State agencies told to limit budget requests due to looming federal funding cuts | Arizona Capitol Times

Key Points:

• Gov. Katie Hobbs’ budget director sent a letter to state agency heads imposing a limit on fiscal year 2027 general fund requests

• Agencies can request an increase of “no more than 2%” of their FY2026 allocation for FY2027 due to a “federal fiscal cliff”

• Hobbs’ spokesman Christian Slater blamed the limit on the passage of President Donald Trump’s “Big Beautiful Bill”

The Governor’s Office is instructing state agencies to significantly limit their budget requests for fiscal year 2027 due to federal funding uncertainties.

A letter sent by Gov. Katie Hobbs’ budget director, Ben Henderson, to state agency heads on July 18 instructed all agencies to cap their FY2027 budget requests from the state’s general fund at “no more than 2%” of what they were appropriated from the general fund in the FY2026 budget.

“It is imperative that we approach FY2027 with a sense of caution and realism. This is not the year to ask for significant investments from the General Fund,” Henderson wrote.

Agencies are in the midst of developing their budget requests for FY2027, which begins July 1, 2026,  and those requests must be provided to the Governor’s Office by Sept. 2. Hobbs’ Office of Strategic Planning and Budgeting will then use those requests to create the executive budget the governor presents to the Legislature at the start of each legislative session.

In a statement, Hobbs’ spokesman Christian Slater blamed the limit on the “reckless actions of the Trump administration” and the recently passed federal reconciliation bill that included several spending and tax cuts. 

“H.R. 1 slashes funding for critical services Arizonans rely on while overloading the state with bureaucracy and red tape that will cost significant taxpayer dollars,” Slater said. “While the federal government raises costs, cuts funding and kills jobs even as their deficit explodes, Governor Hobbs is prepared to deliver a balanced budget that protects critical services and provides the opportunity, security and freedom Arizonans rely on.”

Henderson’s letter also noted that the uncertainties at the federal level come as pandemic-era stimulus funding is running out, creating a “cliff in federal funding unlike anything in recent history.” 

“We will do everything we can to mitigate the impacts of these decisions, but it is important to set an expectation with your staff and stakeholders that the state is unable to shoulder such a large gap in federal support,” Henderson wrote. 

Hobbs has said on multiple occasions that the state does not have the revenue to backfill cuts from the federal government. There is a chance agencies could get more than they request in FY2027, but it will depend on the status of the state’s revenues and budget negotiations between lawmakers and the governor next year. 

Sen. John Kavanagh, R-Scottsdale, served as the Senate Appropriations Committee chairman this session and shepherded the FY2026 budget through the Legislature. He told the Arizona Capitol Times that he hadn’t been made aware of the 2% limit but isn’t entirely opposed to it.

“I applaud the conservative and realistic approach that the Governor’s Office is taking, although I’m not sure if a flat 2% is wise, given that some agencies might be able to weather cuts and others might need an increase of more than 2%,” Kavanagh said. 

The 2% limit will impose significant restrictions on agencies, many of which operate on large sums from the state’s general fund. An agency like the Department of Public Safety, which will see over $300 million in General Fund appropriations in FY2026, will only have around $5.7 million to work with in FY2027. 

Smaller agencies will have even less to work with. The Department of Agriculture, which will receive approximately $14 million in FY2026, will be limited to requesting up to $350,000 from the general fund in FY2027. 

The letter from Henderson notes that any new state revenues will likely be devoted to funding caseload growth at the state’s human services agencies, state employee health insurance and other spending required by various court injunctions. 

Henderson also warned of more potential cuts, given Congress has yet to pass a budget for federal fiscal year 2026. Agencies are being asked to develop proposals for finding “savings, offsets, and other efficiencies.”

Those could include eliminating ineffective programs, developing new private sector partnerships or creating new earned revenue streams like fees. Nearly every agency collects fees from services they provide that help sustain the operations for those services, and the Governor’s Office is not expecting any impact on the fees.