The state is facing a budget cliff. Modifying the fiscal rules could preserve essential services to help Connecticut thrive
Every family has a budget, and Connecticut’s government is no different.
There are many factors to take into account when making a budget. How much money should go toward your “rainy day” fund? How much should be tucked away for retirement? What about education? Our government faces those same questions, just on a greater scale.
Connecticut’s budget is constrained by “fiscal guardrails” designed to provide stability during both good and bad revenue years. Those rules were enacted in 2017, when the state was in a financial crisis. Now, however, those rigid guidelines could force tough decisions about cutting critical services if the state doesn’t responsibly adjust them.
For example, the state recently “found” more than $300 million in interest generated from investing pandemic-era American Rescue Plan Act (ARPA) funds. Under the fiscal rules, that extra money will likely be forced to go toward pension reductions and savings – adding to the state’s existing $1.5 billion surplus.
Your budget isn’t the same as it was in 2017. Neither is Connecticut’s. Our state has the money to continue funding critical services like healthcare, home energy, early childhood education, and other education, if the state modifies the guardrails to allow the government to use it.
We deserve a government that values our communities as much as we do. People are struggling to make ends meet under the current guidelines. Costs are going up. We have a child care crisis. Conditions will only get worse unless we strengthen the fiscal rules through responsible changes.
What are the fiscal rules?
The fiscal rules are rigid guidelines that put a cap on government spending. Their purpose is to stabilize a budget to avoid drastic cuts to services during years when revenue is low.
The rules are more than a simple budget guideline. They’re a complex equation that takes multiple revenue streams into account, and then sets rules on how much of that money can be used, and how.
The state has had budgetary rules for decades. Connecticut first adopted a debt limit in the 1950s and a spending cap in 1991. Both of those have been adjusted multiple times to reflect the state’s most updated financial situation. The fiscal rules came along much later, in 2017.
When were they made?
Connecticut was in a “permanent fiscal crisis” after the Great Recession in 2007-2008. Even though the state saw a boost in revenue a few years later and cut spending, it still wasn’t matching the need. Additionally, the new budgeting strategies put into place between 2008 and 2018 didn’t solve the problem, either, because the state was still paying for mistakes that’d been made decades earlier.
The government adopted the fiscal rules in 2017 to ensure Connecticut had strong budgetary guidelines moving forward. However, while creating those rules, the legislature also made it extremely difficult to change them.
What do the fiscal rules control?
Like your own budget, there isn’t a single factor that decides how much you can spend. It all depends on how much you make, what your needs are, and if there’s debt you need to pay off. However, unlike your own budget, Connecticut’s is sealed by a “bond lock” that forces the government to keep the rigidity of the fiscal rules through at least 2028, unless changes are made.
Connecticut’s fiscal guardrails are a complex equation that boils down to four rules:
- a spending cap limiting how much the government can appropriate each year;
- a volatility cap that keeps the state from relying too much on revenue sources that can drastically change from year to year;
- a revenue cap that stunts how much projected revenue can be spent. It also created a “cushion” to protect the budget;
- a bonding cap, which sets limits on how much money the government can borrow on the state bond agenda.
The caps don’t stand alone. They’re broad and overlap, but still serve as budget controls. The rules also cap the state’s “rainy day” fund at $4.1 billion, an amount we’ve already reached. Under the existing guardrails, the state cannot put any more money into that savings. But the fiscal rules – unlike a family budget – also limit what the state can spend surplus dollars on, preventing the state from investing in child care, education, and infrastructure.
Can the fiscal rules be changed?
Legislators purposely created to make them hard to change. That doesn’t mean it’s impossible, but the state will need to thoughtfully and responsibly adjust them in order to do so.
Each aspect of the fiscal rules has its own rules. Adjusting the spending cap requires the state Constitution to be amended, changing the threshold for the volatility cap requires the approval of three-fifths of the General Assembly, and conditions written into the bond lock prevent any structural changes from happening until after 2028.
Why explore adjusting the fiscal rules now?
The rules were adopted in response to shaky financial times. They’ve since done what they were designed to – empower the state to pay off its debts, responsibly budget, and not rely on unstable revenue sources. However, we live in a new decade, and circumstances have changed.
For example, the volatility cap was designed so that the state didn’t spend revenue that it couldn’t rely on to be stable. But that “volatile” revenue has proven more stable than predicted. That cap has generated a surplus of $10 billion over the last seven years. The state has also reached the maximum amount of what it’s legally able to place in the rainy day fund.
The $4.2 billion the state has received in federal COVID relief funding through ARPA and the CARES Act has also masked an approaching $1 billion fiscal cliff that will fully hit in the 2026 fiscal year. ARPA funds will support $510 million in services during the 2025 fiscal year. Our government has the revenue to make up the difference and prevent cuts. But, under the current fiscal rules, it can’t use it.
Even if the state frees up funds from the volatility cap and revenue cap, Connecticut would still have to reduce spending by $863.5 million because of the spending cap. Changing the guardrails isn’t a single decision. It’ll take a dedicated effort to responsibly adjust a complex system.
What’s at risk?
Pandemic-era funds helped fund K-12, early education services, emergency rental assistance, and child care programs that boosted early childhood education. Without that federal money, those critical services are at risk of being cut.
Modifying the fiscal rules is a solution for how the state can continue to fund essential services with revenue that’s already coming in.
The rules were created as a way to thoughtfully and respectfully craft a biennial budget, all while providing stability. We can use those same values to adjust the guardrails to keep Connecticut’s fiscal future bright.
A joint report by The Connecticut Project and Yale University’s Tobin Center for Economic Policy provides a deep analysis of the fiscal rules. Read the full report for data-driven options for Connecticut’s future.