Northeast states avoided big swings in their 2027 budgets

Budget season is over, and many Northeast states managed to scrape by without meaningfully changing their tax codes. 

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Northeast states are feeling a revenue crunch, with new demands on their revenue from the federal government and cash-strapped municipalities. They’re also hesitant to make major cuts ahead of a big election year. 

Fiscal 2027 budgets were light on new programs and light on cuts, leaving big decisions for next fiscal year.

The One Big Beautiful Bill Act passed by the federal government last year shifted costs to the states for Medicaid and the Supplemental Nutrition Assistance Program. Those cuts are phased in, beginning in 2027 and 2028. 

States “finally” had to find revenue-raising measures, said Erica Vladimer, executive director of the State Revenue Alliance, after years of coasting on strong tax proceeds. 

Maine and Rhode Island created wealth taxes in their fiscal 2027 budgets, but most Northeast states approached it by “skirting around the edges,” Vladimer said, largely by decoupling their tax codes from the federal tax code. Many states still have not budgeted enough for the increased costs, she said.

Northeast states also took part in a national trend of stronger pension funding, according to S&P Global Ratings analyst Geoff Buswick. 

Average pension funding across the country is approaching 90%, he said, the highest rate since the early 2000s. 

Now that pensions are so well funded, many states are increasing pension benefits, Buswick said, often at the urging of unions.

Massachusetts

Massachusetts passed a $63.4 billion budget for fiscal 2027, a 4% increase over FY 2026. 

“The major considerations for this budget year are really focusing on sustainable changes to their program funds regarding Medicaid,” S&P analyst Ladunni Okolo said.

The budget contains no major tax changes, according to Okolo. It increases local government aid by $40 million and bumps the rainy day fund by $51 million, to $8.2 billion.

Massachusetts GO bonds are rated Aa1 by Moody’s and AA-plus by S&P and Fitch Ratings. 

The commonwealth’s Fair Share tax revenue, a 4% surtax on income over $1 million, continues to exceed expectations, said Phineas Baxandall, director of research and policy analysis at the Massachusetts Budget and Policy Center, a progressive think tank.

The budget estimated $2.7 billion of revenue from the tax, but the Department of Revenue now estimates the tax will actually pull in $3.38 billion. Gov. Maura Healey has now requested to allocate an additional $100 million to K-12 schools, in light of the new revenue and local budgetary pressures. 

The budget contained some preparation for costs from the OBBBA, including partial, temporary decoupling from the federal tax codes, Baxandall said.

“We’re looking at real uncertainty from the federal government, which is really targeting what we refer to in Massachusetts as the eds and the meds,” Baxandall said — educational and medical institutions, which comprise a large share of the commonwealth’s economy.

“So we’re trying to prepare as a state, and you can definitely see that in this budget,” he said.

“While we think they have some exposures, like a lot of other states, to federal policy changes, particularly on Medicaid, we think it’s absorbed in this current budget,” Okolo said.

The budget does not cover the projected costs of SNAP cost sharing based on current error rates, Okolo said, but she expects the commonwealth to address those costs in supplemental budgets later on in the fiscal year.

“With the changing federal environment with respect to SNAP, Medicaid, and pretty much everything else, states find themselves in this crossroads where they have to make a decision about how much additional funding they want to provide,” Moody’s Ratings analyst Ted Hampton said. 

“Massachusetts is a very wealthy state. It has a strong surplus. It’s in a good position to do this sort of thing,” Hampton said. “But I think generally speaking, in this budget, they’ve shown some restraint, at least compared with recent years, in terms of spending increases.”

Pennsylvania

Pennsylvania has been “kicking the can down the road” in its budgets for years. This year, its lawmakers managed to do so again. 

Pennsylvania’s budget was $50.8 billion, a $700 million increase over the FY 2026 budget.

The commonwealth had a $6.4 billion gap heading into budget season, and managed to shrink it, but not eliminate it. The final budget was balanced using $500 million of one-time revenues from various funds, and delaying certain costs to future years.

“They punted on a bunch of things that’ll probably cost them in a while,” Buswick said. 

This year’s budget is best understood as a “cost maintenance budget,” said Felicity Williams, executive director of the Pennsylvania Policy Center, a progressive think tank. 

The commonwealth offered new funding to a few social services, but “a larger share of the new spending is needed to cover Medicaid, pensions, debt service, and other existing obligations,” Williams said. 

The budget increased education funding by more than $800 million, part of a years-long effort mandated by the Commonwealth Court, and added a cost of living adjustment for certain pension recipients.

This is the third consecutive year that Pennsylvania has balanced its budget with reserves. Its general fund surplus has shrunk from $14 billion in fiscal 2024 to $200 million after the fiscal 2026 budget. This year, it used reserves from outside of the general fund surplus, and still left the rainy day fund untouched at nearly $8 billion.

