States Should Brace for Budget Storms

BY DOUG STEIGER, MPP, SENIOR CONTRIBUTOR

The federal landscape is shifting rapidly. States face sweeping cuts to Medicaid and SNAP, fiscal brinkmanship, economic volatility, and rising pressure to do more with less. Here’s what’s coming — and what to watch.

Ratcheting Risks: The Looming Budget Crisis

RECONCILIATION REDUCES FEDERAL FUNDS

The One Big Beautiful Bill Act will slash billions annually from Medicaid and SNAP, forcing states to either absorb the costs or make painful cuts to essential health and nutrition programs. At the same time, the bill adds trillions to the federal deficit and national debt. 

The result is a double-bind for states: less federal support for vulnerable families, and a weakened national economic position that could lead to higher borrowing costs and less fiscal room to maneuver in the future. These cuts are also substantial enough to risk impacting states’ credit ratings, which would raise their borrowing costs and further squeeze state budgets.

ECONOMIC WARNING SIGNS

The economy isn’t in recession—yet. But the signs are getting harder to ignore. In March, a Federal Reserve indicator of economic uncertainty reached its highest point since the Covid-19 Pandemic. 

The Administration’s fluctuating tariff policies are further complicating short-term decisionmaking for corporations and consumers. Extensive job losses among federal employees are also having a negative near-term impact, especially in states with a significant federal presence.

The National Association of State Budget Officers noted that revenue forecasts for states have been “mostly revised down in recent months.” For example, Indiana’s revenue forecast is down $1 billion from December. Pew recently found that “[m]ost states’ tax revenue falls below long-term trends amid federal uncertainties.”

Other Fiscal Landmines

While the One Big Beautiful Bill Act’s Medicaid and SNAP cuts dominated headlines, state budgets face other distinct risks. A cluster of lesser-known but deeply consequential federal decisions and uncertainties are creating additional fiscal landmines that states must now navigate.

IMPOUNDMENT

The Trump Administration has asserted that it can withhold — or “impound” — funds Congress has appropriated, contrary to decades of accepted legal interpretation. 

If the courts back up the Trump Administration on impoundment, many grants and program funds that have been delayed will never be distributed. And it would mean that the Administration could withhold billions in funds for the next three years for everything from education to mental health supports

This means states may have to make up the difference, or be forced to cut access to essential services. However, a Supreme Court decision against the Administration would force the release of withheld funding and an end to this risk. 

SHUTDOWN/CONTINUING RESOLUTION

The annual federal appropriations process is far behind schedule, which will make a continuing resolution (or “CR”) necessary to keep the government running after September. Under a typical CR, programs are largely funded at around their current levels.

CRs generally require 60 votes to pass. This means that Republicans in the Senate will need at least some Democrats on board. They may be unwilling to support a CR given the negative reaction among Democratic voters to those Senators who supported the last CR in March – seeing it as failing to fight the Administration – and in the face of impoundment. 

If the White House is unwilling to offer concessions to Democrats, there may be an extended federal government shutdown, delaying funds disbursed in the fall. Now is the time to prepare for that possibility.

DISASTER FUNDING

The President has said he plans to “phase out” FEMA after this hurricane season, putting more responsibility for disaster recovery on states. While the Administration appears serious about rethinking the federal role in disaster relief, there will continue to be expectations for federal relief after major disasters. 

How This Could Play Out

Even in the chaos of federal policymaking, there are patterns. Below are the key signals to monitor across the biggest fiscal threats. Staying ahead of these signs may give just enough time to prepare—or push back.

IMPOUNDMENT: WATCH THE COURTS

On impoundment, the key question is whether the courts—or Congress—will force the Administration to release funds that have already been appropriated. So far, Republican lawmakers have shown little appetite to challenge the White House or require the use of the traditional “rescission” process. That leaves the outcome of ongoing legal challenges as the main lever.

SHUTDOWN SHOWDOWN: WATCH DEM LEADERS’ LINE

A government shutdown becomes more likely if Senate Democrats demand concessions as the price for passing a continuing resolution. This was their position in the spring and could resurface in fall negotiations. Watch for signals from Minority Leader Chuck Schumer and Appropriations Ranking Member Patty Murray for where the party will draw its line.

A government shutdown will happen if Democrats – particularly in the Senate – insist on a price for supporting a CR that the Republicans and White House are unwilling to pay. In the spring, the Democrats wanted an end to the impoundment policies and may insist on that again. Statements from Minority Leader Schumer and Senate Appropriations Ranking Member Murray are particularly important signals of the stance Democrats will take.

DISASTERS: WATCH RECOVERY RESPONSE AND SUPPLEMENTAL FUNDS

On disaster funding, the signal will come during the first major disaster, perhaps the tragic Texas flooding. Will the usual recovery funding be provided or will the Administration seek a different approach? When the cost of recovery is especially high, Congress and the Administration normally propose supplemental funding. It will be worth watching whether calls for that relief are bipartisan, and beyond the impacted region.