Everyone is aware that President Donald Trump and his One Big Beautiful Bill Act (OBBBA) are drastically cutting federal largess to states, local governments, educational institutions, nonprofits and others, surprisingly few are preparing for the larger changes awaiting them.
This isn’t like the earlier government financial crises of this century — the 2002-03 recession, the 2007-09 Great Recession, or the 2020 economic downturn occasioned by the global COVID-19 pandemic — when state and local officials could make it through severely choppy seas by throwing every loose budget item overboard. Those downturns were caused by circumstances that, while extreme, were also temporary and cyclical. This time it’s different.
The fiscal and operational crises looming today in states from Maine to Hawaii and cities from Nome, Alaska, to Key West, Fla., are due to a sudden, dramatic and lasting change in the nature of American government. In particular, our federal structure is being altered unlike any other period since the Great Society programs of the 1960s, or perhaps even the New Deal of the 1930s.
This time, the fiscal and programmatic challenge facing state and local governments is not just a matter of discharging excess ballast. The ship itself is breaking up. Most Americans don’t realize how dramatically state and local governments — which most directly affect their daily lives — are about to change.
OBBBA itself will deliver deep cuts as early as Oct. 1, when the law takes effect. But that’s only the first of a half-dozen changes in governance and finance about to swamp states and cities.
John Kuntz/TNS
Effects on States and Cities
President Trump is changing the fundamental nature of government in this country. Like many earthquakes, it’s unleashing a tsunami of aftereffects.
Most state forecasters had already been projecting for the past year or two that revenues would decline by late 2025 due to lower economic growth. Trump’s tariffs, widespread layoffs and federal spending cuts are now showing signs of slowing the economy. This will further depress government revenues.
In addition, as the economy slows, demands for assistance through programs such as Medicaid, the Supplemental Nutrition Assistance Program and countless others will increase just as government revenues fall and federal support disappears. The Congressional Budget Office projects that states will, for instance, have to make up for half of the $900 billion cut from Medicaid by the OBBBA out of their own budgets.
The Trump administration has already slashed federal funding to states and localities in a wide range of areas, and has served notice that it intends to terminate federal funding across others, no matter how unconnected, for any state that doesn’t toe the administration’s line.
For example, the national artificial intelligence strategy recently released with much flourish threatens to terminate federal funding across a range of areas for any state that doesn’t embrace the administration’s social values when it comes to AI. This is a clear signal that the constriction of federal aid to states is only beginning and will spread to virtually every area of operations.
Although people are aware that OBBBA cut taxes and preserved tax cuts from Trump’s first term, the law also changed the federal definition of “income” to reduce taxes for certain classes of taxpayers. This will automatically reduce revenue in most states, which couple their income tax codes to federal definitions. In Arizona, a moderately sized state, a legislative staff report puts the projected revenue loss from tax definitions alone at $381 million next year.
The Coming Sea Change
All of these factors are dragging down government budgets nationwide. That, of course, is intentional. More consequentially, however, Washington is moving away from longstanding responsibility for activities such as preparing for terrorist threats, coordinating responses to disasters and addressing nationwide concerns that span city lines and state borders, such as environmental issues, public health and communicable diseases — not to mention other areas including education and workforce development.
The federal pullback will require most states, cities and counties not only to expand funding in these areas but also to ramp up hiring and training, acquire new facilities, and change regulations and procurement practices as they tackle duties that haven’t been their primary responsibility for 50 to 100 years. This is a huge lift just in terms of operations, not to mention cost.
I’ve spent 30 years helping state and local governments tighten their belts without cutting needed services. This is not simply belt-tightening. It’s a sea change.
Although a small number of states have announced plans to establish designated disaster funds or bolster education reserves in response to potential federal cuts, they remain the exception. It’s almost as if most state and local governments either don’t recognize or don’t want to acknowledge what’s coming.
But there is plenty they can and should be doing now to meet this seismic shift:
- Expand rainy-day funds and targeted reserve funds earmarked for priorities such as disaster response and recovery or educational funding.
- Build capacity, including training and equipping staff to take over responsibilities previously managed by federal agencies.
- Making statutory and administrative changes in hiring and procurement rules to replace critical resources such as federal support teams and other “just-in-time” program staff.
Such administrative minutiae may sound boring but they are essential if you happen to manage or lead one of these governments.
But there also are major policy and conceptual shifts governments can undertake to survive in this brave new world. That is, assuming they (and their voters) want to maintain the current array of government services.
Lowering the Baseline
The first, of course, is to lower the budgetary baseline, by imposing strategic belt-tightening based on comprehensive efficiency reviews. They must also deploy thoughtful process improvements and not wait until it’s too late for anything other than taking a hacksaw to essential functions. There are proven strategies for doing so — and they don’t look like DOGE (the federal Department of Government Efficiency).
Some people like to imagine that governments are so inefficient that one-third to one-half of their costs and operations can be eliminated simply by cutting fat; try more like 5 percent, or maybe 10 if you’re lucky. Such savings still require pushing the envelope before some constituency with public support starts rallying against cuts (law enforcement agencies are old hands at this).
Even 5 percent, however, is real money. South Dakota, the state with the smallest budget, a 5 percent budget reduction would translate into more than $100 million in savings, not exactly chump change.
Leaders who begin preparing now can stabilize their budgets, strengthen their operations, and position their states and communities to thrive even as federal support recedes and the administration in Washington turns the ship of state upside down. Those who fail to act swiftly will find themselves not simply manning the lifeboats but caught in the undertow, with their citizens paying the price for years to come.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
