Governors Address Fiscal Challenges in 2025 State of the State Speeches

In their 2025 State of the State addresses, governors throughout the nation raised concerns about budgetary constraints, revenue shortfalls, and the difficult decisions they face in balancing their states’ budgets. Many states are grappling with declining revenues because of the expiration of federal pandemic aid; slowing economic growth; and rising costs in areas such as health care, education, and public safety.

Government efficiency amid budget pressures

One prominent theme in the speeches was a renewed focus on government efficiency as a way to manage mounting fiscal pressures. In fact, at least 11 states have established efficiency commissions or task forces, with at least a dozen more considering legislation that establishes similar groups.

In his speech, Governor Patrick Morrisey (R) of West Virginia addressed his state’s expected budget shortfall of $400 million for fiscal year 2026, with larger shortfalls expected in future years. He warned that while the state has $2.1 billion in reserves, most of it—$1.3 billion—is in a rainy day fund “reserved for the most severe of emergencies; think of a major flood or a natural disaster, a severe economic downturn, or a depression,” Gov. Morrisey said. “Only in the most desperate of times do you touch that nest egg.”

But Gov. Morrisey warned that unless lawmakers take immediate action, they have less than two years before they’ll have no choice other than to use their state’s emergency funds to fill the projected deficit. “That’s why there’s real urgency now,” he said.

Several Republican governors highlighted the Trump administration’s newly established Department of Government Efficiency (DOGE) in their addresses, often in the context of their own efforts to shrink state government and reduce spending. Missouri Governor Mike Kehoe (R) remarked, “As we are seeing a national movement to reduce the size of government and focus on efficient practices, I hope to see the same in Missouri,” adding that he is working with House and Senate leadership to launch a DOGE-like government efficiency initiative in the state.

Similarly, Iowa Governor Kim Reynolds (R) noted, “I like to say that we were doing DOGE before DOGE was a thing,” explaining that her administration’s “alignment and efficiency efforts” have saved taxpayers $217 million in 18 months—exceeding the state’s projections for the entire four years of her administration.

Some Democratic governors, on the other hand, expressed concerns about DOGE’s implications for state autonomy and public services—but are still embracing government streamlining in their states, particularly in order to cut costs in a challenging budget year. Governor JB Pritzker (D) of Illinois highlighted cost-saving initiatives such as operational reforms, hiring freezes, fund consolidations, and a state purchasing overhaul in his proposed budget. Meanwhile, during his annual budget proposal preview, California Governor Gavin Newsom (D) announced plans to save the state nearly $5 billion and help address its budget deficit by eliminating approximately 6,500 vacant positions and cutting spending on state operations by about 8%.

And in Colorado, Governor Jared Polis (D) highlighted his administration’s progress in digitizing government services and operations through the Colorado Digital Services initiative. “And just a few weeks ago,” he said in his Jan. 9 speech, “I sawed through 208 old executive orders—some going back over a century—cutting down, quite literally, on needless bureaucracy.”

Federal funding uncertainty

Though most governors who delivered their State of the State speeches before President Donald Trump’s second inauguration didn’t reference federal funding uncertainties, such issues have been prominent in more recent speeches.

“We cannot negotiate this budget in a bubble. And while I sincerely hope that the situation in Washington settles down, and that we in turn have a normal, healthy budget season over the next few months, that is by no means a guarantee,” New Jersey’s Phil Murphy (D) warned in his late February budget address.

One of the biggest questions for lawmakers is whether the federal government will cut Medicaid funding, which accounts for more than two-thirds of total federal grants to states. States are already grappling with rising Medicaid costs, and a move by Congress to reduce the federal share of the bill could place significant pressure on state budgets.

Several governors used their State of the State addresses to discuss provider shortages, especially in rural or underserved areas, and recommend that their states move to retain health professionals by increasing Medicaid provider rates. But if there are federal Medicaid cuts, which in turn would impact state budgets, state lawmakers may have to reassess whether they can afford such provider rate increases.

Governors also discussed Medicaid in the context of expansion—an ongoing debate since the 2010 Affordable Care Act gave states the option to expand Medicaid coverage to more people in exchange for increased federal funding. Kansas Governor Laura Kelly (D) pushed in her address for full Medicaid expansion, lamenting six years of what she characterized as legislative inaction and arguing that not expanding Medicaid costs Kansas taxpayers more money than expansion would. Georgia Governor Brian Kemp (R) defended his state’s partial expansion through its Georgia Pathways program, arguing that its qualifying activities, including work requirements and higher education enrollment, provide better outcomes than would come through traditional expansion. He framed full expansion as fiscally irresponsible and noted that “we’re covering well over 200,000 more Georgians than traditional Medicaid expansion would cover.”

In Mississippi, uncertainty about federal Medicaid funding is causing state lawmakers to slow their efforts to expand Medicaid. Governor Tate Reeves (R) said, “Medicaid changes, for example, are coming. What they will be, we do not yet know. But there is a large possibility that those changes will result in a greater spend by states who have enacted this type of welfare expansion.”

Rainy day savings

Amid these challenging fiscal conditions, several governors pointed to the role of robust reserves as part of a broader approach to long-term planning and resilience—helping their states navigate economic slowdowns, natural disasters, and unpredictable shifts in federal policy.

Nevada Governor Joe Lombardo (R) highlighted the recovery of his state’s rainy day fund, which was entirely depleted during the pandemic but has since rebounded to a historic high of $1.3 billion. Lombardo credited this turnaround to “smart fiscal decisions” and “prudent policies.”

In New Mexico, Governor Michelle Lujan Grisham (D) said the state’s strategic use of surging oil and gas revenues have bolstered the state’s general fund reserves and helped shore up public pension funds, contributing to an improved credit rating outlook from Moody’s Investors Service. And Tennessee Governor Bill Lee (R) also pointed to strong reserves as a key pillar of the state’s budgetary strategies, framing Tennessee’s almost $2.2 billion rainy day fund as vital for enduring “any economic crisis.”

Final thoughts

States are navigating an increasingly complex fiscal landscape, and governors used their State of the State speeches this year to strike a balance between celebrating successes and warning of the potential difficulties ahead. Governors from both major parties are embracing efficiency as a key strategy to address budget shortfalls, even as they differ on their approaches and rhetoric.

With looming economic uncertainties, including the possibility of federal funding reductions, some governors highlighted the importance of having robust reserves—and being strategic about using those savings. Reserves can’t permanently replace potential cuts to federal funding, but they can serve as a temporary bridge, giving policymakers time to assess their options. And with the risk of a recession rising, states may also need reserves for their traditional purpose of helping to close shortfalls during economic downturns.

The uncertainty over federal funding—particularly for Medicaid—could force states into difficult decisions, such as service cuts or reallocation of resources. Ultimately, how states respond to these fiscal pressures will shape not only their budgets, but the services and programs available to millions of Americans.

Riley Judd works on The Pew Charitable Trusts’ Fiscal 50 project.