As States Face Budget Gaps, What Does the Future Hold?
Long-term assessments help manage fiscal challenges
Rising expenditures, slowing revenue growth, and declining federal support are putting pressure on state budgets throughout the country and resulting in projected deficits in several states, according to The Pew Charitable Trusts’ review of states’ long-term budget assessments published in late 2025 and early 2026.
Long-term budget assessments are analyses that identify and project for at least three fiscal years of revenue and spending categories that are central to a state’s budgetary balance. The reports then use those projections to reveal and explain future deficit risks and provide lawmakers with the information they need to enact policies that support fiscal sustainability.
Pew reviewed recent long-term budget assessments from 16 states and found that 13 projected budget gaps in their long-term outlooks. And although many of these states have since updated their revenue forecasts and enacted fiscal year 2027 budgets, the key themes from these analyses remain relevant to ongoing budget conversations.
What drives budget gaps?
A long-term budget assessment helps policymakers understand the pressures shaping a state’s fiscal outlook. Although some causes are specific to individual states, recent long-term assessments also reveal shared challenges.
For example, Pennsylvania's November 2025 Independent Fiscal Office report attributes that state’s budget gaps in part to spending increases coupled with slowing revenue growth. From fiscal 2026 to fiscal 2031, the report projects average annual expenditure growth of 3.3%, compared with just 2.1% for revenue. The gap reflects rising costs for prekindergarten and for long-term care and other services for aging residents, which are partially funded through Medicaid, as well as the phased-in reduction of the state’s corporate net income tax rate and declining interest earnings from the general fund surplus.
Several states, among them Minnesota and Rhode Island, identify rising health-related expenses as contributors to spending growth in their long-term budget assessments.
Minnesota’s November 2025 Management and Budget report projects a structural deficit of $4.49 billion in the fiscal 2028-29 biennium with the state’s Medicaid program accounting for most projected spending increases. For example, under H.R.1, a federal budget reconciliation bill that passed in 2025, some lawfully present noncitizens will lose their Medicaid eligibility, potentially shifting the care and associated costs for those residents to MinnesotaCare—a joint federal-state funded health program for low-income individuals. As a result, the state anticipates that spending for MinnesotaCare will increase by $36 million in the fiscal 2026-27 biennium and $103 million in the next biennium.
Rhode Island’s five-year outlook shows that the state expects its “grants and benefits” program, which includes Medicaid and the Supplemental Nutrition Assistance Program (SNAP), to be its fastest-growing spending category, in part because of SNAP-related changes in H.R.1 that will shift more of the administrative and benefits costs to states. Similarly, Alaska’s January 2026 Legislative Fiscal Analyst reports that, beginning in fiscal 2028, the state could incur $15.4 million to $46.2 million in SNAP costs.
Other states, such as Arizona and Illinois, also cited higher state costs and tax changes as fiscal pressures. Illinois estimates that general fund revenue will be more than $830 million below previous forecasts because of H.R.1 business tax changes, which account for 95% of the state’s fiscal 2026 revenue reductions. Arizona likewise found that conforming to federal law changes will cost $1.45 billion from fiscal 2026 to fiscal 2029.
State efforts to close budget gaps
To help close projected budget gaps, some states outlined policy recommendations in their long-term assessments, with an emphasis on the need for a sustainable approach built around reducing spending and increasing revenue, rather than one-time fixes, such as raiding rainy day funds.
Florida’s September 2025 Long-Range Financial Outlook, a joint effort of three state agencies, focused on closing anticipated gaps during surplus years rather than waiting until deficits emerge. The analysis found that making $2 billion in annual adjustments, such as spending cuts, revenue increases, and fund transfers from fiscal 2027 to fiscal 2029, including anticipated surplus years, would close looming gaps. Waiting to make budget adjustments until fiscal 2028, when the deficit is projected to start, would increase the annual amount needed to $3.5 billion. The report concludes that early action lowers long-term costs and improves fiscal stability.
Although many states created rainy day funds to help balance budgets in recessions, some allow withdrawals outside of downturns, under specific statutory conditions. However, long-term budget assessments regularly caution that reserves are a stop-gap tool, not a sustainable solution to structural deficits, and instead prioritize ongoing policy changes to address multiyear gaps.
For example, Maryland’s December 2025 Spending Affordability Committee report assumes the state will draw down its rainy day fund to 8% of general fund revenue but recommends that policymakers first “better align ongoing spending with ongoing revenues.” And California's November 2025 Legislative Analyst’s Office report warns that reliance on temporary measures, including rainy day fund withdrawals, has left the state less prepared for future downturns and urges lawmakers to address the projected deficit in part by enacting ongoing spending reductions or revenue increases.
New Mexico’s September 2025 Legislative Finance Committee report offers similar guidance, advising policymakers to spend below incoming revenue and highlighting the importance of fostering economic growth to strengthen long-term revenue.
Some states have sought to ease projected budget gaps by decoupling certain state tax provisions from H.R.1 because in states that link their tax codes to federal law, major federal changes can significantly affect state revenue. The governors of New York and Rhode Island, for instance, recommended decoupling their states’ tax codes from selected federal business tax provisions. Rhode Island’s report estimates that opting out of H.R.1’s research and development provisions would increase the state’s business tax revenue by $22.6 million annually in fiscal 2026 and 2027. Similarly, New York’s analysis projects a $1 billion increase in business tax receipts, primarily because of decoupling from certain H.R.1 tax provisions.
Whatever the challenges individual states face—or solutions they ultimately adopt—for the states that use them, long-term budget assessments help clarify the extent and drivers of deficits and give state agencies a critical opportunity to recommend a blueprint to efficiently avoid or reduce those shortfalls.
Gayathri Venu works on The Pew Charitable Trusts’ state fiscal policy project.
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