Lawmakers Extend State’s Fiscal Guardrails

With unanimous votes in the state House and Senate Feb. 9, lawmakers approved the extension of the 2017 budget reforms that played a significant role in Connecticut’s current robust fiscal health.

The legislature used the emergency certification process for HB 6671, which extends revenue and volatility caps locked into bond covenants that were scheduled to expire this year.

The Lamont administration and legislative leaders reached an agreement earlier in the week that initially protected those fiscal guardrails for another 10 years.

However, after protests from the State Employees Bargaining Agent Coalition and some progressive lawmakers, a last-minute compromise locked in the guardrails through June 30, 2028 and then for another five years unless the General Assembly votes against an extension.

“These guardrails have contributed to a full rainy day fund which provides protection in case of unforeseen risk,” Gov. Ned Lamont said during his Feb. 8 budget address.

Fiscal Health

Connecticut’s fiscal health is the strongest in decades, with a maximum $3.3 billion in the state’s rainy day fund and a projected $3.2 billion surplus for this year, the second-largest in history.

That fiscal strength stems from the bipartisan budget reforms adopted by the legislature in 2017 that were set to expire on June 30.

The heads of @boehringerus, @Cigna, @RaytheonTech, @StanleyBlkDeckr, @TheHartford, and @Travelers applauded the extension of the 2017 fiscal reforms and called for "lawmakers to continue to work together to promote long-term economic growth." #transformCT https://t.co/JHhxpo6AfS

— CBIA (@CBIANews) February 10, 2023

CBIA president and CEO Chris DiPentima said extending the fiscal guardrails was a key priority this year for the business community “given how those reforms significantly transformed the state’s fiscal outlook.”

“This is great news for Connecticut’s near- and long-term fiscal health and another victory for bipartisan collaboration,” DiPentima said.

“Those hard-won bipartisan reforms enacted in 2017 provided long-needed stability and a platform to invest in economic growth—extending them keeps our state moving in the right direction.”

‘Unprecedented Surpluses’

During Senate debate on the bill, Sen. John Fonfara (D-Hartford), one of the architects of the reforms, said Connecticut reaped the benefits of the legislature’s 2017 actions “in ways none of us could have predicted.”

“Prior to enactment of these reforms, Connecticut was unceasingly headed towards having 60% of every dollar we raised in revenue committed to fixed costs—and a significant portion of that goes to past pension obligations,” he said.

Finance Committee co-chair Sen. John Fonfara said the 2017 reforms benefited Connecticut “in ways none of us could have predicted.”

Fonfara, who co-chairs the legislature’s Finance, Revenue, and Bonding Committee, noted that Connecticut endured eight years of budget deficits after the last recession, with little choice but “to raise taxes and cut services.”

“Today, we not only seeing unprecedented surpluses and investments in paying down our pension debt … but a new sense of encouragement by the business community that has stuck it out through many tough years,” he said.

“And it’s sent a message to those who might start a business or relocate here to Connecticut that we are on a new path of fiscal prudency.”

Fiscal Guardrails

The fiscal guardrails set in 2017 include bonding, spending, revenue, and volatility caps protected by bond covenants—essentially guarantees to the state’s creditors.  

The volatility cap requires that revenues from quarterly income and business tax receipts in excess of $3.3 billion are deposited into the rainy day fund. 

Once the fund reaches 15% of General Fund operating expenses, excess funds are deposited into the state’s unfunded liabilities.

Over the last few years, the state has paid down $5.8 billion in long-term liabilities, freeing up $186.8 million in savings for the General Fund and $13.5 million in the Special Transportation Fund.  

HB 6671 alters the volatility cap by increasing the 15% threshold to 18%, with a 50-50 deposit of excess funds to the rainy day fund and unfunded liabilities until the threshold is met.  

What's in @GovNedLamont 's $50.5B #budget? "There's a number of positives," says CBIA's @egjede, “particularly individual tax relief and full restoration of the pass-through entity tax credit—which will give #smallbiz a much-needed boost." #transformCT https://t.co/6aJWkjaIp5 pic.twitter.com/PaGZOHQ2DQ

— CBIA (@CBIANews) February 10, 2023

The legislation also freezes the revenue cap, preventing the legislature authorizing General Fund and Special Transportation Fund appropriations that exceed 1.25% of estimated yearly revenues.

The spending cap, which also remains in effect, prohibits lawmakers increasing general budget expenditures that exceed the greater of the percentage increase in personal income over the preceding five calendar years or inflation.  

The bond issuance and allocation caps were also extended, preventing the state from issuing more than  $2.4 billion in bonds annually.

The caps do not apply to borrowing for transportation projects or for capital programs at public colleges and universities.

The bond covenants can be broken by the governor’s declaration of an emergency or the existence of extraordinary circumstances and affirmative votes by at least three-fifths of lawmakers from each chamber. 

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For more information, contact CBIA’s Ashley Zane (860.244.1169) | @AshleyZane9.