Budget Season

For US states, spring marks budget season, a time to check the ledger board and allocate funds to entities and projects within the state—or cut back where needed. Jennifer Johnston, our Municipal Bond Director of Research, explains what her team has an eye on when it comes to state budgets—and the good news is that, in general, things are looking pretty positive.

For sports enthusiasts, spring marks the NCAA “March Madness” basketball tournament, the Masters Tournament in golf, the opening of the US baseball season, and for those of us in the Northern Hemisphere—the advent of warmer weather. For US states, spring also means budget season. Most states have fiscal year ends of June 30, so the budget process usually starts in January or February, and some even in November or December! For many of the states, the governor will announce his or her proposed budget in January or February. This can serve as a way to begin the legislative process, present the administration’s priorities, and in some cases, float trial balloons to get citizen and legislator feedback.

These proposals are just initial thoughts and can change dramatically by April or May when legislatures start holding budget hearings. The changes can be economic or fiscal in nature and oftentimes, political. Typically, legislatures start holding budget hearings during the April–June period, with ultimate passage ideally completed by June 30. Many states have constitutional or statutory requirements for budget adoption by a specific date, with varying repercussions if deadlines aren’t met.

What We Are Watching for this Budget Season

A key message from states this year regarding their budget outlooks is that things are good, and in some cases, have continued to improve since budget proposals were introduced a few months ago. Surpluses are very common for fiscal year (FY) 2021 and FY2022, driven by federal COVID-19-related aid as well as strong growth in sales taxes and income taxes due to strong employment dynamics. In 2020 and 2021, low interest rates enabled states and other municipal issuers to borrow money cheaply to help refinance more expensive debt or manage cash flows, which relieved some budgetary pressures related to borrowing costs.