Happy New Year. Welcome to 2026. Now that we’re in a new year, the question for state and local leaders is now acutely: How are you going to pay for your priorities?

Budget leaders are entering this year facing familiar pressures — tight revenues, rising costs, growing service demands — but in a context that feels fundamentally different. Responsibility for funding and delivering essential services continues to shift downward, even as the core tools of public budgeting remain largely unchanged.

Recent analysis from the National Association of Counties estimates that federal policy changes under consideration or already enacted could shift roughly $1 trillion in costs and responsibilities to state and local government over the next decade. At the same time, a national survey of local government leaders found that fewer than six in 10 believe their budgets meaningfully focus on outcomes — despite more than eight in 10 saying they want stronger alignment between budgets, goals, and results.

Over the past two years, I’ve spoken and worked with nearly 100 budget leaders across cities and counties of all sizes. More recently, against the backdrop of accelerating national policy shifts, I’ve been asking a more pointed set of questions: What are local leaders actually focused on for the year ahead? What keeps them up at night? And are the conversations happening behind closed doors as dire as the headlines suggest?

Despite differences in geography and politics, a consistent picture is emerging as leaders look ahead to 2026 and beyond.

It’s not a crisis — yet. Nearly everyone I spoke with emphasized that this does not yet feel like an emergency. Budgets are tight, and cuts are real, but most described them as within the bounds of what they’ve managed before. Many jurisdictions are moving through standard budget cycles, albeit with more scrutiny and less margin for error.

At the same time, there is a shared sense that something larger may be approaching. Leaders described an “intense storm on the horizon”—one they can see forming but cannot yet fully predict. Some are actively preparing their organizations; others are taking a wait-and-see approach, wary of acting too early or committing to changes that may prove unnecessary.

Uncertainty has become structural. Contrary to the many public narratives, most governments are not facing immediate insolvency. What they are facing instead is persistent volatility, driven by shifting federal guidance, unpredictable grant timing, legal risk and policy changes that arrive mid-cycle.

One finance director described budgeting today as “building a five-year plan knowing the assumptions won’t hold — but knowing it’s riskier not to plan at all.” As a result, more governments are stress-testing service lines, modeling downside scenarios, and thinking several years ahead. This isn’t about forecasting perfectly; it’s about being ready to respond when conditions change.

Shrinking discretion is the central budget challenge. For many counties and cities, the most pressing issue is not revenue alone — it’s how little of the budget is truly flexible. Large shares of general fund spending are tied up in legally required services such as jails, courts, child welfare, behavioral health and public safety. Even when funding levels are not dictated, service expectations often are.

When elected officials call for across-the-board cuts, budget officers know those reductions almost always land in the narrow slice of the budget that is actually discretionary. The result is a recurring tension between political expectations and legal reality.

To navigate this, some jurisdictions are developing service inventories or mandate frameworks that clarify what is required by law, what has limited cost control, and what is genuinely optional. These tools don’t make tradeoffs easier, but they make them more honest and often reveal how much of the budget was never truly available for reprioritization.

Federal funding feels increasingly risky. Federal dollars remain essential to state and local governments, but many leaders are rethinking how, and whether, to pursue them. Ambiguous statutory language, evolving compliance requirements and clawback risk have made some grants difficult to manage, particularly for smaller jurisdictions with limited legal or grants-management capacity.

In some places, federal funding proposals now undergo enhanced legal review before submission to assess policy alignment and long-term exposure. In others, governments have declined funding altogether when staffing, reporting, and compliance obligations outweigh the short-term benefit. Availability of money is no longer the only question; administrative capacity and risk tolerance matter just as much.

Reserves offer protection and create pressure. Pandemic-era fund balances helped stabilize many governments, but those reserves are now under intense scrutiny from residents, labor groups and elected officials. Budget officers repeatedly emphasized that reserves are not recurring revenue, yet pressure to use them for ongoing costs remains strong.

In response, many leaders are steering one-time dollars toward technology upgrades, deferred maintenance, and process improvements. These investments strengthen long-term capacity, even if they are less visible than service expansions—and often harder to defend politically.

Capacity is becoming a fiscal strategy. With limited options to raise new revenue, many leaders are turning inward: modernizing financial systems, improving hiring timelines, streamlining procurement and reducing administrative friction. These efforts are not framed as innovation for its own sake, but as necessary to sustain service delivery under constraint.

As one county leader put it, “If we can’t do the work better with the same dollars, we won’t be able to do it at all.”

Still, many budget officers acknowledge how difficult it is to generate political momentum for major change. “Now is the time to make our systems more responsive to the outcomes we want,” one director told me, “but the national environment is making everyone skittish about taking big swings.”

Evidence is becoming a practical tool. Few jurisdictions claim to run fully evidence-based budgets. But many leaders are using data selectively — to understand demand, flag implementation risks and prioritize among competing needs. When cuts are unavoidable, evidence helps move conversations away from across-the-board reductions toward decisions about what is actually working.

What stands out most in these conversations is not pessimism, but realism. Local budget leaders are not waiting for relief from Washington or state capitals. They are assuming responsibility will continue to shift downward, and they are and planning accordingly.

So welcome to 2026. The hard choices are already here. The real test for state and local governments will not be whether they face pressure, but whether they have the tools, capacity and clarity to respond deliberately — protecting essential services while adapting to a world that is asking more of them than ever before.

This post was originally published on Next City.