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With The Fiscal 2025 Budget Deadline In Sight, U.S. States Navigate A New Revenue Environment


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With The Fiscal 2025 Budget Deadline In Sight, U.S. States Navigate A New Revenue Environment


Of the nine states with a June 30 fiscal year-end date, two have budgets that are awaiting governors' signatures, while the remaining seven are in ongoing legislative negotiations. One state, Michigan (Sept. 30), has a later fiscal year-end date. Some states regularly pass their budgets close to the finish line and typically adopt measures that provide more time to finalize their budgets. In 2023, 17 states enacted biennial budgets and therefore, did not have to enact a fiscal 2025 budget in the 2024 legislative session.

S&P Global Ratings continues to monitor the evolving impact that slower growth, high inflation, and tightening federal monetary policy are having on states' economic resiliency. The potential for late budget adoption could persist as some states consider softer economic and revenue forecasts. In general, states are approaching the end of the current fiscal year from a relatively stable financial position, with historically high reserves and liquidity to manage emerging economic headwinds. This supports our view that for most of them, late budget adoption will be rooted primarily in legislative and executive fiscal policy differences, rather than indicating structural budget imbalance. Historically, some states have a pattern of last-minute negotiations and routinely adopt measures that provide more time to finalize their budgets.


States Prepare Their Budgets Amid An Uncertain Revenue Path

Most U.S. states are wrapping up fiscal 2024 with some uncertainty on how the economy will evolve, making revenue forecasting trickier. S&P Global Ratings now anticipates the first federal funds rate cut will come in December rather than July, and expects that economic momentum will weaken amid currently high interest rates. See "Economic Research: Persistent Above-Target Inflation Will Delay The Start Of Rate Cuts In The U.S.," published May 1, 2024, on RatingsDirect. Consequently, states have demonstrated some conservatism in spending, with general fund spending falling for most, based on executive budgets. According to the National Association of State Budget Officers, revenue projections for fiscal 2025 used in governors' budgets are 1.6% higher than current revenue estimates for fiscal 2024. Budget negotiations will have to incorporate dampened expectations as states race to the finish line.

While we believe some states can adapt their budget more readily to a slower revenue growth environment than others heading into fiscal 2025, we view most states as being well-positioned financially, including having record-high reserves built up during recent good economic times to navigate future uncertainties, leading to smoother budget negotiations.

Budget Priorities And Negotiations Remain Similar To Prior Years

Budgetary priorities among states remain focused on staple issues, including enhancing grade K-12 education funding, Medicaid spending, and further extending tax relief. The debate to increase education funding continues, stemming from reduced local funding sources and the appetite for pay increases for teachers and staff, as well as general maintenance.

A year after the expiration of Medicaid continuous coverage and the 6.2% increase in the emergency Federal Medical Assistance Percentage from the pandemic, state enrollment levels have fallen significantly from their peak, but states have budgeted higher Medicaid expenditure growth. For now, we expect spending growth to be a modest 2.5% in fiscal 2025 following a notable 17% in 2024, as cost estimates and enrollment stabilize. (For additional information, see "U.S. State Medicaid Transition: Stable Condition Near Term, With Outyears Demanding Care," May 2, 2024.)

In current inflationary conditions, a peculiar challenge for state and local governments has been rising personnel costs due to fierce private-sector competition that has contributed to public-sector labor shortages. Although public-sector wage gains have not kept pace with private-sector salaries, many states have proposed or approved salary increases and cost-of-living adjustments for eligible state employees, teachers, and public safety personnel to improve recruitment and retention.

The Race To The Finish Line

As the June 30 deadline approaches, most states without a fiscal 2025 budget are addressing tax and spending policy differences during budget negotiations, rather than grappling with structural budget shortfalls, with California being an exception. Some states also face political control split between the legislature and governor, which could extend negotiations to reach a bipartisan agreement beyond June 30 before a final bill is passed.

Protections For Debt Payment Are Key In Late Budget Negotiations

As several states fine-tune their budgets, we believe most maintain significant leeway over their cash flow that allows them to temporarily fund operations and debt service if a budget is not enacted by the start of the fiscal year. If budget negotiations extend beyond the year-end deadline, many states have procedures in place, including continuing resolutions or appropriations, piecemeal budgeting, or authorizing provisions in statute, that allow the treasurer to prioritize debt service payments in the absence of a budget.

Uncertainty about a state's legal authority to pay debt service emphasizes how budget negotiations that go past the end of a fiscal year could hamper credit quality. Should a state's budget not be enacted by the end of the fiscal year, exposure to a missed or nonpayment event increases if a state lacks measures to mitigate potential disruptions in governmental operations (for example, government shutdowns).

States That Don't Have A June 30 Fiscal Year-End

Fiscal year-end for the following states is not June 30.

  • New York (AA+/Stable): March 31
  • Texas (AAA/Stable):Aug. 31
  • Alabama (AA/Stable): Sept. 30
  • Michigan (AA/Stable): Sept. 30

States Awaiting Action By Their Governor

Louisiana (AA/Stable)

Louisiana's legislature approved the fiscal 2025 budget, and it now sits with the governor, who may sign or veto the entire budget, or veto specific line items. Of note, the approved budget uses $717 million available in the state's Revenue Stabilization Trust Fund, dedicating this money to various funds to support transportation infrastructure, criminal justice, higher education, and water and sewer system improvements. Louisiana ended fiscal 2023 with approximately $3.13 billion in its combined primary reserve accounts, and despite the planned spending, we anticipate that reserves will remain well above levels we consider very strong. The budget also provides a stipend for teachers and support staff. Louisiana has an established record of timely budget adoption, even during periods of economic and budgetary stress, and we expect that trend will continue. If a budget is not adopted by the beginning of the fiscal year, resources collected and held in the Bond Security and Redemption Fund would still be available to support debt service on the state's general obligation (GO) bonds.

