Over the past several months, we have worked as part of a collaboration between Yale’s Tobin Center for Economic Policy and The Connecticut Project to examine the broad set of spending, revenue and bonding caps that have become known as Connecticut’s “fiscal guardrails.” Last month, we published a series of papers highlighting the impact of those caps and offering a framework for policymakers as they consider responsible adjustments.
The rules are complicated and overlapping. In short, in addition to a limit on borrowing, the fiscal restrictions adopted or revised in 2017 – including a revenue cap, volatility cap, and spending cap – place substantial amounts of revenue “off limits” for expenditure, restrict how much can be spent regardless of how much revenue is available, and build an extra cushion into each budget.
These constraints have had an important impact. Over the past seven years, they have helped Connecticut build up a rainy-day fund of $4.1 billion and make $8.6 billion in supplementary payments into Connecticut’s pension funds, above and beyond the state’s annual pension contributions. At the same time, the caps have left legislators with little flexibility as federal funds expire, the cost of providing existing services goes up, and families and communities face growing pressure from the cost of education, childcare, housing, healthcare, and more.
Indeed, Connecticut is now rapidly approaching a self-imposed budget cliff: without adjustments to the law, policymakers will be compelled to make deep cuts to current services in the next two years, even as the state anticipates more than a billion dollars in surplus revenue each year.
The balancing act isn’t easy. Connecticut still carries one of the largest long-term debt burdens in the country. What we hope the papers released last month do, however, is demonstrate that policymakers have a range of sensible options to consider. The debate should not be about keeping the guardrails versus abandoning them. The debate should be about how best to structure fiscal rules that strike a balance between multiple goals: paying for the mistakes of the past, promoting budget stability, and meeting the needs of the present.
In addition to offering a broad overview of the guardrails, our reports make three specific contributions that we hope will help policymakers as they work to strike that balance.
First, we offer a framework for redesigning the volatility cap. In theory, the volatility cap should ensure that the state isn’t relying on unpredictable revenues to fund predictable costs. That makes sense. But the threshold picked in 2017 was chosen arbitrarily and, as our paper highlights, the cap is not working like a true “volatility cap.” Our paper examines an alternative design, looking back over a multi-year period and allowing the volatility cap to adjust in a dynamic way. This design would continue to promote stability and capture savings, while at the same time giving policymakers more flexibility.
Second, we highlight the extent to which Connecticut’s spending cap has a “one-way ratchet” that makes it hard for the state to keep pace with costs. The spending cap is set based on the prior year’s appropriations. But when a revenue shortfall forces the state to cut back – as happened in 2017 – the spending cap doesn’t easily catch up when economic conditions and revenue projections improve. Together with the governor, the General Assembly could adjust the spending cap so that it keeps pace with Connecticut’s economic conditions, if they agree that extraordinary circumstances warrant the adjustment.
Third, we highlight and attempt to measure the stark choices the state will face this year. Without thoughtful adjustments to current law, Connecticut will need to close a gap of somewhere between $331 million and $1.05 billion just to maintain current services— never mind the growing calls for new investment in areas such as affordable childcare, K-12 education, higher education, the non-profit sector that supports vital services, and Medicaid, among others.
There will be a variety of workarounds available if policymakers want to reduce the impact of the fiscal caps without making changes to the caps themselves. But some of those workarounds risk making the state budget less transparent and more complicated. We don’t argue for any specific adjustment, and we recognize that some of these adjustments may not happen until the fiscal rules come due for renewal in 2028. However, our reports support the idea that Connecticut should have an honest, forthright conversation about the design of the fiscal guardrails – and base that conversation on data and clear policy goals, rather than ideology, dogma, or political expediency.
The bottom line is this: the fiscal guardrails have served and continue to serve an important purpose. But there was no magic, and arguably little science, behind the guardrails’ initial design. Seven years on, with a cliff looming, it’s time to take a new look. There are sensible ways to mend, not end, the fiscal guardrails, should policymakers choose to do so.
Luke Bronin is the former Mayor of Hartford. Zachary Liscow is a professor at Yale Law School and served as chief economist at the White House Office of Management and Budget from 2022-2023.
