Veridus Advisory: Governor Hobbs Releases FY 2026 Budget

Dear clients:

Today, Governor Katie Hobbs released her fiscal 2026 Executive Budget, a $17.7 billion General Fund spending plan that recommends significant funding hikes for K-12 schools, pay raises for state employees, child care assistance, and more. 

The proposal also sets up a coming clash with GOP lawmakers, who are sure to oppose the Governor’s plan to cut $150 million from the ESA program by reducing or eliminating vouchers for high-earning Arizona families. According to Governor Hobbs’ plan, only households earning below $100,000/year would be eligible for the full voucher amount. Families earning more would receive incrementally less State support, and households with incomes above $200,000 would be eliminated from the program altogether.

Governor Hobbs said her plan “reflects my commitment to continuing our strong economic growth, lowering costs, keeping communities safe and securing the border, and protecting Arizonans’ fundamental freedoms.” House Speaker Steve Montenegro (R-Goodyear) countered that the Executive Budget “raises concerns about parental choice, fiscal responsibility, public safety (and) economic growth …”

The spending plan represents an approximately $1.6 billion year-over-year spending increase, restoring a host of programs cut during budget negotiations last spring. However, it is nearly equal to the General Fund of two years ago.

Hobbs administration spending priorities include:

• Over $450 million in added funding for K-12 education, plus almost $260 million to build new schools in fast-growing communities;

• An additional $191 million for child care assistance, which the Governor’s Office estimates will allow the State to help over 25,000 children per month;

• $35 million to provide 5% pay raises to frontline law enforcement and correctional officers;

• $23 million to combat illegal fentanyl at the border; and

• $15 million for the Housing Trust Fund, including $5 million to assist homeless veterans.

Potential sticking points include the Governor’s fiscal assumption that lawmakers refer to the ballot and Arizona voters approve an extension of Prop 123. The measure provides nearly $300 million/year in revenue for K-12 schools. Lawmakers are unlikely to approve a Prop 123 referendum without funding assurances for the ESA program.

Additionally, the Governor’s budget omits funding to enforce the newly-approved Prop 314. The voter-ratified border enforcement package empowers local law enforcement to detain non-citizens who cross the border outside a port of entry. The Governor’s Office indicated key provisions of the proposition remain in flux due to legal challenges.

Governor Hobbs’ proposed spending hikes are made possible by a budget surplus estimated at nearly $700 million, along with a cache of federal ARPA funds. Regardless, expect the GOP-led Legislature to push back against many of the added expenditures.

A budget must be approved before the fiscal year ends June 30, though budget negotiations typically heat up later this spring. We will keep you informed as talks progress.

Sincerely, 

The Veridus team