Missouri (AAA/Stable)

For fiscal 2025, the Missouri General Assembly passed a $51.7 billion budget, which was sent to the governor and awaits his signature. The budget is geared toward expanding broadband access, continuing to rebuild and repair roads, and supporting public education. Approximately $728 million was budgeted for rebuilding Interstate 44, including six lanes at Springfield, Joplin, and Rolla.

States With Budget Development In Progress

Alaska (AA/Stable)

Alaska's legislature reached an agreement on a $5.98 billion unrestricted general fund budget for fiscal 2025, which includes $5.06 billion in state agency spending and $914.3 million for a combined $1,650 Permanent Fund dividend payment and energy relief check (estimated) to state residents. Of the $282 million (or 4.95% year-over-year growth) in new spending compared with the previous fiscal year, $175 million will be a one-time base funding increase for education and $30 million for other education initiatives and early child development. The compromise budget awaits the governor's action, but in our view, the budget plan is balanced compared with spring 2024 revenue projections; in addition, it does not rely on a draw from the Constitutional Budget Reserve Fund. Although approval of previous year budgets has come close to the June 30, Alaska has historically enacted budgets on time; averting the potential for a partial government shutdown if a budget is not in place by July 1. The governor's appropriation bill includes separate subsections for appropriations for state GO and appropriation-backed debt, allowing the State Bond Committee to prioritize and appropriate from the general fund and, if necessary, from other funds--including the Permanent Fund--to make all required debt service payments in the absence of a budget.

California (AA-/Stable)

Following the California legislature's adoption of a fiscal 2025 budget plan on June 13, negotiations shifted to bridge differences between the legislature's bill and the governor's proposed plan. The administration's estimates, reflected in the May revision, noted that fiscal years 2023 and 2024 revenue was 20% lower than the initial forecast when the fiscal 2023 budget was adopted. On June 22, the governor and legislative leadership announced a budget agreement to be enacted before the start of the fiscal year that addresses an estimated $46.8 billion deficit for the budget year.

Massachusetts (AA+/Stable)

The governor's proposed $56.2 billion fiscal 2025 budget makes key investments in education, transportation, housing, workforce development, and health care. The Massachusetts joint conference committee is currently deliberating the final version of fiscal 2025's budget, which the governor will have 10 days to either approve, veto, or attempt to modify. However, historically, the governor has filed an interim budget to keep state government running, if the state should not enact a budget by July 1, the start of the state's fiscal year. If necessary, Massachusetts can extend the interim budget month by month, as it did previously.

Pennsylvania (A+/Positive)

The governor's proposed $48.3 billion fiscal 2025 budget, an 8.4% increase from fiscal 2024, is based on a beginning balance of $7.1 billion and forecast general fund revenue of $46.3 billion after tax changes but before refunds. The proposed budget contains a $1.1 billion increase to school funding, including $872 million as a first-year adequacy investment of a $5.1 billion seven-year spending increase recommended by the Basic Education Funding Commission and $200 million to be distributed through the Basic Education Funding Formula. The commonwealth, which must pass a balanced budget, has had prolonged budget impasses in past cycles because of protracted budget negotiations.

New Jersey (A/Stable)

Overall, the governor's proposed fiscal 2025 budget includes what we view as reasonable revenue assumptions, with total revenue forecast to increase 3.6% more than revised estimates for fiscal 2024. The state's income and sales taxes are forecast to rise 3.5% and 3.7%, respectively, relative to fiscal 2024. Of note, the budget proposal includes a new corporate transit fee--funded through a tax on corporations with net annual incomes more than $10 million. The tax, as proposed, would raise slightly over $1.0 billion and is intended to serve as a dedicated revenue stream to support NJ Transit. In recent years, budget adoption has been relatively smooth, though current negotiations might take adoption until the tail end of the current fiscal year. The last time New Jersey had a late budget was in 2017, when a brief government shutdown ensued. While certain debt service payments are due shortly after the start of the fiscal year, we understand procedures are in place to mitigate disruptions in the event of a shutdown.

South Carolina (AA+/Stable)

Members of South Carolina's Senate and House have reached a compromise on a fiscal 2025 budget, which included negotiations around the level of pay raises for state employees, as well as funding details for tax relief and capital spending. According to the state's budget process, once the legislative budget is finalized, it is sent to the governor for review and any potential line-item vetoes before enactment. The general assembly has also passed a continuing resolution that authorizes state spending in fiscal 2025 at fiscal 2024 spending levels, which would include any debt service payments due early in the fiscal year, should the budget not be enacted by fiscal year-end.

This report does not constitute a rating action.

Primary Credit Analysts:Ladunni M Okolo, Dallas + 1 (212) 438 1208;
Bikram Dhaliwal, Dallas (1) 214-468-3493;
Secondary Contacts:Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Sussan S Corson, New York + 1 (212) 438 2014;
Rob M Marker, Englewood + 1 (303) 721 4264;
Oscar Padilla, Dallas + 1 (214) 871 1405;
Coral Schoonejans, Englewood + 1 (303) 721-4948;
Thomas J Zemetis, New York + 1 (212) 4381172;

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