Southwest state budgets face revenue growth slowdown

With a sharp decrease in revenue growth expected in fiscal 2025, New Mexico Gov. Michelle Lujan Grisham proposed a $10.5 billion spending plan that she said maintains hefty reserves that help cushion state coffers from volatility in the fossil fuel industry, which generates tax and other revenue. 

“Here’s my promise to New Mexicans in future years and future generations: We will continue to spend within our means, responsibly and with an eye toward accountability, always, while capitalizing on the fiscal opportunities available,” the Democratic governor said in a statement earlier this month.

A December forecast showed general fund revenue increasing just 2.2% in fiscal 2025, marking a big drop in growth from fiscal 2023’s 19.8% and fiscal 2024’s 10.2%.

“As legislative changes to the tax code take effect, inflation returns to pre-pandemic norms, employment markets weaken, consumer savings are depleted, oil prices soften, and oil production slows, revenue growth is expected to shrink to 2.2 percent in FY 25 before returning to more typical growth of over 3 percent in FY27 and beyond,” Legislative Finance Committee economists reported. 

States are confronting broadly shared budget challenges for the first time since 2020 as atypical revenue growth driven by federal fiscal aid abates and spending increases and tax cuts adopted in recent years weigh on budgets, according to a report published Jan. 9 by The Pew Charitable Trusts.

“Based on budget analyses states published in late 2023, roughly half of Americans live in states that report short-term budget gaps, potential long-term deficits, or both — and this inventory almost certainly understates the scope of the problem because many states do not publish sufficient forward-looking data to meaningfully assess their fiscal outlook,” the report said.

Pew added shortfalls are occurring at a time states have increased their rainy day fund balances to record levels.

“However, for states with structural budget deficits—where ongoing spending chronically exceeds ongoing revenue — policymakers need to either decrease spending or increase revenue to bring the budget back into balance, or else they will eventually exhaust even the largest reserves,” the report said.

Arizona’s Joint Legislative Budget Committee reported Friday the general fund budget faces projected shortfalls of $835 million in the current fiscal year and nearly $879 million in fiscal 2025, which were up from an October forecast that showed gaps of $400 million and $450 million respectively.

The rising deficits come amid big tax cuts enacted in 2021 and a costlier-than-expected  universal school voucher program. 

In her State of the State address last week, Democratic Gov. Katie Hobbs reiterated her call to rein in spending on the empowerment scholarship account program, which was greatly expanded under her Republican predecessor.

“It is our responsibility as stewards of this state to put in place guardrails to ensure taxpayer dollars dedicated to education are used properly,” she said, adding that requiring voucher recipients to have attended a public school for at least 100 days would save $250 million. 

Republicans who control the legislature contend vouchers are not fueling the shortfall and will fight efforts to undermine the program.

Kansas Gov. Laura Kelly on Thursday unveiled an $11.18 billion general fund spending plan for fiscal 2025 when a slight revenue decline is forecast. 

The state’s Consensus Estimating Group in November projected total receipts to increase by 11.8% this fiscal year, but fall by 0.25% in fiscal 2025.

“I’m a fiscal conservative, which is why, once again, I’m proposing a budget that’s balanced, pays off debt, and includes tax cuts for working families and retirees,” the Democratic governor said in a statement.

Kelly, who must work with GOP supermajorities in the state legislature, proposed tapping $1.3 billion in surplus funds for one-time expenditures with $521 million earmarked to pay off debt, including $450 million for a tender offer or defeasance of pension bonds. A bill last year to appropriate $250 million to buy back a chunk of the $504 million of taxable pension bonds Kansas sold in 2021 did not make it out of the legislative session.

Another $540 million in surplus dollars would be used to cash fund capital projects, including a new jail. 

Kansas has built up its budget balances and reserves, which S&P Global Ratings noted when it revised the outlook on the state’s AA-minus rating to positive last year. 

Fitch Ratings, which recently announced its first-ever issuer default rating for Kansas of AA, cited the state’s “sustained trend of structurally balanced budgets” and the rebuilding of fiscal reserves to levels well above historical norms.

The governor’s budget would also expand Medicaid to 150,000 residents and cut more than $1 billion in property and other taxes over three years. 

Tax cuts are also being sought in Oklahoma, where the State Board of Equalization last month issued a preliminary general fund revenue estimate for fiscal 2025 of $8.7 billion, an increase of nearly $458 million from fiscal 2024.

Republican House Speaker Charles McCall introduced bills to phase out the corporate income tax over five years and decrease personal income tax rates.

A special legislative session in October called by Republican Gov. Kevin Stitt to phase out income taxes was cut short when the Republican-controlled Senate adjourned without taking any action.

In Utah, general fund revenue “continues to squeak past expectations,” according to a December Legislative Fiscal Analyst report.

“Through five months of (fiscal 2024) the state’s general, income and transportation fund revenues totaled just over $4.5 billion, up 2.1% over the same time last fiscal year,” the report said. “The most recently updated year end projection for all state sources expects to have a slight contraction from last year’s astronomical revenue.”

Utah Gov. Spencer Cox’s $29.5 billion fiscal 2025 operating and capital budget, which made affordable housing and homelessness its centerpiece with more than $350 million in spending, also proposes to use half of $1.1 billion the legislature appropriated to pre-fund transportation debt service in fiscal years 2024 and 2025 for “critical needs.”