State governments are entering 2026 with ambitious spending plans, but weak internally generated revenue is forcing many to rely heavily on federal transfers, borrowing, and temporary inflows to fund their budgets, Sunday PUNCH reports.

An analysis of appropriation bills and approved estimates across multiple states shows that only a handful can cover a meaningful portion of their expenditure from IGR, raising concerns about the sustainability of planned capital projects.

The review suggests that governors remain fiscally dependent on Abuja, the country’s administrative capital. Across the states, federally shared revenue from the Federation Accounts Allocation Committee remains the single largest and most predictable source of funding, supplemented by value-added tax distributions and, for oil-producing states, derivation proceeds.

Lagos State, the commercial capital, plans to spend N4.237tn in 2026, the largest subnational budget on record. Governor Babajide Sanwo-Olu says the proposal, built around his administration’s T.H.E.M.E.S.+ agenda, will be funded primarily by N3.12tn in internally generated revenue and federal transfers, with the remainder coming from bonds and loans. Even for Lagos, whose tax take rivals that of some smaller African countries, debt remains essential to balancing the books.

Abia State’s numbers are more strained. Governor Alex Otti proposed a N1.016tn budget, allocating N811.8bn (80 per cent) to capital projects and N204.4bn (20 per cent) to recurrent expenditure. The state projects N83.2bn from FAAC allocations, N67.1bn from VAT, N26.5bn from grants and aid, and N168bn from other federal revenue channels, bringing total projected revenue to N607.2bn.

This leaves a N409bn deficit, about 40 per cent of the budget. While recurrent expenditure is expected to be fully funded from IGR, capital projects will depend heavily on federal allocations, grants, and borrowing.

The Managing Director of Optimus by Afrinvest, Dr Ayodeji Ebo, said heavy reliance on federal transfers, borrowing, and temporary inflows poses a clear risk to fiscal sustainability.

“These revenues are volatile and largely outside state control, making budgets vulnerable to oil price shocks. Over time, this approach also discourages ingenuity, as states become dependent on external inflows rather than building durable local revenue sources,” the economist told our correspondent.

In Ogun, the situation follows a similar pattern to Abia. The state’s N1.669tn “Budget of Sustainable Legacy” also shows reliance on multiple funding sources. Internally generated revenue from the state and its ministries and agencies is projected at N509.88bn, federal transfers, including statutory allocations and VAT, are expected to contribute N554.81bn, and N518.9bn is expected from capital receipts, comprising internal and external loans and grants. While the budget appears balanced, over 30 per cent of the funding comes from non-recurring sources.

Enugu State’s N1.62tn budget represents a 66.5 per cent increase over 2025. Capital spending is N1.296tn (80 per cent), with recurrent expenditure at N321.3bn (20 per cent).

Revenue projections include N870bn from IGR, N387bn from federal allocations, and N329bn from capital receipts, such as loans and grants. Analysts note that approximately 20 per cent of Enugu’s planned spending relies on non-recurring funds, highlighting the state’s dependence on external financing to execute its developmental plans.

The Optimus executive cautioned that the limited IGR highlights the need for reform: states must strengthen local revenue sources, attract investment, and leverage public-private partnerships. “Fiscal sustainability will come not from higher transfers or more debt, but from productive local economies and broader tax bases.”

Osun State approved a N723.45bn budget, with recurrent revenue projected at N421.25bn, capital receipts at N286.01bn, and an opening balance of N16.19bn. Though the total projected inflows match the budget, a significant share comes from capital receipts, which are not guaranteed, making the budget’s execution contingent on the successful mobilisation of these funds.

Oil-producing Delta State is betting heavily on improved federal inflows following fuel-subsidy removal. The state anticipates a N1.664tn budget, with N1.165tn (70 per cent) earmarked for capital expenditure and N499bn (30 per cent) for recurrent spending.

Revenue projections include N720bn from statutory allocations and mineral derivation and N250bn from IGR, which the governor expects to grow following reforms in collection and the removal of the fuel subsidy. Despite these measures, Delta remains reliant on federal transfers and oil-linked revenue to meet ambitious spending targets.

