Avoiding Past Mistakes Means Respecting Fiscal Guardrails

Connecticut’s recent run of fiscal surpluses have renewed an old argument: if we have money left over, why not spend more of it now?

Our rules, the fiscal guardrails, prevent us from doing so, so should they be amended? 

We need to remember that these rules are in place to protect us from repeating our old budgetary mistakes.

The volatility cap and the Budget Reserve Fund were designed to reduce the boom-and-bust cycle driven by volatile revenue—especially capital-gains-sensitive income tax collections—so that an economic downturn doesn’t immediately force either painful tax hikes or disruptive cuts. 

The 2025 Office of Policy and Management Fiscal Accountability Report provides the useful insights we need to evaluate our fiscal position under different scenarios. 

What OPM Tested (and Didn’t) 

OPM’s recession stress test uses three scenarios built from two historical episodes: 

• A mild scenario based on the “dot com” recession (fiscal years 2002–2006); 

• a severe scenario based on the Great Recession (fiscal years 2009–2012); 

• and a moderate scenario that is simply the average of the mild and severe scenarios. 

Two historical episodes (plus an average of the two) is not a large sample, and OPM itself cautions that “no two recessions are alike” and future performance may vary.

This is not meant to be critical of OPM’s methods, but to simply point out that we do not have significant historical data from which to draw our conclusions.  

Volatility Cap Buffer Makes ‘Net’ Losses Look Better 

A core piece of OPM’s analysis is the distinction between gross revenue loss and net revenue loss.

Gross loss is the total decline in General Fund collections, including volatile revenue. Net loss is the decline after accounting for the volatility cap, which OPM describes as providing a “buffer” to bottom-line General Fund revenues in a recession. 

That buffer shows up explicitly as “foregone volatility cap deposits.” In other words: in good years, the cap diverts excess volatile receipts away from the operating budget; in a downturn, those excess receipts disappear, which means the diversion disappears too, softening the hit to the operating budget. 

It is worth noting that the state budget is more reliant on volatile sources now than in the past.

Timing matters. In each of the recession scenarios, revenues drop off early and recover in later years.

The longer the BRF can hold out, the more we can reduce the peak deficit experienced and thus limit challenging budget decisions. 

Finally, it is worth noting that the state budget is more reliant on volatile sources now than in the past.

In fiscal 2026, 25.9% of revenues will come from these sources compared to 18.5% in fiscal 2009, the peak before the Great Recession. 

A Workable Definition of ‘Purpose‘ 

If we’re going to debate changes to the guardrails, we should start by stating a purpose clearly enough that we can test it. 

Here’s a possible purpose statement: 

The volatility cap + BRF should protect Connecticut from being forced into mid-recession tax increases or emergency spending cuts in a “mild” recession. The guardrails should minimize the size of peak annual deficits in worse scenarios, because deficits have long-lived consequences. 

OPM’s mild scenario gives us a straightforward benchmark. Over fiscal 2027–2030, OPM estimates: 

• Net General Fund revenue loss (mild): $2.944 billion 

• BRF balance (6.30.2025 baseline): $4.326 billion

• Projected BRF balance after that mild scenario: $1.382 billion remaining 

So, under current guardrails, the state clears the mild-recession test with room to spare. 

As for the deficit test, in the moderate recession scenario, the peak annual deficit reaches $606 million in fiscal 2030. In the severe scenario, the peak annual deficit reaches $2.16 billion.

While both of these scenarios require additional intervention to balance the state’s finances, the moderate case represents 4.8% of non-fixed cost GF expenditures for fiscal 2030, a manageable figure. 

Why Raising the Volatility Cap Changes the Answer 

Many “spend the surplus” arguments are effectively arguments for keeping more volatile revenue in the operating budget during good times, whether by raising the volatility threshold, redirecting cap deposits, or otherwise loosening the diversion mechanism. 

While the expected performance under the mild scenario may indicate a capacity to raise the volatility threshold, we also need to look at the impact that such a move would have on deficits in more severe scenarios.

For example, if we raised the volatility threshold by $460 million, we would still be okay in a mild recession, draining the BRF to a balance of $1.5 million after three years.

We risk putting ourselves in the same position we faced in previous recessions, lacking the reserves to cover our losses.

However, under a moderate recession we would drain the BRF after 1.82 years and experience a peak deficit of $1.34 billion in fiscal 2029, or 10.6% of non-fixed cost GF expenditures. For comparison, Gov. Dannel Malloy’s 2015 tax hike was equivalent to 8.7% of non-fixed GF expenditures. 

That’s the heart of my concern with the “we’re ready, so spend more” leap.

If we cherry pick the mild recession scenario, we risk putting ourselves in the same position we faced in previous recessions, lacking the reserves to cover our losses.  

Deficit ‘Stickiness’ Is the Real Policy Risk 

While it can’t be captured fully in a table, the “stickiness” of policy matters for governing: 

• Tax increases implemented to close gaps are politically difficult to unwind, even when conditions improve. 

• Spending cuts often destroy capacity—programs don’t simply “pause;” institutions lose staff, contracts dissolve, and service networks break. Restoration later is slower and often more expensive than prevention. 

• Potential Reversal of Pension Progress—at the heart of challenges in the past was our significant debt burden, driven by pension underfunding. Deficits will put pensions back in the crosshairs and risk the progress we have made. Underfunding, as we have learned, carries decades of risk to our budget. 

So, it’s not enough to look only at how long the BRF lasts. We should also care about the size and duration of deficits once reserves are exhausted, because those are the years when policymaking becomes reactive and the damage can outlast the recession itself. 

A Simple Decision Rule for This Debate 

Connecticut’s fiscal guardrails were built for recessions. Before we weaken them, we should agree on what we want to protect. 

If we want a practical way to evaluate proposals (raise the cap, divert more, lower deposits), we can use a rule like this: 

1. Don’t design policy that exhausts the BRF in the mild scenario. 

2. Don’t increase the post-BRF deficits in the moderate scenario without naming (and owning) the tax increases or spending cuts that would follow. 

3. If proponents want to change the guardrails, they should provide an updated stress test under the new rules—because the current “net loss” assumes the current buffering structure. 

If we can agree on that framework, the disagreement shifts from “do we want to spend money,” to “how much protection are we willing to trade away and what is our plan when the bill comes due?” 

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About the author: Dustin Nord is the director of the CBIA Foundation for Economic Growth & Opportunity.