By Robert Williamson
Connecticut’s financial recovery is making headlines, and for good reason. Lawmakers from both parties can be very proud of the bipartisan approach to the pivotal 2017 reforms that steered the state away from disaster and laid the foundation for its current stability.
Today, we see headlines about tax cuts, balanced budgets, and a record-setting rainy day fund, but these achievements didn’t materialize overnight. The turnaround began with a surprising legislative session seven years ago—one that reshaped Connecticut’s financial future.
For years pension liabilities soared, deficits grew, and borrowing spun out of control. For much of the 2010s, the state government continued to increase spending, relying on volatile revenue from high-income earners while neglecting long-term obligations. “We were spending like there was no tomorrow,” former State Senator L. Scott Frantz recalled in an interview this week with the Sentinel, “and eventually, tomorrow came.”
By the time the state hit rock bottom in 2017, it was staring down a $5.1 billion budget deficit, the largest in its history, and watching its credit rating spiral downward. “We were on the verge of bankruptcy,” Frantz said, reflecting on the state of affairs before Connecticut lawmakers passed the critical fiscal guardrails in 2017. “The forecasts were horrific. It was clear that if we didn’t change course, the situation was going to implode.”
Political Control and Missteps
Governor Dannel Malloy, in office from 2011 to 2018, inherited a state already weakened by rising pension liabilities and a volatile tax base. His administration’s approach to handling the crisis did little to improve Connecticut’s long-term fiscal health. Pension obligations were growing exponentially, yet the solutions leadership offered often involved extending the liabilities into the future, with no clear path to paying down the debt.
“Every year, they were kicking the can further down the road,” Frantz explained. “The pensions were a ticking time bomb, and no one wanted to make the tough decisions to rein in spending.”
Connecticut’s reliance on income taxes, especially from wealthy residents whose earnings were tied to the stock market. When the markets were up, the state enjoyed short-term gains, but those surges masked a deeper issue. “We had windfall revenue from capital gains and other taxes during good years,” Frantz said, “but instead of saving for a rainy day, they spent it all.”
The Consequences of Mismanagement
The ballooning pension costs, coupled with a lack of meaningful spending cuts, created a structural deficit. In January of 2016 General Electric, a longtime Connecticut fixture, packed up and relocated to Massachusetts, citing the unfavorable business climate. Other companies and high-net-worth individuals followed suit making it even harder for the state to close its growing budget gaps.
Connecticut’s bond ratings were downgraded by major credit rating agencies, including Standard & Poor’s, which reduced the state’s rating to “A+” from “AA-” and later shifted its outlook on the state’s debt from stable to negative. These downgrades increased the cost of borrowing and put further pressure on its budget. “It was a wake-up call,” Frantz said. “When your credit rating drops, it’s a clear sign you’ve lost control of your finances.”
The Game Changer
From 2011 through 2016, Connecticut’s state government was under the control of the one party. The 2016 Connecticut State Senate election was a game-changer. Democrats, who had long held a 21-15 majority, saw Republicans gain three seats, resulting in an 18-18 tie. This unexpected shift forced procedural changes and required both parties to adopt a power-sharing agreement that reshaped the dynamics of the Senate.
Control of the chamber was split right down the middle, with committees divided 50-50. Perhaps most notably, Republicans were given the ability to call procedural votes to bring legislation to the floor—a major shift in influence.
One of the most significant outcomes of this power-sharing arrangement was the joint leadership of key committees, including the Finance, Revenue, and Bonding Committee, where the state’s most critical financial decisions are made. This committee has jurisdiction over everything from capital bonding to tax policy, and it was here, with Republican Scott Frantz and Democrat John Fonfara sharing the chairmanship, that the fiscal guardrails were born. These measures, which have played a pivotal role in stabilizing Connecticut’s finances, came from a unique moment of bipartisan cooperation that few could have predicted.
The Fiscal Guardrails
Become Law
Enter the fiscal guardrails—measures designed to cap spending, limit borrowing, and create a buffer against the volatility of the state’s tax revenues. “It was a rare moment of bipartisanship,” Frantz recalled. “We both knew that if we didn’t act, the state’s financial future was in jeopardy.”
The fiscal guardrails consisted of three key components: a spending cap, a bonding cap, and a volatility cap. The spending cap limits the state’s ability to increase its budget beyond the rate of inflation or the growth in personal income, whichever is higher. “This was critical,” Frantz explained. “The state had been spending beyond its means for years, and this cap forced lawmakers to live within a set budget.”
The bonding cap, which limits the amount of debt the state can issue, was another essential reform. “For years, they were treating debt as revenue,” Frantz said incredulously. “It was insane. You can’t treat debt like free money—you have to pay it back.” The bonding cap ensures that the state cannot borrow more than 1.4 times the expected revenue for the next fiscal year, putting an end to the reckless borrowing that had plagued Connecticut’s finances.
Perhaps the most innovative of the guardrails is the volatility cap, which requires that any revenue from capital gains taxes or other volatile sources that exceeds $3.3 billion be set aside in the state’s Budget Reserve Fund, or rainy day fund. “It’s a brilliant solution,” Frantz said, “because it smooths out the revenue fluctuations. When the markets do well, we don’t just spend all the extra revenue—we save it for the bad years.”
The Road to Recovery—and the Risks Ahead
The fiscal guardrails have had a profound impact on Connecticut’s financial health. By 2024, the state’s Budget Reserve Fund had reached record levels, and Connecticut had managed to pay down more than $20 billion in debt. “It’s worked better than anyone could have imagined,” Frantz said, though he cautioned that the guardrails’ success had made some lawmakers complacent. “There’s always the temptation to spend the surplus, but we need to keep that money in reserve for the inevitable downturns.”
The guardrails are not permanent. Parts of the legislation are set to expire in 2025, and Frantz is concerned that political pressure could lead to their weakening. “I’d like to see the guardrails extended indefinitely,” he said. “They’ve proven their worth, and it would be a huge mistake to go back to the old ways of doing things.”
