Fitch Ratings recently issued a warning that federal spending cuts “could amplify pressures during periods of fiscal stress and increase state and local government credit risk.” The agency noted that “state and local governments are increasingly assuming fiscal responsibilities that have typically been shouldered by the federal government.” This includes providing additional funding for programs such as SNAP (food assistance) and Medicaid.
At its core, Fitch’s warning highlights a growing shift in America’s fiscal balance: Washington’s unsustainable spending and mounting debt are forcing more costs and responsibilities onto the states. Programs once funded primarily by the federal government are now increasingly reliant on state budgets. This gradual handoff means Iowa and other states face higher expenses, greater exposure to federal policy changes, and less control over their own financial stability.
The current federal government shutdown is not the direct cause of this warning. Rather, as Fitch explained, “Trump administration and congressional policy initiatives, as well as long-term challenges to the U.S. sovereign’s finances, are resulting in a transfer of fiscal obligations and risks to state and local governments.”
Specifically, changes stemming from President Trump’s “One Big Beautiful Bill” (OBBB) may have a significant impact on state and local finances. The bill’s tax reform provisions will affect Iowa’s revenue, with measures such as “no tax on tips,” “no tax on overtime pay,” and “no tax on interest deductions for American-made cars” estimated to reduce state revenues by approximately $438 million.
However, the OBBB is not just a tax package—it also includes major reforms to Medicaid and SNAP. According to Fitch, “The 2025 tax and spending bill introduces significant changes to SNAP cost-sharing requirements and to states’ ability to levy provider taxes for Medicaid that will directly impact state budgets.”
Under these changes, states will assume a greater share of SNAP and Medicaid costs, especially as part of efforts to curb fraud. For example, states with an error rate of 6% or higher in the SNAP program will be required to cover a larger portion of program costs. The bill also implements federal work requirements for the Medicaid expansion population, which will require Iowa to ensure that all recipients meet eligibility standards. Fortunately, Iowa lawmakers already passed Medicaid work requirements during the last legislative session, which should help improve verification, reduce fraud, and transition more individuals into the workforce.
Fitch notes that “federal spending reductions under the law start out modestly and grow over multiple years,” according to the Congressional Budget Office. “This gives states time to plan budgets accordingly,” the report states, “although states will have less flexibility in a lower-growth or recessionary environment.”
Beyond the OBBB, the Trump administration has also paused or restructured several federal funding streams. Some dollars have been frozen, while others now come with additional “strings” — such as requirements for compliance with administration policies on immigration enforcement — before states can access them.
Finally, Fitch warned that ongoing debt and deficit challenges at the federal level remain a serious risk to state and local governments. “The U.S.’s fiscal challenges — with general government debt projected to reach 124.6% of GDP by 2027 — may limit its capacity to provide meaningful countercyclical support to states and municipalities during a downturn,” the report cautioned.
With the national debt now surpassing $38 trillion and deficits continuing to rise, the threat of federal austerity is real. When Washington is finally forced to make major spending cuts, states that rely heavily on federal funds will feel the impact first.
In Fiscal Year 2024, Iowa received more than $13 billion in federal funds, compared to $9.4 billion appropriated by the Legislature for the FY2026 state budget. Roughly 34% of Iowa’s total revenue comes from federal sources.
Iowa’s fiscal position remains strong thanks to years of conservative budgeting, but rising spending pressures and shifting federal obligations are beginning to create headwinds. The state continues to maintain a surplus, its Cash Reserve and Economic Emergency Fund (Rainy Day funds) are filled to their statutory maximums, and the Taxpayer Relief Fund holds $4 billion. However, these reserves are one-time balances that could quickly be depleted if the state were forced to absorb new federal costs.
The warning from Fitch Ratings underscores how far the nation has drifted from a system of constitutionally limited government. States were never intended to serve as administrative arms of the federal government, yet that is increasingly what they have become. The federal shutdown, the panic surrounding SNAP, and protests over cuts to various federal programs all reveal how dependent Americans have grown on Washington.
Iowa policymakers must prepare for further reductions in federal funding — but more importantly, all levels of government must recognize that public demand for services has outpaced the ability to pay for them. True fiscal stability requires spending restraint and a renewed commitment to federalism. Limiting government growth and restoring constitutional balance are essential steps toward protecting both Iowa’s independence and taxpayers’ long-term security.
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