Sokoto State’s N758.7bn “Budget of Socio-Economic Expansion” relies on N389.3bn from FAAC, N74.5bn from internally generated revenue, and N233.8bn from grants, aid, and capital development funds. With less than 10 per cent of projected revenue coming from IGR, the state is highly dependent on federal transfers and donor support for both recurrent and capital spending.

Fiscal expert Aliyu Ilias said subnational governments are creating challenges for the federation due to how they manage FAAC allocations. He suggested that the federal government consider “counterpart funding,” where states that increase their IGR receive a proportional benefit, noting that without this incentive, states will continue to rely heavily on Abuja.

Ilias warned that while FAAC allocations are at unprecedented levels, they are not necessarily translating into improved living standards. The economist also recommended that the government focus more on direct projects at the local government level, rather than disbursing funds to states, to ensure that resources reach citizens effectively.

Edo State’s N939.85bn budget combines multiple revenue streams: N160bn from IGR, N480bn from FAAC, N153bn from grants and capital receipts, and N146bn from public-private partnerships. Despite diversified sources, a large portion of Edo’s budget relies on external funds and partnerships, exposing the state to potential delays if these funds are delayed or underperform.

Bayelsa State, another oil-dependent economy, plans to spend N1.01tn after lawmakers increased the governor’s original proposal. Projected revenue includes N42.2bn from statutory allocations, N84bn from VAT, N212.6bn from the 13 per cent derivation, N488bn from other FAAC allocations, N85.9bn from IGR, N24.9bn in grants, and N50bn from domestic loans. Less than 10 per cent of Bayelsa’s projected revenue comes from IGR, highlighting reliance on oil-linked federal allocations, loans, and grants.

Gombe State’s N535.7bn “Budget of Consolidation” dedicates N371.44bn (69.3 per cent) to capital expenditure and N164.25bn (30.6 per cent) to recurrent spending. Recurrent revenue is projected at N416.1bn, capital receipts at N225.5bn, and a carryover balance of N100bn. The budget relies on non-recurring capital receipts and balances for the implementation of major projects.

Kwara State’s N644.004bn “Consolidation and Sustained Growth” budget allocates N424.7bn to capital projects and N219.3bn to recurrent expenditure. Revenue assumptions are based on macroeconomic indicators, including an oil price of $64.85 per barrel, daily oil production of 1.84 million barrels, an exchange rate of N1,400 per dollar, and projected GDP growth of 4.68 per cent. This makes Kwara’s budget execution highly sensitive to national economic conditions and federal transfers.

Experts say states must look inward and develop their areas of comparative strength, whether in agriculture, manufacturing, tourism, logistics, or services. “Attracting investment requires reliable infrastructure, streamlined regulation, land access, and predictable tax policies.

Stronger public-private partnerships and regional collaboration can unlock capital and efficiency, reducing over-reliance on borrowing,” Ebo stated. “Ultimately, fiscal sustainability will come not from higher transfers or more debt, but from productive local economies, broader tax bases, disciplined spending, and smarter collaboration.”

Across the country, analysts note that only a few states, such as Osun and Ogun, have budgets that align closely with projected revenue, and even these rely heavily on capital receipts and loans. Most other states are stretching recurrent and capital spending far beyond guaranteed IGR, relying on federal allocations, grants, loans, and donor support to fund their development agenda.

According to Ilias, projected total revenue could reach N35tn, but shortfalls are likely to affect capital expenditure because recurrent obligations, including salaries and debt servicing, must be met first. He emphasised that maintaining fiscal discipline and adhering to a strict January-to-December budget cycle is critical to ensuring that budgets are executed efficiently and spending priorities are met.

The PUNCH reports that 34 state governors have presented their 2026 budget proposals to their respective Houses of Assembly. Governors Babagana Zulum of Borno and Siminalayi Fubara of Rivers are yet to submit their appropriation bills for legislative approval.