Patching the budget with off-budget funds is “a reasonable thing to do,” Buswick said. “In tighter budget times, what you’ll do is you’ll scan and see where there may be a certain program where you can cut unfilled jobs. And those types of things are not uncommon, and they’re not meaningful, to a great extent.”

Pennsylvania deferred $1.3 billion of Medicaid costs to fiscal 2028. This is the second year in a row it’s employed this accounting maneuver, according to Moody’s analyst Baye Larsen. 

“The good things were, they’re not meaningfully making the structural gap worse, and they’re not using any of the rain day funds,” Buswick said.

And although the budget was passed a week and a half late, it wasn’t nearly as late as the fiscal 2026 budget, he noted, which was delayed for so long that S&P lowered Pennsylvania’s outlook. 

The budget increased funding for county assistance offices by $67 million to help them prepare for cost shifts and changing federal standards, Williams said. However, the funding likely won’t cover all that’s necessary to handle the new burdens. 

Pennsylvania’s current SNAP error rate is 9.21%, Penn Policy’s Laura Beltrán Figueroa said. Under the OBBBA cost shifts, it will have to pay 10% of its SNAP costs — projected to be $410 million. 

If its error rate increases to 10%, Figueroa said, it will have to pay even more. 

Gov. Josh Shapiro requested $100 million for a fund to address federal losses, Williams said.

“Granted, that was like pennies in comparison to the hundreds of millions we anticipate we are going to have to absorb,” she said, “but even that did not make it into the final version of the budget.”

If the Keystone State kicks the can down the road for another year in FY 2028, spending even more of its reserves, will it damage its rating? 

“Pennsylvania is already the second lowest rated state,” Buswick said — its A-plus rating already factors in a propensity for structural imbalances, budget impasses, and avoiding addressing problems.

Moody’s and Fitch rate Pennsylvania higher, at Aa2 and AA respectively. 

The commonwealth has one revenue stream on the horizon. Slot-like gambling machines known as “skill games” have proliferated in the state, and are currently untaxed; lawmakers have debated how to regulate and tax them for years. In June, the state Supreme Court ruled that they are legally slot machines, and must be taxed and regulated as such. 

But lawmakers still didn’t include new taxes or regulations on the machines in the budget. They’re waiting until the court–mandated deadline in October to address it. 

The state also punted on transit costs. To avert a fiscal cliff last year, the governor created a two-year stopgap measure for the Southeast Pennsylvania Transit Authority and Pittsburgh Regional Transit, instructing them to cover their operations with a portion of their capital budgets. But that money is running out, Williams said. 

Lawmakers included no funding solution for transit costs in the budget, but some discussed using revenue for skill games to patch the gaps, Williams said.

Pennsylvania is different from many of its Northeast neighbors because it has a flat income tax rate, Larsen noted. This means it’s experienced less revenue growth in recent years, but it also means the state’s revenue is less vulnerable to an economic downturn. 

Next year, the commonwealth will likely face all the same issues again, Williams said. However, the makeup of its government could be drastically different. The governor is up for reelection in November, and both chambers of the legislature have slim majorities, with Democrats running the House and Republicans the Senate.

New Jersey

New Jersey Gov. Mikie Sherrill pledged to promote affordability in her first budget as governor. But the state’s fiscal realities constrained what a budget could reasonably accomplish. 

The new budget increases the child tax credit by 25%, part of Sherrill’s affordability agenda. But for the most part, it’s a “maintenance budget,” Sexton said. The total came in at $61 billion, a three percent spending increase over the prior year. 

New Jersey is notable for its lack of reserves — it has no rainy day fund, and around $7.7 billion of general fund surplus. 

The FY 2027 budget will spend $1.4 billion of the surplus, depleting it to $6 billion, just 10% of annual spending. The budget did reduce the state’s longstanding structural gap, Hampton noted. 

“The general fund surplus has not been historically buoyant, and so they start from a position of less future financial flexibility,” Sexton said. 

But spending reserves is not unprecedented for New Jersey. It’s rated Aa3 by Moody’s, A-plus by S&P, A-plus by KBRA and A-plus by Fitch.

“Arguably, what Governor Sherrill has put together is not a severe deterioration in the surplus,” Hampton said. “So, it’s certainly within our understanding of where the credit is.”

Also, the budget preserved New Jersey’s efforts to fully fund its pension obligations.

The FY 2027 budget marked the sixth year in a row that the Garden State paid its full actuarially determined pension contribution. This year, pension costs made up $7 billion of its $60 billion budget, Buswick said. 

“That is a significant continuation of dedicated monies to this longstanding obligation that we view as a promise made,” Buswick said. 

The state is “moving in the right direction,” Hampton said.

“One of the factors we’ve cited for an upgrade is achieving that future state where they are structurally balanced into the foreseeable future,” Hampton said. “And I think there’s an understanding that that’s a goal. They didn’t quite get there this time around.”