State Budgets Go Flat for FY2027 as Rainy-Day Funds Fall and Washington Shifts SNAP and Medicaid Costs to the States

On 1 October 2026 every state started paying a bigger share of the cost of running SNAP, the food assistance programme. Their share of administrative costs rose from 50% to 75%, a shift of about $3.4 billion a year from Washington to state capitals. It’s the first of several cost transfers written into the July 2025 reconciliation law, and it arrives as state budgets are already tightening.

The state picture

The National Association of State Budget Officers’ spring 2026 survey shows the slowdown. States spent an estimated $1.38 trillion from their general funds in fiscal 2026, up 7.9%. For fiscal 2027, governors recommended $1.36 trillion, a 1.4% decline in aggregate, though one large state drives much of that. The median state plans growth of just 0.6%. Between 22 and 23 states proposed flat or lower spending.

The cushion is thinning too. Rainy-day funds hit a record $191 billion in fiscal 2025, a median of 13.5% of spending. The median is projected to fall to 12.6% by fiscal 2027. Total balances, including other reserves, have dropped from a $437 billion peak in fiscal 2023 to a projected $274 billion in fiscal 2027.

Revenue growth has stalled. General fund revenue rose 2.2% in fiscal 2026, a real decline once inflation is counted. Six states made mid-year cuts in fiscal 2026, and 22 proposed targeted cuts in their new budgets.

What Washington is shifting

The 2025 reconciliation law moves several costs from the federal government to the states on a timetable.

SNAP is the clearest. The administrative shift took effect this month. From fiscal 2028, which starts in October 2027, states also pay part of the benefits themselves, based on their error rates: nothing for states under 6%, then 5%, 10% or 15% for higher rates. CBO estimates about $35 billion moves to states over ten years. Analysts at the Center on Budget and Policy Priorities estimate that nearly half of states could owe $100 million or more a year, and California and New York more than $1 billion each.

Medicaid is larger. CBO puts the federal Medicaid cut at $911 billion over ten years. From 1 October 2026 states can’t add new provider taxes, a common way to fund their share. In states that expanded Medicaid, the provider tax ceiling starts falling in fiscal 2028, down to 3.5% by 2032. State-directed payments to hospitals are capped and phased down from 2028.

Work requirements for Medicaid expansion adults begin nationally on 1 January 2027. States have to build the systems to check them. CMS puts the state systems cost at about $660 million.

What states can do

States have three options: raise taxes, cut services or tighten eligibility. Most will do some of each. The SNAP formula adds a fourth: lower error rates fast, since a state below 6% pays nothing. That makes payment accuracy a budget issue for governors for the first time.

There’s an irony in the design. Federal policy has long pushed states toward expanded Medicaid and broad SNAP access. Now it’s handing them more of the bill. How states respond in their fiscal 2028 budgets, written next spring, will show whether the federal savings turn into state tax increases or smaller programmes.