Saving ‘fiscal guardrails’ may require fine tuning
The “fiscal guardrails” enacted by the state legislature in 2017 have proved to be highly successful in their intended goal of imposing fiscal discipline, more successful than even the authors imagined.
Yet the best chance of maintaining the guardrails in the long term may be to tweak them now. An argument could be made that they have proved too successful. Even as Connecticut has seen record budget surpluses, the guardrails have constrained the legislature from doing more to provide human services, assure the availability of health care and provide affordable access to higher education.
The group of revenue and spending caps were the product of a budgetary impasse in 2017 that had dragged the legislature well past its scheduled adjournment date and into the summer. Democrats and Republicans shared the Senate 18-18, while Democrats held control in the House by only a few votes.
The resulting budgetary compromise included rules intended to ensure long-term fiscal stability. The formula had three main parts.
It put teeth into a constitutional spending cap. The cap was approved by lawmakers in 1991 to reassure voters angered by the passage of the state’s first income tax that lawmakers would not go on a spending spree. But until 2017, it had proved to be a paper tiger.
The compromise legislation included a revenue cap stating that budget appropriations could not exceed 98.75% of estimated revenues. In other words, the legislature must build a 1.25% fiscal cushion into its budgets.
Finally, the deal included a volatility cap. Much of Connecticut’s wealth is tied to those working in financial services, with incomes — and the state tax revenues they produce — tied to stock market volatility. Historically, this led to boom or bust budgetary cycles, with the legislature expanding spending when times were good, then forced to raise taxes to sustain it when the market went south.
The volatility cap requires revenues attributed to market caused income-tax spikes to be funneled into the state’s Rainy Day Fund, until it reaches a maximum of 15% of the General Fund, which it has for some years now. Once a healthy surplus fund is acquired, the money must go to pay down pension debt.
These mandatory guidelines have produced extraordinary results.
Connecticut has experienced five years of budget surpluses, ranging from $530 million in 2020 to an astounding $3 billion in fiscal year 2022, $8.5 billion in total. Connecticut now has a healthy Rainy Day Fund, providing a budgetary safety net. It was nearly broke before the reforms.
Since 2017, the state has paid off about $8 billion of its $40 billion in pension debt. That’s a lot of ground to make up in a short time. That debt reduction has freed up about $650 million in the current budget, money that would have otherwise gone to debt service.
Due to the improved fiscal outlook, last year lawmakers approved personal and business tax cuts of more than $800 million annually.
The guardrails have led to fiscal predictability and stability, which are good for both businesses and households.
But there are problems. State contributions for Medicaid have stagnated. This has led to fewer health care providers taking Medicaid patients. It does no good to provide the poor with health insurance if they cannot find doctors. Low Medicaid reimbursements also adversely affect nursing home care.
Agencies that contract with the state to provide human services for children, the disabled, and to address mental illness, substance abuse and other needs have grown increasingly alarmed that the state is not providing the money to meet these needs, even as Connecticut experiences record surpluses.
As it prepares to begin its 2024 session next month, the legislature faces the need to make about $300 million in spending reductions to stay within the guardrails, despite the state again projecting a surplus.
The best answer lies in adjusting the spending cap formula and other guardrail provisions, while sticking to the goal of fiscal discipline. Given the series of large surpluses, a case can be made for altering the volatility cap so that more revenue remains available to address current needs. Another adjustment could allow some percent of budgetary surplus to pay for necessary services, rather than all of it being directed to pension debt.
Changes to the formula would require a three-fifths vote of the House and Senate and the blessing of Gov. Ned Lamont. In other words, it would have to be something Democrats and Republicans can live with.
The danger of taking a hard line and refusing to entertain any changes is that the legislature may simply abandon the guardrail provisions entirely when they expire in 2028. Compromise led to these provisions. Compromise can improve and extend them.
The Day editorial board meets with political, business and community leaders to formulate editorial viewpoints. It is composed of President and Publisher Timothy Dwyer, Executive Editor Izaskun E. Larraneta, Owen Poole, copy editor, and Lisa McGinley, retired deputy managing editor. The board operates independently from The Day newsroom.
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