next fiscal year’s projected revenues.

It’s Complicated

State spending and revenue paint a mixed picture in the United States. This diversity is driven by many factors, such as the states’ population size, budgetary commitments, and annual tax revenues.

In total, 33 states reported a surplus general fund revenue for 2024; 10 states fell below their estimates, while seven states stayed on target for spending.

An example of states’ contrasting fortune, size, and economic fluctuation is evident California’s budget problems. Prior to the end of the state fiscal year this June 30, Governor Gavin Newsom, alongside Democrat lawmakers, closed on a $16 billion budget cut deal.

The LA Times reports that the most populated state offset part of its rainy day fund, plugging a hole in the $46.7 billion budget. Meanwhile, Governor Newsom declared a statewide fiscal emergency caused by a litany of issues, such as high layoff rates in the tech industry, slow job growth, and last year’s entertainment industry strikes.

California’s Fiscal Emergency

AP News published details of the governor’s impending fiscal measures, which include:

Canceling 10,000 unfilled state jobs, saving $762 million;Cutting $6.7 million allocated to increase doctor access for poor or migrant patients;Reducing state agency operating costs by 8% and modernizing wasteful resources;Saving $2 billion by seeking cheaper alternatives from broadband Internet developments or projects;Giving up 4,600 prison beds to save $81 million;Lowering water storage project funding by $500 million;Scaling back immigrant relief resources like care programs or disability services;Pulling $2 billion from education programs, such as kindergarten, preschool upgrades, and teacher training for middle-class college graduates;Taking more than $500 million from state, local, and mental health service funds.

A Contrasting Story

On the other hand, Missouri emerged from the past fiscal year with near-record budget levels, the St. Louis Business Journal reports. On July 1, the Missouri general revenue surplus was $5.1 billion; the largest ever recorded.

Missouri’s success stems from a 9% sales tax receipts rise. Former state budget director Jim Moody explained to the publication how inflation is driving wages and prices. He adds that the state’s marijuana industry is worth an annual $1 billion. The state also began taxing Internet sales last year.

Tighter Reins

Despite the surplus, the state will also lower public spending in 2025. There are items still in need of funding, and on June 28, Missouri Governor Mike Parson sanctioned the Fiscal Year 2025 (FY25) budget, which will lower spending through all sectors.

The governor’s website details the complete state operating and capital improvement budget bills. “Today, we signed a conservative and balanced budget that focuses on two priorities that we know lift every Missourian up,” writes Parson. He explains how the state has kept its AAA credit rating through “strategic investments, using common sense and spending responsibly.”

The “R’ Word

In Parson’s eyes, “budget” doesn’t always mean “surplus.” His rhetoric shows how a ripple of uncertainty may be present in most state budget decision-making. Prolonged high borrowing rates are sowing seeds of doubt in the stock market, and some financial talking heads are mentioning the “R” word, albeit in light whispers.

Is there a risk of another recession?

The Stock Market has been more than robust over the past two decades, notwithstanding the 2008 financial crash and the COVID-19 pandemic. U.S. Bank recently noted growth in the first two quarters of 2024 was strong. America’s GDP expanded by an annualized 2.8% during this period.

Consumers Keep the Ship Afloat

Senior investment strategy director at U.S. Bank, Rob Haworth, believes the main driver of this surge has been consumer spending. “This report provides signs of a much stronger economy,” he says, “but we add a note of caution that data from one quarter does not yet represent a trend.”

 

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