House Considering FY27 State Budget
State law requires the governor to file a proposed budget for the upcoming fiscal year by the fourth Wednesday in January. This year, Governor Maura Healey filed her Fiscal Year 2027 budget proposal, known as House 2 (H2), on January 28.
The budget process has moved to the Massachusetts House of Representatives, which will release and debate its version in late April. The State Senate typically follows in late May, often during the week leading up to Memorial Day. Differences between the two versions are then resolved by a six-member conference committee before a final compromise budget is sent to the governor for approval prior to the start of the new fiscal year on July 1.
If the governor vetoes a line item or outside section, the Legislature may override those vetoes with a two-thirds vote of both chambers.
PREMIUM CONTRIBUTION SPLITS: GOVERNOR PROPOSES NO CHANGE
Concerns about a slowing economy and potential federal funding cuts have led state leaders to take a more cautious approach to fiscal planning. While some budget tightening occurred in FY26, planning for FY27 has been even more conservative.
These concerns have already influenced discussions surrounding health insurance spending. As we reported earlier (page 1), the Group Insurance Commission (GIC) considered but rejected several proposed plan design changes that would have shifted costs onto retirees and employees for the coming fiscal year (2027).
Importantly, the governor’s H2 proposal did not include additional cuts to the GIC budget and does not propose further benefit or plan design changes. The Administration also chose not to pursue increases in employee premium contribution percentages, a proposal that had been included in last year’s budget but rejected by the Legislature.
H2 maintains the current premium contribution rates for both state employees and retirees and sets the FY27 GIC budget at just over $2.8 billion. That figure assumed approximately $100 million in plan design savings. Without those changes, the budget would need to increase to roughly $2.9 billion to fully fund the program.
STATE & TEACHERS’ FY27 COLA
The governor’s proposal again included a 3% cost-of-living adjustment (COLA) on the existing $13,000 COLA base for retirees in the State and Teachers’ Retirement Systems.
If approved, FY27 would mark the 28th consecutive year the Commonwealth has granted a COLA to state and teacher retirees. Because each COLA becomes a permanent part of a retiree’s base pension, the increases compound over time. For example, a retiree who left service in 1998 would have seen their annual pension benefit grow by more than $10,500 through cumulative COLA adjustments.
This approach differs from many states where COLAs are issued only occasionally as one-time payments rather than permanent increases.
PROPOSED PENSION FUNDING SCHEDULE EXTENDED TO 2039
Massachusetts adopted a formal pension funding schedule in 1987 after decades of underfunding left the Commonwealth with one of the lowest funded pension systems in the nation. The schedule created a long-term plan to eliminate the unfunded liability through a combination of employee contributions, investment returns, and annual state appropriations.
Strong investment returns during the 1990s initially allowed the Commonwealth to accelerate the funding timeline. However, economic downturns—including the early 2000s’ recession and the Great Recession of 2008-2009—required adjustments to the schedule.
In 2010, the Legislature established 2040 as the statutory funding deadline for all 104 public retirement systems in Massachusetts. The Commonwealth adopted a more aggressive internal target of 2036 for the State and Teachers’ Retirement Systems.
Earlier this year, the Healey Administration proposed to extend that state funding target by three years, moving the deadline to 2039. The adjustment restructures the state’s payment schedule for addressing the systems’ unfunded liability.
As a result, the FY27 pension appropriation would decrease by approximately $277 million, though the state will still contribute more than $5.1 billion toward pension funding this year. Annual contributions will then continue to increase by 4% each year through FY2039.
More Importantly, this change does not reduce pension benefits and does not allow funds to be withdrawn from the retirement system. By law, pension assets can only be used to pay retirement benefits and administrative costs.
LOOKING AHEAD
While an extension would be largely driven by budget considerations, it also opens the door to broader discussions about the longterm structure of the pension funding schedule and potential opportunities to improve retiree benefits, including COLA policy.
Despite economic uncertainty, the financial health of Massachusetts’ public retirement systems remains strong. All 104 retirement systems across the Commonwealth continue making steady progress toward the statutory 2040 full-funding deadline, now just fourteen years away.