Is Connecticut’s Fiscal Crisis Really Over?

Comptroller Sean Scanlon recently declared that “the crisis is over” with respect to the state’s fiscal condition. While Connecticut has made significant progress in recent years, such a statement masks the state’s precarious position.  

Connecticut has run surpluses for several years, paid down substantial amounts of debt, and found a much better footing than in 2017 when the fiscal guardrails—critical to that new-found financial and economic health—were first adopted.

However, we disagree that Connecticut has achieved its goal of reaching long-term fiscal stability.  

The purpose of the guardrails—which ended more than a decade of budget deficits followed by damaging tax hikes—was to build resilience in our budget-making process, not simply pay down debt.

If we only use our debt payments as an indicator of progress, we overlook the precarity that remains in the state’s fiscal picture. 

We can see this in two places: budget stress tests and annual debt payments.

Stress Test

When the Office of Policy and Management published its annual fiscal accountability report this year, its stress test showed that the state budget could withstand all but a severe recession akin to 2008.

However, the same analysis shows that without the existing volatility cap, the state’s rainy day fund would fail to absorb even a moderate recession scenario, and would barely hold on in a mild recession.

This illustrates Connecticut’s continued reliance on volatile revenues, and lawmakers must consider the implications of changing the volatility cap, with resilience in mind. 

On the debt payments side, the fiscal guardrails allowed $11 billion in debt to be paid down, but annual debt payments remain substantial.

Without the volatility cap, the state’s rainy day fund would fail to absorb even a moderate recession scenario.

For fiscal 2026, policymakers budgeted $3.14 billion in payments toward unfunded pension liabilities for teachers and state employees.

Total “non-functional” costs were budgeted at $7.76 billion in 2026, or 31.4% of the General Fund. By comparison, lawmakers allocated only $2.27 billion for Education Cost Sharing grants, the primary mechanism for distributing K-12 education funding.  

Within the pension systems, the Teachers’ Retirement System remains only 64% funded, while the State Employees Retirement System is 60% funded.

While funding levels for both systems are now at two-decade highs, they still rank among the worst-funded public sector pension systems in the country—highlighting how perilous Connecticut’s fiscal condition was less than a decade ago.

Guardrails Don’t Block Investments 

Some argue that fiscal controls have meant forgoing investments elsewhere. However, Connecticut has expanded spending on social programs since the guardrails were put in place.

Between 2017 and 2025, General Fund spending grew 3.57% per year, while inflation grew 3.43% annually—meaning the General Fund grew in real terms.

This does not include “off-budget” increases to spending like the childcare trust fund or paid FMLA, both enacted during the guardrails era, nor municipal cost sharing, which was moved out of the budget. 

The line item with the biggest growth was Medicaid, which grew $1.2 billion, or about 50%.

The push to weaken the fiscal guardrails—critical to our new-found fiscal health raises two immediate concerns. The first is the mistaken idea that the guardrails "radically constrained how Connecticut funds education, town aid, and core services." 1/3 https://t.co/F8jCKw5c7d

— Chris DiPentima (@ChrisDipentima) June 4, 2026

This represents the crux of the challenge for lawmakers. Spending continues to grow, but is primarily absorbed by healthcare costs that continue to rise faster than inflation.

As more resources are pulled in to programs like Medicaid, it leaves less available for other social purposes. 

Pension contributions also grew substantially, with contributions toward the unfunded state employee pensions alone rising $511 million or 45%.

However, if not for the guardrails and additional deposits to the system, required pension contributions would have been $872 million higher.

It’s ironic that there are those who blame the guardrails for limiting spending, when the fiscal controls only enabled more spending on social programs. 

Flexibility 

Despite claims that the guardrails are inflexible, lawmakers have not found it difficult to work around them.

Since they were enacted, policymakers have moved hundreds of millions of dollars off budget, first with municipal payments, then with the ECE trust fund, and this year with supplemental hospital payments.

In fiscal 2025, municipal sharing and the ECE deposit represented nearly $1 billion in additional spending not captured by General Fund figures.

The Lamont administration also enabled multiple changes to the volatility cap, which will capture more than $800 million in funds for use this year, one year after lawmakers permanently raised the cap.

That hardly sounds inflexible. Siphoning those funds away from pension liabilities however, means billions more in pension payments in the decades to come and reduced resilience in the face of a downturn. 

What’s clear is that fiscal guardrails cannot substitute for fiscal discipline.

The lack of funds available for education, or Medicaid reimbursement, or even tax cuts, is not due to a lack of resources.

Money we used to create new programs could just have easily shored up existing ones, but that is not what policymakers chose to do. 

We live in a world of unlimited wants and finite resources, and on the margins there will always be something not funded or ignored.

That is a reality of the world, but Connecticut should not sacrifice recent good habits for the sake of near term political wins.

What About Spending Reforms?

One issue too often ignored in this debate is government spending reforms—invariably, the focus is on finding more revenue, rather than reviewing and assessing state government operations and programs.

There are concrete reform opportunities. Five years ago, the state legislature commissioned a report that recommended 200 reforms that would save taxpayers between $600 million and $900 million annually.

Consider state agency overtime spending, which has soared more than 55% in the last decade and is on track to hit a record high $336.2 million in fiscal 2026, with short- and long-term consequences for Connecticut taxpayers.

The 2021 spending report noted that modernizing workforce management, capping pensionable overtime, and improving hiring processes and oversight of overtime and workers’ compensation practices “could generate $70 million to $100 million in cost savings and improve conditions for state employees.”

Unfortunately the reform recommendations outlined in the report—which cost $2 million to produce—have gained little traction at the state Capitol, while government spending continues to soar every year.

Since 2020, annual state government spending has increased a stunning 29.6%, with state lawmakers adopting a record high $28.1 billion tax and spending plan for fiscal 2027.

“We could always do a better job managing expenses,” Senate Majority Leader Bob Duff (D-Norwalk) said last month at an end-of-legislative-session forum hosted by the Hartford Business Journal.

“For what people expect in a state like Connecticut, we try and deliver those things and protections for workers and certain benefits.”

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