Connecticut was trending in the wrong direction just five years ago, and Wall Street took notice.
Lawmakers took until the end October of 2017 to adopt a budget, leaving the state without a spending plan for four months. And even the state said its pensions were only 47% funded at the time.
That prompted all three major credit rating agencies to lower their scores for Connecticut in 2017. Treasurer Erick Russell told investors Tuesday the state has righted the ship thanks to major changes since 2017.
“We’ve made a lot of progress and we have really, on a bipartisan basis, really committed to continuing to our position fiscally as a state,” Russell said at the inaugural Connecticut Investor Conference.
Russell said he wanted “to really tell the story of Connecticut” to investors, which led to Tuesday’s event at the Connecticut Convention Center in Hartford.
He said that commitment included efforts to improve the state’s infrastructure and address climate change, and the conference included panels on those topics.
But in telling the story of Connecticut’s turnaround, one of the focal points is the series of guardrails the state has put into place to ensure budget stability.
Some of the policies have been in place for decades, including a bond cap adopted in 1957, the creation of the budget reserve fund in 1979, and the implementation of the spending cap alongside the income tax in 1991.
But those things didn’t create budget stability. House Speaker Matt Ritter, D-Hartford, reminded attendees the state borrowed money to fund the budget in 2010 because its budget reserve fund was empty.
Then came 2017, when Democrats couldn’t use their narrow majority to pass a budget in time to start the fiscal year. It took months of negotiations to get to a bipartisan agreement.
Ritter told the audience those negotiations also led to additional guardrails of a volatility cap, a spending cap and a revenue cap. And he credited those policies with turning around Connecticut’s fiscal situation.
“It feels really, really, really good, but it doesn’t happen without hitting rock bottom,” Ritter said.
Those policies included a volatility cap, dictating that excess revenue from unstable revenue streams to the budget reserve and then to pensions, and a revenue cap that limits state spending in order to create a surplus. Currently, state spending is capped at 98.75% of revenues.
Investors supported the changes, but asked why the state didn’t opt to use more excess revenue to cover unfunded pension liabilities.
Ritter said lawmakers wanted to prioritize the budget reserve to avoid having to make massive cuts the next time the economy goes into a recession.
House Minority Leader Vincent Candelora, R-North Branford, agreed that Connecticut’s revenue streams are especially vulnerable to recessions because the state relies so much on stock market investors.
“The volatility cap, it really just takes our income and smooths it,” he said.
The changes have been winning over Wall Street. Fitch Ratings in November upgraded its bond Rating for Connecticut from A+ to AA-, a score the agency hast gave the state in 2016.
Moody’s, with a rating of Aa3, and S&P Global, AA-, have also upgraded their ratings since the new measures were put into place.
In its November rating, Fitch directly pointed to the new guardrails as positives.
“We went decades and decades with not doing our part to manage the state in a fiscally sound way,” Russell said. “In recent years, we’ve made this commitment across the board to improve our overall fiscal health.”
Ritter and Candelora both expressed optimism that the guardrails will remain in place. The legislature earlier this year extended them for another 10 years with the ability to opt out after five.
Both leaders also said the guardrails make the budget process easier because the rules limit how much additional money can be spent and forces lawmakers and the governor to offer proposals that are close.
When asked by investors, Candelora and Ritter said they expect to reach a final budget deal soon.
“A lot of our priorities, I think, are very similar,” Candelora said.
Ritter said the final budget could include more money for nonprofits, Education Cost Sharing, and higher education than what was proposed by Gov. Ned Lamont or the legislature’s Appropriations Committee.
Office of Policy and Management Secretary Jeffrey Beckham, who was also on Tuesday’s panel, agreed that Lamont’s office and lawmakers were simply “quibbling here and there over some line items.”
