Connecticut lawmakers are once again eyeing the state’s fiscal guardrails — the bipartisan reforms widely credited with stabilizing the state’s finances less than a decade ago.
But many of the legislators pushing to adjust those guardrails were not in office when the crisis that prompted their adoption nearly pushed Connecticut into fiscal freefall. And several who were should remember how that period ended.
H.B. 5187, titled “An Act Adjusting the Fiscal Guardrails,” would modify how volatility transfers are calculated and raise the cap on the state’s Budget Reserve Fund. The language may sound technical. The consequences are not.
Small structural changes to how windfall revenue is handled can have large long-term effects. The proposed adjustments would make it easier to redirect volatile revenue toward current spending instead of debt reduction — precisely the behavior the guardrails were designed to prevent.
A Crisis That Prompted Reform
Between 2015 and 2017, Connecticut experienced chronic deficits, repeated credit downgrades, late budgets, and deep uncertainty about municipal funding. The state went months without a fully enacted budget. Towns prepared contingency plans. Schools and nonprofits braced for cuts. Market confidence wavered.
The fiscal guardrails, adopted in 2017 with bipartisan support, were a response to that instability.
They imposed enforceable spending limits, restricted the use of unpredictable revenue streams, and rebuilt the state’s reserves to historically strong levels. Since their adoption, Connecticut has restored fiscal predictability, reduced borrowing costs, and generated surpluses that policymakers now treat as routine.
The guardrails did not solve every structural problem. But they worked.
The Volatility Cap: A Quiet but Powerful Reform
One of the most important, and least understood, components of the guardrails is the volatility cap and transfer system.
Before 2017, Connecticut treated volatile revenue — especially capital-gains taxes paid by high-income earners — as though it were stable and permanent. During strong market years, lawmakers spent that windfall on ongoing programs and benefits. When markets cooled, the money disappeared, and deficits followed.
The guardrails broke that cycle.
Under current law, when certain volatile revenues exceed a set threshold, the excess cannot be spent. Instead, it is automatically transferred into savings and debt reduction.
Think of it as forcing the state to save lottery winnings instead of using them to buy new car and boat.
Where the Money Goes
Volatility transfers serve two primary purposes.
First, they build the Budget Reserve Fund, providing a cushion during downturns and helping avoid emergency tax hikes or abrupt service cuts.
Second — and more significantly — once the reserve fund reaches its statutory cap, additional funds are directed toward reducing Connecticut’s large unfunded pension liabilities.
That distinction matters. Pension debt functions much like a high-interest credit card: early principal payments reduce long-term interest costs. By accelerating pension contributions when revenues are strong, Connecticut reduces compounding liabilities.
Since 2017, the state has paid down well over $10 billion in volatile revenue into reserves and pension debt reduction. The state’s actuary estimates theseaccelerated payments will save taxpayers roughly $18 billion over the next two decades by reducing principal and avoiding future interest costs.
Not surprisingly, credit rating agencies took notice. Fiscal discipline improved, reserves strengthened, and borrowing risk declined.
What H.B. 5187 Would Change
H.B. 5187 would adjust how volatility transfers are calculated and increase the reserve cap. While those changes may appear modest, they would reduce the automatic redirection of windfall revenue into debt reduction.
In practical terms, that means more revenue would become available for current spending — and less would be applied toward long-term obligations.
In the short term, flexibility may be appealing. In the long term, it weakens the very mechanism that prevented Connecticut from repeating its pre-2017 pattern.
Connecticut’s pension crisis was not caused by insufficient revenue. It was driven by decades of treating temporary windfalls as permanent income while deferring structural liabilities.
The volatility cap was designed to stop that behavior.
A Matter of Institutional Memory
Some of the bill’s supporters were not in office during the 2015–2017 budget crisis. That absence may explain differing perspectives.
Others were present during that period. They witnessed the consequences of depleted reserves, unstable budgets, and mounting deficits.
The fiscal guardrails were adopted precisely because lawmakers recognized the need for enforceable discipline — especially during good economic years, when political pressure to spend is strongest.
Stability is not accidental. It was the result of deliberate policy reform.
The Choice Ahead
Connecticut’s finances improved after the guardrails were enacted, not before.
The state still carries substantial long-term obligations and remains vulnerable to economic downturns. The guardrails were designed to reduce that vulnerability by forcing savings when revenues are strong.
Adjusting those rules may provide short-term flexibility. It also risks weakening the discipline that restored stability in the first place.
The guardrails exist because Connecticut learned — through experience — what happens without them.
The question now is whether the state intends to remember that lesson.
