Key topics covered in this article include:

  • State and local governments are focusing on cybersecurity, workforce planning, and citizen engagement to address rising risks and operational challenges in 2026.
  • Strategic planning is critical as governments face budget shortfalls, demographic shifts, and evolving compliance requirements.
  • Proactive measures like updating internal controls, improving transparency, and preparing for an aging population can help governments meet community needs effectively.

State and local governments are entering the second quarter of 2026 with a clearer picture of what the rest of the year may bring. Revenues have stabilized, but that also means the unusually strong growth many governments experienced in recent years has started to level off. There may be less flexibility to absorb rising costs, manage funding delays, or respond to unexpected challenges.

That is one reason many state and local leaders are taking a closer look at strategic planning right now. Governments that identify key issues early, strengthen internal operations, and prepare for what comes next will be in a better position to maintain services and meet community needs throughout the year.

Current Conditions

The year began with a relatively encouraging inflation rate of 2.4%. Still, recent reports suggest inflation could rise to 4.2% by the end of 2026, driven in large part by international pressure on oil, gas, and other commodities. At the same time, state and local investment is expected to slow through 2030. That may affect the timing and scope of projects such as building renovations, road and bridge repairs, water and sewer upgrades, and technology improvements.

This comes as many municipalities are already managing budget shortfalls. To protect core services, they are often using several smaller adjustments instead of one major cut or a tax increase. That may include delaying hiring, postponing lower-priority maintenance or equipment purchases, and looking at fee increases. Common examples include trash collection fees, parking fees, permit fees, and recreation fees.

Federal funding remains difficult to predict. In 2025, thousands of grants were terminated or delayed, creating new uncertainty for governments that rely on outside funding to support community programs and essential services. Healthcare costs are another concern, especially as federal Medicaid spending is expected to drop sharply over the next 10 years.

Finance teams will also want to keep the 2025 OMB Uniform Guidance in mind. Released in late November 2025, it introduced new compliance and audit requirements for federal awards, including changes to testing requirements. The higher Single Audit threshold of $1 million remains in effect for fiscal years beginning on or after October 1, 2024, which may reduce audit requirements for some smaller governments.

Key Priorities

What are state and local leaders prioritizing for 2026? Several issues are rising to the top:

Cybersecurity

Cybersecurity remains one of the most immediate operational concerns for state and local governments. Government entities experienced 374 cyberattacks worldwide, up 27% from 294 in 2024.

For public entities responsible for citizen welfare, public safety, financial operations, and critical infrastructure, that kind of increase makes cybersecurity much more than an IT issue; it’s also a governance and internal control issue. As systems become more connected, governments are rightly placing more attention on cyber governance, risk management, access controls, data retention policies, and incident response planning.

Artificial intelligence fits into this conversation as well. Many municipalities are still in the early stages of AI adoption, working through where it can improve efficiency and where the risks outweigh the benefits. A growing number are developing formal AI policies and appropriate use guidelines, including guidelines for staff who may already be using open AI tools for work purposes. For now, the focus tends to center on privacy, governance, and public trust as governments evaluate specific use cases, set expectations, and determine what training and oversight would need to be in place before moving forward.

Workforce Planning

Workforce planning is another top priority, and the numbers help explain why. Only 7% of government workers are under the age of 30. At the same time, about 33% of government workers are at the other end of the spectrum and eligible to retire this year.

When staffing needs are not addressed, it can influence service delivery, public safety, public health, and financial reporting. Institutional knowledge may be lost. In some cases, staffing gaps may also place pressure on internal controls, including segregation of duties and approval workflows.

In response, state and local governments are taking a closer look at how they recruit and retain talent. Standardized job descriptions, flexible work arrangements, and same-day hiring initiatives are all part of the conversation. Many public sector employers are also rethinking how they present the value of government work, including stability, purpose, and work-life balance, to a younger generation of workers.

Citizen Engagement

For many state and local governments, citizen engagement is becoming a more important part of day-to-day work. Clear, accessible information can help residents better understand available services, current projects, and how public resources are being used. Over time, that kind of visibility can support transparency, accountability, and public trust.

Updating municipal websites to be more user-friendly is often high-impact for residents; this generally makes information about services, events, and meetings easier to find. Community newsletters, annual reports, and budget summaries written in plain language can also help governments communicate their value more clearly. Some cities are also exploring open data policies that make municipal data freely available through open data portals and other web tools.

Demographic Shifts

An aging population is becoming a more important planning consideration for state and local governments. By 2030, nearly 20% of the population in the U.S. will be age 65 or older. This age group is growing faster than any younger segment, and that has direct implications for the services and infrastructure communities may need in the years ahead.

That means demand for healthcare services, public transportation, housing support, and accessibility improvements is likely to grow. Governments that start working these projections into their long-term planning now will be better prepared to meet those needs.

Next Steps

  • Assess the current state of operations. Before setting priorities, a close look at internal systems, staffing, and public-facing services can help identify where the most meaningful gaps or opportunities exist.
  • Choose an area of focus. Narrowing attention to two or three areas with the highest risk or greatest opportunity makes planning more manageable and more effective.
  • Build longer-term trends into planning. Workforce retirements and the needs of aging communities may develop gradually, but governments that begin planning for them now will have more options later.
  • Talk to advisors early. Questions about grant compliance, cybersecurity, internal controls, and long-term financial planning are often easier to address when outside advisors are part of the conversation early.

Looking Ahead

The year is far from over, but the priorities are becoming clearer. For many state and local governments, the focus now is on making strategic decisions that best support operations, strengthen service delivery, and help meet the changing needs of their communities. For more information or guidance, contact Betsy Hedrick or Michael Garber, Partners on PBMares’ State and Local Government team.