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What are Connecticut’s ‘fiscal guardrails’? We’ve outlined them here

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What are Connecticut’s ‘fiscal guardrails’? We’ve outlined them here

Feb 12, 2024 | 7:30 am ET
By Keith M. Phaneuf and Gabby DeBenedictis
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What are Connecticut’s ‘fiscal guardrails’? We’ve outlined them here
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The 2024 Connecticut General Assembly listens to Gov. Ned Lamont's State of the State address. SHAHRZAD RASEKH / CT MIRROR

When a fiscal crisis paralyzed the Connecticut General Assembly in 2017, lawmakers from both parties compromised to end a nine-month-long struggle to adopt a new budget.

A key part of the compromise reached in late October 2017 was to create a new spending cap, considerably more stringent than the original cap established in 1991 to accompany the new state income tax. This revised 2017 cap also was complemented with a new annual limit on bond issuances and two new programs to force the state to save a significant portion of its revenues — particularly when times are good.

These so-called “fiscal guardrails” have helped Connecticut to generate a string of surpluses, a full budget reserve and to pay down nearly $7.7 billion in pension debt.

Here’s what to know about the guardrails.

Revised spending cap

Connecticut’s spending cap — one of the single-largest factors shaping its budget — is designed to keep most government spending in line with changes in household income and inflation.

Under the cap, overall spending — excluding a few exempted areas — can grow at a percentage rate equal to either the previous calendar year’s inflation rate in urban areas or the average growth in personal income over the previous five calendar years, whichever is higher. Average growth in personal income has been higher most years.

The governor and legislature can legally exceed the cap if the governor declares a fiscal emergency and if three-fifths of both the House and Senate vote to exceed it. This tends to require some bipartisanship, since one party rarely has held three-fifths’ control in either chamber in the history of the cap.

Some expenditures, like debt service, are exempt from the cap. Some other key exemptions from the earlier spending cap system, though, are gone.

[RELATED: The history of Connecticut’s spending cap, explained]

Aid to about 25 poor cities and towns, deemed “distressed municipalities,” became subject to the cap as part of that 2017 deal. This is huge given that aid to these communities represents about two-thirds of the roughly $3.9 billion in statutory municipal grants awarded annually and could be constrained severely in years when room under the spending cap is scarce.

Those tight years could become more frequent soon, due to another change in exemptions.

The 2017 compromise moved required contributions to the state employees’ pension fund under the cap in 2023 and brings payments to the teachers’ pension system under it in 2027. Historically, those required payments often have grown faster than both household income and the rate of inflation. And if they do so again once both are back under the cap, they could eat up a disproportionate share of the spending growth, grabbing funds that otherwise might go to core programs like education, health care, social services, town aid and transportation.

Bond issuance cap

Connecticut borrows billions of dollars annually by issuing general obligation bonds on Wall Street, and the bond issuance cap limits the amount it can sell in a given fiscal year. The limit adjusts annually for inflation — during the 2022-23 fiscal year it was capped at $2.4 billion.

General obligation bonds are used to finance projects like municipal school construction, capital improvements at public colleges and universities, state building renovations and upgrades, open space and farmland preservation, and numerous smaller civic projects in legislators’ districts.

The bonds are repaid out of the state budget’s General Fund, which makes up about 90% of the overall budget.

Revenue cap

The revenue cap requires that the state budget have a built-in cushion of, at a minimum, 1.25% of the General Fund.

It was designed to prevent state lawmakers from adopting a budget with no margin of error, ensuring that unexpected expenses don’t plunge the state into a deficit.

Volatility adjustment

The volatility adjustment requires the state to save a portion of its income tax receipts from quarterly filings, which generally refers to income from capital gains, dividends and other investment earnings. It also requires the state to save a portion of quarterly business taxes paid by companies that don’t file corporation taxes.

When established in 2017, the volatility adjustment initially captured any revenues from these sources that exceeded $3.15 billion. That threshold is adjusted annually for inflation and currently is just shy of $3.8 billion.

This budget mechanism, more than any others, has helped the state produce massive state surpluses since 2017, amass a $3.3 billion rainy day fund and make $7.7 billion in supplemental payments into its pension funds.