Posted on Behalf of Capitol Consulting
2025 Session Recap
After a tense 169- day session marked by a record number of vetoes and three different proposed budgets, the Legislature adjourned Sine Die on Friday, June 27 and 1:20pm, narrowly avoiding a government shutdown. Lawmakers passed a record 438 bills and 174 were vetoed by Governor Katie Hobbs. Ultimately the Legislature approved a $17.6 billion bipartisan budget, negotiated primarily by the Senate and the Governor.
2026 Session Outlook
Opening Day: January 12, 2026
100th Day: April 26, 2026
FY 2027 State Budget Deadline: July 1, 2026 (constitutionally required)
The Legislature is preparing to convene for the 2026 Regular Session amid heightened political tensions, a constrained fiscal environment, and several major policy issues including education funding, water, and federal revenue uncertainty, are positioned to dominate early-session debates.
Divided Government and Hyperpartisanship
Arizona enters the 2026 session under its fourth consecutive year of split control between the Governor’s Office and legislative leadership, creating competing policy priorities. Partisanship is even more amplified ahead of the 2026 election cycle, which is already well underway with several lawmakers running for higher office or facing competitive primaries. This environment is expected to intensify political messaging efforts and slow bipartisan negotiations.
Tight Fiscal Outlook Despite “Slight Budget Surplus”
Legislative budget staff and leading economists from across the state have cautioned policymakers that sluggish tax revenues, broader economic uncertainty, and the implementation of HR 1 are pointing to limited financial growth for Arizona over the next fiscal year. Although the FY 2026 budget had a modest surplus, updated forecasts for FY 2027 indicate the state may have as little as $67 million in true discretionary spending capacity. This estimate does not account for approximately $580 Million in typical one-time obligations, such as School Facilities funding, or ongoing commitments like the State Employee Health Insurance Subsidy. This means the practical flexibility in the FY 2027 budget may be even more constrained.
Although FY 2027 revenues are projected at $17.85 billion, including a $519 million carryforward from FY 2026, lawmakers and budget forecasters base discretionary spending on the lowest ending balance in the three-year forecast. That figure is just $67 million in FY 2028.
Adding to the challenge, lawmakers will have to address that the $67 million balance falls short of the $1.1 billion needed to address HR 1’s long-term tax impacts to the state. While H.R. 1 did provide $10 billion to reimburse states for border-security costs incurred since 2021, the timing of those reimbursements remains uncertain. Arizona has applied for $750 million, and that full amount has been approved, but it is unclear when the state will receive the deposit. State statute requires that any reimbursement be deposited into the General Fund, where it could be appropriated by the Legislature as part of the budget. As a result of these uncertainties, lawmakers are expected to prioritize one-time investments, minimize new ongoing spending, and maximize opportunities to leverage federal dollars wherever possible during budget negotiations.
Governor Katie Hobbs has also instituted a 2% cap on agency budget growth for FY 2027, citing continued fiscal and federal-funding uncertainty. Lawmakers will be closely monitoring revenue trends as FY2026 progresses, and the Governor is expected to release her Executive Budget proposal in January, which will provide further clarity on the administration’s priorities and assumptions moving into the session.
Federal Funding Volatility
The recent federal government shutdown highlighted vulnerabilities in Arizona’s reliance on federal dollars. Delays in Medicaid matching funds, SNAP administration support, and border-security reimbursements have created even more downstream uncertainty for state budget assumptions. Additionally, the state will need to address an approximately $111 Million shortfall for SNAP benefits due to conformity with HR 1.
Proposition 123 Extension Uncertainty
Prop 123 increased State Land Trust distributions to K-12 from 2.5% to 6.9%, but expired on June 30, 2025 after negotiations stalled. Without legislative action this session, the distribution reverts to 2.5%, forcing the General Fund to absorb roughly $300 million annually in education costs.
Empowerment Scholarship Accounts (ESAs)
ESA growth continues to outpace early projections. Costs are becoming a key budget driver, with increasing calls for oversight, caps, or eligibility reforms, especially amongst economic uncertainty. Any proposed changes, however, will face intense political scrutiny.
Water
Water will again be one of the defining issues of the 2026 session as Arizona continues to face long-term challenges surrounding availability, infrastructure, and growth. Expected priorities include:
- Regulation of groundwater basins
- Updated groundwater modeling and Active Management Area (AMA) reform proposals
- Infrastructure investments for water and wastewater systems
- Colorado River guideline negotiations, which are set to expire next year
- Water legislation is already being introduced, with multiple stakeholder groups continuing to have pre-session discussions.