Fitch warns of slower state growth, higher Medicaid costs in 2025
By Maxwell Adler, Bloomberg / September 11, 2024
For years US states have been navigating uncertain, yet ultimately favorable, economic conditions. But now, Fitch Ratings says that the volatility and strong growth of the Covid era is subsiding in a return to normalcy.
“States have transitioned from booming to slowing and, now, to normal growth, with revenues overall expected to be flat or slowly growing in fiscal 2025,” Fitch analysts led by Karen Krop wrote in a report. “States are well positioned to weather economic turbulence in the current fiscal year.”
After an initial shock when Covid-19 hit in 2020, the stock market rallied and Americans spent from home, driving years of robust tax collections that saw state budgets balloon by roughly 30%. That surge combined with federal pandemic funding and unprecedented spending volatility made it more difficult for officials to forecast and plan.
The years of plenty saw several states record surpluses and enact tax cuts. Now most states are anticipating slower, more typical revenue growth in fiscal 2025, as the US economy returns to prepandemic norms, according to the report.
The latest budgets show most states are lowering their spending commitments to match declining revenue projections. That means less overall for one-time items, debt service payments and reserve fund deposits, with fewer states planning to introduce major tax-policy changes in the 2025 budget cycle compared to years prior.
States such as California and Maryland that opted to set aside surpluses or pay down liabilities proved to be fiscally prudent as officials needed to pull from their rainy day funds to help balance the latest budgets.
“Most states built significant resilience into their financial operations during the period of extraordinary revenue growth that followed the pandemic recession,” Fitch analysts said.
Still, officials are grappling with spending pressures including rising costs from Medicaid, migration and asylum seekers, curbing homelessness and inflation, as well as efforts to recruit and retain state and public education employees, according to Fitch.
School choice programs are another pain point for budgets. The scope and cost of these programs continue to increase in Republican-led states and in some cases, local school districts are bearing the burden for public school students moving to private schools.
Alabama and Iowa enacted a policy of near-universal choice that rely heavily on state funding.