Opinion: Why Connecticut risks return to fiscal chaos

Hartford Courant – Thursday, May 8, 2025
By Andrew Fowler

Connecticut saw significant fiscal improvement over the last few years, driven by a set of structural reforms that decreased long-term debt and restored investor confidence. Responding to potential cuts to federal funding, state leaders are now considering rolling back those reforms to fund short-term priorities, risking undoing hard-won progress and returning the state to an unstable fiscal path.

In 2017, facing soaring pension debt and persistent budget shortfalls, Connecticut lawmakers passed a set of bipartisan fiscal reforms. Known as “the guardrails,” these measures capped spending, diverted volatile revenue into a rainy-day fund, and required that surpluses be used to pay down pension liabilities. These guardrails were written as a guarantee into the state’s bond covenants to ensure that future politicians would not reverse this commitment to fiscal stability.

These reforms successfully enabled Connecticut to salvage its fiscal reputation. The state’s pension system, which was only 35% funded at the time of the reform, is now 52% funded. With consistent surplus contributions, required annual pension payments have decreased by $738 million. Lawmakers were able to use these savings to implement the largest income tax cut in state history. All four major credit rating agencies, which had repeatedly downgraded Connecticut, have since issued upgrades—with Fitch holding a positive outlook on the state’s AA- rating, upgraded in 2021 from A+.

Yet, policymakers are now attempting to undo the very policies that rescued the state’s balance sheet. With federal pandemic aid now depleted, political pressure is mounting to find solutions to offset expected Trump administration cuts to Medicare, Medicaid, and other federal assistance. Worse, Connecticut lawmakers are not only aiming to preserve current services, but presenting new ones, like a universal pre-K program.

Democratic Gov. Ned Lamont has proposed weakening a core mechanism of the guardrails: the revenue volatility cap. This cap limits how much unpredictable revenue—such as capital gains taxes—can be spent in a given year, requiring any amounts above a set threshold to be saved or used to reduce long-term debt. Lamont’s proposal would raise the cap from its current $3.9 billion to $4.4 billion in fiscal year 2026 and reclassify an additional $300 million to bypass the limit entirely—redirecting nearly $1 billion that would go toward debt reduction to fund near-term political priorities.

The political calculus may not pay off. In 2024, nearly 150 of Connecticut’s 169 municipalities shifted rightward, even as Democrats held onto a supermajority. A Business Roundtable poll found that 69% of voters in Connecticut—including 65% of Democrats—support the fiscal guardrails.

Rating agencies are watching closely to see whether the state gives up on its goal of reducing the debt. S&P Global Ratings recently cautioned that federal budget tightening could lead to credit instability among local governments. On average, 30% of state revenues come from the federal government. If state and local governments do not adjust their spending to match the drop in federal funding, their fiscal position—and creditworthiness—will decay.

Connecticut still has $40 billion in unfunded pension liabilities and another $20 billion in unfunded retiree healthcare liabilities to pay—the second highest in the country in per capita terms, equivalent to $16k per resident. Interest on that debt compounds at 6.9% annually. Any pause or reduction in pension contributions carries long-term costs.

A September 2024 report by Reason Foundation and Yankee Institute found that if Connecticut maintains its current pace of extra pension contributions, its pensions could reach full funding by 2038, nearly a decade ahead of schedule—saving $6.77 billion in interest costs over the next 30 years. But that trajectory assumes the guardrails hold.

Connecticut’s fiscal condition improved significantly with structural safeguards that forced long-term discipline and prioritized debt reduction. If the state—which still ranks second in public employee debt per capita—chooses to weaken these mechanisms, it risks returning to the path that led to the need for reform in the first place. Whether progress endures will depend on whether state policymakers resist the urge to slack on debt reduction at the first sign of improvement.

Andrew Fowler, is a communications specialist at Yankee Institute. Mariana Trujillo is a policy analyst at the Reason Foundation.

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