The budget that lawmakers sent to Gov. Maura Healey's desk Monday features the latest signal that Beacon Hill is taking a different approach to the state's rainy day savings account.

Rather than let hundreds of millions of dollars in capital gains tax revenue automatically inflate the planned deposit to the Stabilization Fund, the House and Senate agreed in the fiscal year 2026 budget passed Monday to instead use that money to take a bite out of the state's unfunded pension liability.

The Stabilization Fund is viewed by many officials as a barometer for the state's fiscal responsibility and health. State government has preciously guarded the fund from even the suggestion of withdrawals and elected politicians routinely and loudly trumpet the fund's high balance. The account is fed by earned interest, surplus revenue (when it exists) and capital gains tax revenue in excess of a set threshold.

Senate Ways and Means Chairman Michael Rodrigues said Monday that it's been the capital gains tax revenue above that threshold that gets "just regularly and routinely deposited into the Stabilization Fund" that has allowed Beacon Hill to push the balance of the fund up to a balance of $8.165 billion as of June 2. The fund's post-pandemic growth has been so significant that lawmakers opted in 2023 to raise a cap that could have constrained further state saving and led to automatic tax rebates.

"Now that the Stabilization Fund is at this high balance, we're looking at other long-term liabilities that are a hindrance for future budgets of the commonwealth, most notably our unfunded pension liability. So this budget conference report proposes to use $599 million from excess capital gains to pay down our unfunded pension liability, reducing this liability for years to come," he said.

Once capital gains tax revenue surpasses a certain threshold (projected to be $1.66 billion in fiscal 2026), state laws calls for most of the excess (90%) to automatically go to the Stabilization Fund. The Pension Liability Fund is statutorily due 5% of the excess, as is a trust fund for other post-retiree benefits, also known as OPEB.

Lawmakers and governors have diverted so-called excess capital gains revenue before, including to balance the budget as recently as last year. Healey and the House this year proposed changing the distribution for fiscal 2026, instead directing 65% of the excess to the pension obligation, 20% to the rainy day fund, and 15% to OPEB.

But it was the Senate approach that prevailed through conference committee talks: 90% of excess capital gains to the pension liability, 5% to the Stabilization Fund and 5% to OPEB. That means about $600 million will go towards the pension liability, $33 million will go towards OPEB and $33 million will be deposited into the Stabilization Fund.

The most recent valuation report for the state's total pension obligation, released in January, found an unfunded actuarial accrued liability of approximately $42.252 billion as of Jan. 1, 2024. Beacon Hill is working along a schedule to fully fund that pension liability by 2036, though it is legally required by 2040.

The revenue agreement that Rodrigues, House Ways and Means Chairman Aaron Michlewitz and Administration and Finance Secretary Matthew Gorzkowicz agreed to for fiscal 2026 calls for a $4.933 billion transfer to the state pension fund – $432 million more than in fiscal 2025. Rodrigues said the roughly $600 million in excess capital gains revenue would be part of, not a supplement to, the transfer already agreed to. 

Senate Minority Leader Bruce Tarr, who said he and Rodrigues "share a concern about maintaining a healthy Stabilization Fund," has raised concerns with the approach each time the budget has been before the Senate and in May called the idea "radical" and "risky." The Gloucester Republican said Monday that he would think that the same uncertainty that led Rodrigues and the House to reduce the budget's bottom line would also highlight the value of a robust rainy day fund deposit.

"I would argue that given everything that he has described and the potential need to backfill – and I hesitate to use that term, but respond to – reductions in federal funding, to make anything less than a full contribution to the Stabilization Fund, full being defined as what we have done in the past, I think, is in error," Tarr said Monday.

The fiscal 2025 budget called for $124.5 million in excess capital gains revenue to go to the Stabilization Fund, the fiscal 2024 budget called for $525 million, and the fiscal 2023 budget contemplated a deposit of nearly $1.4 billion in excess capital gains.

Rodrigues said in May that the $8.1 billion balance in the Stabilization Fund was "north of 15% of our operating budget," a level that he described as "well beyond the gold standard" of credit rating agencies. 

"My goal now is to get the commonwealth of Massachusetts to the highest bond rating possible, which is AAA. What's the largest impediment to achieving AAA? Primarily the amount of indebtedness the commonwealth has," Rodrigues said in May, specifically pointing to the state's roughly $42 billion unfunded pension liability.

After previously drawing scrutiny from ratings agencies for dipping into the rainy day fund while the economy was growing, Beacon Hill spent the last handful of years working to build up a sizable nest egg and resisted calls to spend from its more than $8 billion balance.

But while withdrawals still aren't favored, the budget's latest diversion of revenue from the Stabilization Fund shows that lawmakers are warming up to different approaches to savings and long-term liabilities.

Lawmakers and the governor showed a similar willingness to forgo the maximization of growth in the Stabilization Fund with the fiscal 2025 budget Healey signed last July. That allowed the state to divert up to $375 million in excess capital gains tax revenue from the rainy-day pipeline and instead use it to balance the books for the cycle that ran from July 1, 2024 to June 30, 2025. 

When it was time to close the books on fiscal 2024 this past December, Beacon Hill Democrats redirected more than half a billion dollars in capital gains revenue that would have been headed for the long-term savings account in order to close a budget shortfall and support some spending.

A law Healey signed in September lets her administration leverage up to $750 million in Stabilization Fund interest for grant-matching purposes through November 2026, as well as to pay down state debt. Fiscal year 2024's interest earnings contributed $420.8 million to that new fund, a state financial report confirmed in February.

And by leaving themselves a roughly $800 million gap between the revenue forecast and projected spending in the fiscal 2026 budget, Beacon Hill Democrats have built in an additional layer of insulation for the Stabilization Fund. Meant to mitigate the impact of future tax revenue declines or federal funding changes, the wiggle room could give budget managers a cushion before they would have to turn to the Stabilization Fund in the event of a major downturn.