States brace for impact as Trump's big bill nears completion in Congress

Key Points

• Most states have already finalized their budgets for the new fiscal year without knowing the extent of potential federal funding cuts, creating uncertainty and anxiety among state governments.
• The pending legislation would impose new Medicaid work requirements and shift more SNAP costs to states, potentially reducing enrollment by millions and forcing states to divert funds or cut benefits.
• Several states are stockpiling reserves to buffer against cuts—New Mexico created a $2 billion Medicaid trust fund, Hawaii set aside $200 million, and Vermont earmarked up to $110 million for contingencies.
• Some governors, like Virginia’s Glenn Youngkin, have used line-item vetoes to build financial cushions, while others have authorized special sessions or monitoring mechanisms to quickly address funding shortfalls.

JEFFERSON CITY, Mo. (AP) — President Donald Trump’s big bill to cut taxes and reduce federal spending on some social safety net programs could have large implications for states, but for many it’s too late to do much about it this year.

Tuesday marks the start of a new budget year in 46 states. Though some legislatures are still working, most already have adjourned and finalized their spending plans without knowing whether federal funding will be cut and, if so, by how much.

“The ebb and flow of rumors and reality have created great uncertainty and some anxiety in state governments,” said David Adkins, executive director of The Council of State Governments.

Several states have taken preemptive steps, setting aside money in reserves or tasking committees to monitor the impact of federal funding reductions. Others are tentatively planning to return in special sessions this year to account for potential funding cuts to joint federal-state programs such as Medicaid and the Supplemental Nutrition Assistance Program, or SNAP. Others will have to wait until their legislatures are back in session next year.

What's at stake for states?

“If there are significant cuts, states wouldn’t be able to fully absorb those,” said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers.

Nationally, the Medicaid health care program for lower-income residents accounts for 30% of total state expenditures, according to the health policy research organization KFF. That makes it the costliest program in many states, ahead of even K-12 education. The bulk of Medicaid money comes from the federal government, meaning any changes in federal policy can create big ripples for states.

Legislation pending in Congress would affect Medicaid in several ways. New work requirements are expected to reduce enrollment by millions of people, while other proposed changes also could reduce federal payments to states.

Until now the federal government also has covered the full cost of SNAP benefits and half the administrative costs. Trump's bill would shift more of those costs to states, leaving them to either divert money from other purposes or trim back their food assistance programs.

The Medicaid and SNAP changes are just the latest in a series of Trump policies affecting state finances, including the rollback of grants for transportation and high-speed internet projects and attempts to withhold federal funds from sanctuary jurisdictions that limit cooperation with federal immigration authorities.

Some legislatures are stocking up on savings

A surge in federal aid and state tax revenue during the coronavirus pandemic led to booming budgets and historic cash surpluses in many states. As revenues slow and those surpluses get spent, some states now are trying to guard against federal funding reductions.

New Mexico enacted a law this year creating a Medicaid trust fund gradually stocked with up to $2 billion that can be tapped to prop up the program if federal funding cuts would otherwise cause a reduction in coverage or benefits.

Hawaii lawmakers, in crafting the state's budget, left an extra $200 million in the general fund as a contingency against federal funding uncertainty. They plan to return for a special session.

And Vermont's budget sets aside up to $110 million in case federal funding is cut. That includes $50 million that can be spent while the Legislature is not in session and up to $60 million that could be appropriated in the future to address federal funding shortfalls.

Though not necessarily tied to federal cuts, Florida lawmakers approved a proposed constitutional amendment that would set aside $750 million a year — or an amount equal to up to 25% of the state’s general revenue, whichever is less — in a reserve fund that lawmakers could use for emergencies. That measure still must go before voters.

Some governors are cutting back on spending

Because of legislative deadlines, some state lawmakers had to craft budgets well before the details of Trump's bill took shape.

Virginia lawmakers passed a budget in February for their fiscal year that starts Tuesday. Republican Gov. Glenn Youngkin announced several dozen line-item vetoes in May with the goal of creating a roughly $900 million financial cushion.

“There are some short-term risks as President Trump resets both fiscal spending in Washington and trade policies that require us to be prudent and not spend all of the projected surplus before we bank it,” Youngkin said in a statement.

Other states also have left money unspent, even though it has not always been touted as a buffer against federal cuts.

States are “enacting really cautious budgets, knowing that they may have to kind of revise them in special sessions or address changes in next year’s sessions,” said Erica MacKellar, a fiscal affairs program principal at the National Conference of State Legislatures.

Some are taking a wait-and-see approach

Before adjourning their sessions, some state legislatures established procedures to monitor federal funding cuts and recommend budgetary changes.

Montana's budget includes $50,000 for an analysis of the financial implications of federal actions, but that spending kicks in only upon the cancellation of at least $50 million of previously approved federal funding or the anticipated loss of at least $100 million of future revenue.

If federal funding to Maryland decreases by at least $1 billion, a provision approved by lawmakers requires the state budget office to submit a report to the General Assembly with proposed actions and potential spending reductions.

The spending plan passed by Connecticut lawmakers also requires the state budget office to respond quickly to federal reductions by identifying state funds that could be used to preserve programs, particularly those providing health care, food assistance, education and other priorities.

North Dakota lawmakers left room for more work. They adjourned their biennial session six days shy of their 80-day limit, allowing time to reconvene if needed.