Connecticut’s fiscal guardrails are a solution, not the problem 

The Connecticut Conference of Municipalities recently responded to Yankee Institute and the Reason Foundation’s report, “The Case for CT’s Fiscal Guardrails,” which analyzed the success the state has achieved in reducing pension debt with a set of policies enacted in 2017. These policies, known as the fiscal guardrails, cap spending growth, stabilize revenue, and direct budget surpluses toward reducing long-term debt, particularly unfunded public employee pensions.

The CCM, an organization made up of municipal government leadership, claims the state’s fiscal guardrails are to blame for rising property taxes. This is misplaced criticism. The fiscal guardrails are not the cause of rising property taxes—they are, in fact, the best existing policy for reducing Connecticut’s overall high tax burden.

The fiscal guardrails address the deeper, systemic issue with Connecticut’s high taxes: its long history of unsustainable spending and unrealized debt.

Connecticut’s financial trajectory before the guardrails’ implementation was unsustainable. Pension obligations grew unchecked for decades, and the state consistently overspent during economic booms, creating budget deficits and tax hikes in downturns. The fiscal guardrails were introduced to stop this cycle. Limiting spending growth and requiring debt repayment has stabilized the state’s finances, improved credit ratings, and reduced borrowing costs.

The CCM desires that the state government take on a greater share of education funding. This only reinforces the importance of these guardrails. With them, Connecticut’s taxpayers can see more of their taxes go toward education or tax relief rather than to increasingly expensive interest payments on runaway debt.

According to the most recent Census Public Elementary-Secondary Education Finances Survey, Connecticut’s per-pupil spending hit a record high of $24,453, the fifth highest in the nation. This increase is largely fueled by instructional salaries and benefits, which represent over half of per-pupil costs—58% above the national average. The main driver of rising employee benefit costs has been Connecticut’s compounding pension debt—precisely what the guardrails aim to address. In 1995, the cost of providing employee pensions was equivalent to 6.5% of payroll costs; as of 2024, it amounts to 39%. Only one-third of this cost is directed toward current employee pensions. Most of this cost—two-thirds—is directed toward paying off pension debt.

The guardrails work by directing surplus state revenues toward debt reduction, which ultimately lowers the state’s interest expenses and reduces the annual pension contribution burden for Connecticut’s taxpayers. As estimated in Reason and Yankee Institute’s report, the continuation of the guardrails means the required contributions will decrease progressively each year, reaching a stable rate of around 3.5% by 2038 and leading to Connecticut saving $2.96 billion in interest expenses to fund the teachers’ pensions, accounting for inflation.

The pension cost savings generated by the guardrails amount to $7 billion in interest savings when also considering the early funding of the state employees’ pension plan, which is also receiving additional contributions from the guardrails.

Since their implementation, the guardrails have not reduced overall state spending. On the contrary, Connecticut’s state budget grew from $18.2 billion in 2010 to $25 billion in 2023. These policies have prevented reckless overspending, ensuring that any surplus funds received are used to address the state’s debt crisis and reduce pension costs.

Connecticut is far from being out of fiscal trouble. It has the second-highest pension debt per capita in the nation, behind only New Jersey. Further, as CCM’s article itself highlighted, a Tax Foundation study ranked Connecticut as having the 47th most burdensome tax climate in the country. Fiscal guardrails are one of the few tools Connecticut has to stabilize its finances and address these deeply ingrained challenges.

The guardrails are relatively recent, but they have already delivered significant results. From fiscal years 2020 to 2023, Connecticut made $7.7 billion in additional pension contributions to its public employee pension fund. Such contributions helped avoid an estimated $13 billion in future pension costs. According to State Comptroller Sean Scanlon, the additional pension contributions made through the fiscal guardrails have freed up approximately $738 million in the state’s yearly budget.

Without the fiscal guardrails, Connecticut wouldn’t have been able to implement last year’s modest income tax reduction—the first in decades.

If the state’s cities and towns are interested in increased education funding and tax relief for residents, their focus should be on supporting the fiscal guardrails—not undermining them.

A version of this commentary first appeared in the Hartford Courant.

The post Connecticut’s fiscal guardrails are a solution, not the problem  appeared first on Reason Foundation.

Source: https://reason.org/commentary/connecticuts-fiscal-guardrails-are-a-solution-not-the-problem/