Debate over CT’s ‘fiscal guardrails’ is getting heated. Here’s why you should care

CT Insider – Friday, December 27, 2024
By Alex Putterman

If you plan to pay even cursory attention to Connecticut politics over the coming months, you are likely to hear the same two-word phrase so many times you’ll grow sick of it.

The phrase: “fiscal guardrails.”

Its meaning: a web of statutes that constrain how much the legislature can spend in a given year.

Its relevance: What happens with the fiscal guardrails during the legislative session that begins Jan. 8 and spans into June could determine the level of funding for your kids’ school, the cost of public college across the state, the sustainability of social services you may depend on and the availability of child care in your community for years to come, as well as the state’s long-term fiscal health amid a challenging debt burden.

The guardrails, which date to the 1990s but have existed in their current form since 2017, were created to stabilize Connecticut’s financial outlook amid persistent budget deficits and to force lawmakers to more aggressively pay down the state’s considerable pension debt.

Over time, though, some lawmakers and advocates have come to see the measures as having gone too far. As the state has recorded surpluses year after year, lawmakers have been forced to set aside large sums, even as colleges, K-12 schools and non-profits face difficult cuts and 40 percent of residents say they’re “just getting by” financially.

Now, a large and seemingly growing number of Democratic lawmakers are ready to adjust the guardrails to free up funding for key services. As they see it, more of Connecticut’s surpluses should be funneled toward struggling residents and institutions.

Republicans and Gov. Ned Lamont, a fiscally moderate Democrat, defend the guardrails as necessary for the state’s long-term fiscal health and have resisted the idea of even minor tweaks.

“I just think we’ve been well-served,” Lamont said recently about the guardrails. “We want to make sure we don’t go back to where we were 10-plus years ago.”

As the session approaches, the guardrails have stoked tension at the Capitol. In an interview this week, Speaker of the House Matt Ritter, D-Hartford, criticized the Lamont administration for taking a hard-line posture on the issue instead of reaching a deal Ritter views as inevitable.

“The longer it takes people to strike a deal, because they think it gives them leverage, the harder the session will be for everybody,” Ritter said. “The reality is, you can make a minor tweak in February, put it in the budget and be done.”

Ritter said he expects legislators and the governor’s office to eventually reach a deal to adjust the guardrails in a way that enables “major investments” in child care, special education and other areas. The main question, he said, is the timeline.

“The fact that we’re going to be negotiating this thing until May is just idiocy,” Ritter said.

What are the fiscal guardrails?

The term “fiscal guardrails” generally describes the following measures:

• A “spending cap” that prevents the state from increasing spending from one year to the next by more than the increase in personal income or inflation, whichever is greater
• A “volatility cap” that further limits the amount of money the state can spend from its most unpredictable revenue sources
• A “revenue cap” requiring that lawmakers leave some cushion in their budgets so the state doesn’t experience a shortfall if revenues fall short of projections
• Several caps on how much bond money the state can authorize each year
• A limit on how much overall debt the state may incur

Together, these mechanisms prevent lawmakers from spending anywhere near the full amount of revenue the state collects (not counting debt service). During the most recent fiscal year, for example, Connecticut set aside more than $1.5 billion for pension debt and the state’s rainy day fund, equivalent to more than 5% of the state budget.

Though it’s highly unlikely lawmakers will drastically alter any of these policies in 2025, small changes could be in order.

One popular proposal — favored by Ritter, among others — involves increasing the volatility cap threshold. In theory, the volatility cap is designed to force lawmakers to save in particularly good years so they have money set aside for bad years. But because the cap is pegged to tax revenues from 2017, when revenues were particularly low, the state has wound up above the cap year after year, saving far more through this mechanism than was ever intended.

Increasing the volatility cap threshold would preserve the spirit of the cap, proponents say, while still creating considerable revenue.

Another proposal, advanced in a recent report from Yale researchers, calls for resetting the spending cap to reflect the allowable cap amount each year, as opposed to the amount the state actually spent, so the cap doesn’t decrease if lawmakers choose to spend less than they’re allowed to.

These slight tweaks, or others like them, could mean hundreds of millions more dollars for lawmakers to allocate to education, child care, social services, health care or whatever else they wish.

The case for adjusting the guardrails

Over recent years, the state legislature has bolstered K-12 districts, higher education and non-profits partly through money from the federal American Rescue Plan Act. With these funds, school districts hired more support staff, colleges balanced their budgets despite enrollment struggles and social-service agencies introduced ambitious new programs to help people in need.

Now, however, that federal money is gone, and all those institutions have holes in their budgets.

“We worry that we were saved by the ARPA money and now there are going to be consequences,” said Norma Martinez HoSang, director of the CT for All coalition. “We need to take action.”

