Connecticut’s fiscal guardrails have garnered praise for helping stabilize the state’s finances by facilitating a series of budget surpluses. But as lawmakers enter the new legislative session, debates are intensifying over whether these measures are too restrictive, particularly when it comes to funding education, health care and social service programs.
“Not a single legislator yet has proposed repealing this system,” said Keith Phaneuf, a state budget reporter with the Connecticut Mirror. . “I think, in concept, it draws very strong bipartisan support. Folks have simply said, ‘We actually have calibrated this system poorly.’”
'Fiscal guardrails' defined
Connecticut’s fiscal guardrails are a set of budgetary rules enacted on a bipartisan basis in 2017 to stabilize state finances. The rules aim to limit spending growth and require a portion of volatile tax revenues — such as those from capital gains from things like stock sales — to be diverted into state savings. These measures include a spending cap, a volatility cap, and a requirement to use surplus funds primarily for debt repayment.
Balancing savings and needs
Phaneuf argued that the current fiscal guardrail approach funnels too much revenue into pension debt repayment while starving critical state programs.
“One out of every five dollars state government is collecting is being paid into the pensions,” he said. “Even if somebody said, ‘Well, I don’t mind. I really want this pension debt over with,’ it’s important to realize pension debt is so huge ... it’s still projected we’re going to be paying on the unfunded liability until the late 2040s.”
The emphasis on paying down pension debt quickly comes at a cost, according to Phaneuf. He compared the state’s fiscal strategy to an overly aggressive personal savings plan.
“If you said, ‘Keith, could you help me save some more money,’ I’ll say, ‘OK, let’s stop making your mortgage payment ... cut your grocery bill to maybe $10 a week,’” he said. “Before you know it, you’re going to be sitting alone in the dark ... But boy, your savings account is going to be great! Well, it wasn’t all really savings.”
Phaneuf pointed to signs that Connecticut’s fiscal policies are already straining key areas. Over the past two years, Connecticut community college tuition has risen by 11%, Medicaid reimbursement rates have stagnated, and private nonprofits delivering state social services are struggling to make ends meet.
“Don’t forget, the state delivers almost all social services through the private sector,” Phaneuf said.
Fiscal 'thermostat' instead of 'guardrails?'
While an actual guardrail is a mostly rigid barrier designed not to be moved, Phaneuf said a better way legislators should think of Connecticut’s fiscal guardrails is as a household thermostat.
“If you woke up one morning in the dead of winter and you were too warm in your house, you wouldn't go to the basement and rip out the furnace and throw it on the lawn,” Phaneuf said. “You'd simply lower the thermostat to cool the house down.” In other words, he said the state should not be so rigid in designating certain revenues as unspendable on anything but debt service.
The volatility cap is key
One of the key provisions of the state’s fiscal guardrails in rigidly designating certain revenues as unspendable is “The volatility cap.” The theory behind it is that certain revenues, like sales taxes, are fairly predictable from year to year, whereas other revenues, like tax revenues from capital gains investors and businesses make on stock trades, are thought to be less predictable or, to put it another way, more volatile.
Connecticut's volatility cap limits the amount of volatile revenue that the state can spend in its budget. Any revenue exceeding a predefined threshold is diverted into the state's budget reserve fund, also known as Connecticut's "rainy day fund."
“In theory, our volatility adjustment some years should be capturing a lot of money,” Phaneuf said. “Other years, it should be capturing nothing.”
But Phaneuf said that has not been the case because the state has overestimated how much revenue each year is actually “volatile.”
“In the first seven years of the [fiscal guardrails] program, we've only captured less than $1 billion once,” Phaneuf said. “And that was when a once in a century pandemic arrived in 2020. And even then, we still grabbed $530 million. In other words, we've never had a year where we've captured even a small amount of money.”
“This volatile money, as it's labeled, is not all volatile,” he said. “What we're actually doing is siphoning money that is stable, that should be going into core programs.”
Federal safety net gone
The pandemic-era American Rescue Plan Act (ARPA) provided a temporary cushion for the state’s budget, funding critical areas outside the constraints of the guardrails. However, Phaneuf warned that this federal relief has masked the full impact of the state’s stringent fiscal policies.
“We’ve had the best, I’ll call it, ‘budget Novocaine’ in existence,” Phaneuf said. “You don’t feel a lot of the pain because we’ve had Washington covering parts of our budget they never have before. But that money is now gone.”
With federal ARPA funds depleted and discussions underway in Washington about tightening Medicaid funding for states, Phaneuf cautioned that Connecticut could soon face even greater fiscal challenges.
“You’re coming off the Novocaine, and whatever kind of a fiscal root canal we’ve been going through, you’re about to feel the full force and effect of that,” he said. “We could reform the guardrails, put more of this so-called volatile money back into play in the budget, and still be in trouble.”
