2026 Fiscal Year in Review

Eastern states entered fiscal year 2026 braced for trouble. Budget officers across the region spent the past eighteen months warning about slowing revenue growth, rising health care costs, tariff exposure, and the downstream effects of federal tax and spending changes. Several states built their budgets assuming the good years were behind them.

As the books close on FY 2026, and the picture is better than many expected. Maine posted its fifth consecutive General Fund surplus. New Hampshire rebounded from a deficit year into a revenue surplus. Connecticut is on track for its eighth straight year in the black. Massachusetts finished nearly $2 billion above benchmark. Vermont’s revenues landed almost exactly where forecasters said they would.

But the headline numbers deserve a closer read. In state after state, the surplus rests on one-time collections, volatile capital gains, or the mechanics of the state’s own budget rules — not on broad-based, recurring economic growth. As Connecticut Rep. Kate Farrar, who chairs the CSG East Fiscal Affairs Committee, put it: “Here in Connecticut, our budget rules produce surpluses, so [it’s possible] there is something similar going on in other places” despite initial projections.

Is that what’s happening in every state? As usual, the numbers are worth a closer look.

Maine: a fifth straight surplus, and a transportation lifeline

The Mills administration announced in late July that Maine ended FY 2026 with a General Fund surplus of more than $148 million — slightly below the $152.2 million recorded in FY 2025, and the fifth consecutive year the state closed above projections.[^2] Gov. Janet Mills framed the result as the product of budgets built to keep the state, in her words, “within our means.”[^3]

Under Maine’s statutory “cascade,” unappropriated surplus funds flow to a fixed sequence of accounts. Smaller priority transfers went to the Governor’s contingency account, the Finance Authority of Maine’s loan insurance reserve, the reserve for operating capital, and retiree health insurance. The remainder split between the Budget Stabilization Fund and the Highway and Bridge Capital Fund.

That split mattered this year. A $26.2 million deposit returned the rainy day fund to its statutory ceiling of roughly $1.056 billion — 18 percent of the prior year’s General Fund revenues. The larger share, about $115.6 million, went to highway and bridge capital and combined with a $20.3 million Highway Fund surplus to deliver roughly $136 million to the Maine Department of Transportation. MaineDOT had moved in June to halt as much as $400 million in construction work amid a funding shortfall; the year-end transfers allow a substantial share of that work to be rescheduled.

The surplus also arrives alongside a significant drawdown. Roughly $291 million is being pulled from the rainy day fund under the state’s supplemental budget, including one-time $300 relief payments to about 500,000 Mainers, leaving the fund above $764 million. The reserve hit its cap and is already being spent down — a sequence worth noting for other states weighing similar one-time relief.

Vermont: on target, but the ground underneath is moving

Vermont’s is not a shortfall story, which may surprise readers following the state’s tight budget commentary this year. When state economists Tom Kavet and Jeff Carr presented their consensus forecast to the Emergency Board in late July, key lawmakers were bracing for a downgrade. They did not get one. FY 2026 revenues finished essentially on target, and the forward outlook was left largely unchanged from January estimates. General Fund revenues are projected to grow 2.4 percent in the current fiscal year and 3.2 percent the year after.

Carr characterized the past eighteen months as a stretch in which tariffs, federal policy turbulence, and geopolitical conflict might reasonably have derailed the state’s revenue base — and did not. His summary to officials: “so far, so good.”

The concern is what is holding the revenue up. Kavet pointed to surging equity valuations pushing capital gains sharply higher, and noted that artificial intelligence accounts for roughly 75 percent of equity market valuation gains since 2022 — a degree of single-sector concentration in national output he likened to railroad construction in the nineteenth century. If those valuations correct, the personal income and consumption tax receipts carrying Vermont’s roughly $9.3 billion budget would erode quickly.

There is a second, quieter pressure. Middlebury Rep. Robin Scheu, welcoming the steady forecast, noted that revenues still are not expected to keep pace with inflation — which will sap the purchasing power of next year’s budget at a moment when demand for state services is rising. That is the sense in which Vermont is genuinely constrained: not a revenue collapse, but a slow squeeze.

The regional pattern: real surpluses, narrow foundations

Maine and Vermont are not outliers, and Rep. Farrar’s observation about budget rules applies broadly.

Massachusetts offers the clearest illustration. FY 2026 collections totaled approximately $45.542 billion — $1.928 billion above benchmark and 4.2 percent above FY 2025. But excluding the income surtax and capital gains tax, collections came in at $38.945 billion, just $58 million, or 0.1 percent, above benchmark. The Commonwealth’s preliminary FY 2026 surtax revenue was certified at $3.380 billion and capital gains tax revenue at $3.216 billion. Nearly the entire margin came from two of the most volatile revenue sources a state has.

New Hampshire rebounded from a deficit year to a preliminary revenue surplus of roughly $182 million across the General and Education Trust funds. An unanticipated tax amnesty program contributed roughly $104 million of that, alongside stronger-than-expected lottery, insurance premium, and interest earnings. Strip out the amnesty and the picture is considerably thinner. Figures remain preliminary pending audit.

Connecticut projected a General Fund surplus of roughly $322.8 million heading into year-end, which would mark an eighth consecutive surplus. That result follows mid-session budget adjustments; the Office of Fiscal Analysis had projected an operating deficit absent those changes. Comptroller Sean Scanlon has separately flagged likely pressure to revisit the volatility cap threshold in coming years.

Nationally, NASBO’s Spring 2026 Fiscal Survey found total balances still well above historical norms but declining, with the median rainy day fund balance falling for the first time since the Great Recession. Aggregate general fund spending is budgeted to decline 1.4 percent in FY 2027 — the first year-over-year decline since 2010, with nearly half of states planning to spend less than the prior year.

What to watch

Three questions will shape the FY 2028 budget cycle across the region:

Do capital gains hold? Massachusetts and Vermont are both leaning heavily on equity-driven receipts concentrated in a single sector. This is the clearest shared vulnerability in the region, and the one least within any state’s control.

Are reserves being replenished or spent? Maine’s rainy-day fund hit its cap and is already committed to a supplemental drawdown. Regionally, median reserve balances have begun to decline. Reserves built for a downturn are increasingly being deployed against federal funding changes instead.

Can structural gaps be closed with recurring measures? NASBO’s data suggests states are turning to targeted reductions and revenue measures rather than reserve draws. That is the healthier response — but the harder political one, and it will land squarely on appropriations committees this session.

The Fiscal Affairs Committee will continue tracking FY 2026 closeout data across the region and will take up these questions at CSG East’s Annual Meeting this December in San Juan, Puerto Rico, where state budget chairs and other members will convene for the for its yearly Fiscal Roundtable.