For advocacy groups across a range of focus areas, adjusting the guardrails seems like an easy, obvious and necessary solution to serious budgetary problems. Education advocates want to tweak the guardrails to more equitably fund Connecticut’s public schools. The United Way of Connecticut suggests doing so to create a state child tax credit that would lift thousands of families out of poverty. Others say the state needs more money for non-profits that provide key services they otherwise can’t afford.

Advocates say adjusting the guardrails could be particularly important if the incoming Trump administration scales back federal funds that Connecticut and other states rely on, as the president-elect and his advisers have promised.

Martinez HoSang and others at CT For All sometimes call the guardrails “fiscal roadblocks,” reflecting their view that the budget mechanisms are impeding the state’s progress. The non-profit Connecticut Voices for Children, in a recent report advocating changes to the guardrails, dubbed them “fiscal controls.”

It’s not just advocates, though. Senate President Pro Tempore Martin Looney, D-New Haven, has repeatedly called for tweaking the guardrails to fund higher education and other priorities, and numerous other legislators have endorsed doing so for their own causes. One key Democrat last spring described the guardrails as a “brick wall” blocking lawmakers from addressing key issues.

In July, the Connecticut Non-Profit Alliance published the results of a survey showing 63% of residents wanted to see surplus funds go toward health and human services, education and other priorities, while only 8 percent said they should go entirely toward pension debt.

Mel Medina, vice president advocacy for the left-leaning Connecticut Project, acknowledges the guardrails have helped bolster reserves, pay down pension debt and improve the state’s credit rating. At a time when many residents are struggling, though, he believes the state must do more to help them.

The guardrails, Medina said, are “overly rigid,” designed during a time of budgetary crisis and ill-suited to the current reality.

“We’ve been forced into a false choice between paying debt and helping people,” he said. “We think we can invest in the present and the future.”

The case for preserving the guardrails

Others, however, see the guardrails as performing exactly the function they were created for: reigning in the impulses of lawmakers who want to spend now and worry about the future later.

As Lamont sees it, the guardrails have been successful at forcing the state to pay down pension debt, which remains substantial. Sure, legislators want to spend more when the state has surpluses, he says, but what about when times aren’t as good?

“I want to make sure if we get another recession or some other surprise — a lot of surprises right now — we don’t have to raise taxes and cut key social services,” Lamont said. “I’m not going to let that happen.”

Bryce Chinault, director of external affairs for the conservative Yankee Institute, said the guardrails have “resulted in reducing the state’s long-term debt, making sure budgets are balanced and that volatile revenue is being allocated toward those long-term issues that Connecticut has built up over time.”

“Keeping them is going to send a positive message to your average resident taxpayer but also to private enterprise,” Chinault said.

In a recent report, the Yankee Institute argued the guardrails had “reversed decades of pension underfunding,” while improving Connecticut’s credit-worthiness. The group feels so strongly about the issue it has begun running advertisements at gas stations urging residents to call their legislators and demand they preserve the guardrails.

Notably, not everyone who supports keeping the guardrails wants to see the resulting surpluses pay down pension debt and bolster reserves. Some Republicans would prefer at least a chunk of the money go toward tax breaks, which they favor over increased government spending.

Proponents of the guardrails, including Lamont, note that the legislature voted unanimously in 2023 to extend the measures for five more years. If lawmakers had problems with the current rules, why didn’t they come up then?

Even those who want to adjust the guardrails tend to propose only small changes, maintaining the broader framework in place. Still, the governor said he worries small tweaks could beget larger ones.

“I’m never sure that we ‘tweak’ in this building,” Lamont said. “We open the door.”

What to expect this legislative session

With top Democrats — as well as plenty of rank-and-file members — open to adjusting the guardrails to fund key priorities, the decision will ultimately come down to Lamont.

The governor has been clear his priority is to keep the guardrails in place, but he has also shown an openness to negotiating around the budget process. Last session, for example, he resisted the idea of using one-time federal money to sustain higher education and social services, before eventually agreeing to do so.

Asked recently whether he would be willing to negotiate on the guardrails, Lamont declined to answer directly but seemed to leave the door open.

“Look, I’m always open to alternate (viewpoints),” he said. “We’ve got a co-equal branch of government right here in the legislature. I’ve got to get a budget done.”

Ritter, frustrated by Lamont’s stance, offered a prediction of where the negotiation will eventually land: a small increase to the volatility cap threshold that will yield an extra few hundred million dollars. He’d like to see that money go toward child care or special education, though other lawmakers will surely have other ideas.

“Minor tweaks make some major investments, still put a lot of money to pension fund,” Ritter said. “Easy deal.”

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