Connecticut may face a “fiscal cliff” in the upcoming year thanks to a confluence of factors including the end of federal funding and the state’s stringent fiscal guardrails, according to new reports from Yale University and The Connecticut Project.

The reports, collectively titled “Connecticut’s Fiscal Guardrails: A Data-Driven Analysis,” lay out the case that even though Connecticut has recorded record surpluses in the last few years and is projecting another in FY26, the state is potentially facing “severe austerity” due to the end of federal funding the state has relied on through the American Rescue Plan Act, or ARPA. At the same time, the state’s fiscal guardrails may exacerbate the problem.

In one example, the report points out that the Connecticut State Colleges and University system (CSCU) has used $410 million in ARPA dollars to fund its operations. ARPA funds account for nearly 30% of CSCU’s operating budget since 2022. The University of Connecticut has also relied heavily on ARPA funding, receiving $169 million and $245 million for UConn Health in the same period.

However, the state’s spending cap requirements will make it nearly impossible to make up for the loss of ARPA funding in higher education and other sectors of government spending. According to the report, the spending cap will restrict General Fund appropriations to $24.1 billion in FY26, leaving a gap that could run between $540 to $860 million.

“This convergence of factors – the growth of the cost of current services, the exhaustion of non-recurring revenue sources, and the limitations placed by the guardrails on the state’s ability to utilize more than a billion dollars of projected revenue – thus produces a budgeting paradox,” the report states. “Lawmakers will face a requirement to cut current services, even as the state continues to project more than enough revenue in coming years to avoid those cuts. The looming budget challenge dramatically raises the stakes of the debate over Connecticut’s fiscal guardrails.”

Higher education is not the only area where the state may be forced to either make cuts or skimp on future investments. Other government services such as K-12 education, childcare, nonprofit support, and Medicaid may face pressure as well.

The reports do offer some suggestions for modifying the fiscal guardrails, particularly the volatility cap and the spending cap. For the volatility cap, suggested changes include changing the method by which the amount of allowable annual growth under the cap is calculated and reconsidering the sources of revenue that are deemed volatile. To modify the spending caps, the reports suggest setting the spending cap with reference to the prior year’s spending cap, which represents potential spending, rather than prior year appropriations.

The disconnect between projected budget surpluses and anticipated cuts to services has led some leaders across the state to continue their call for revising the fiscal guardrails.

Garth Harries, president and CEO of the Connecticut Project Action Fund, said that state residents have been given a “false choice” between paying debt and giving taxpayers relief through important programs and services.

“Connecticut needs a budget that works for our past, present, and future,” said Garth Harries, president and CEO of The Connecticut Project Action Fund. “Working people in Connecticut are facing a cost of living crisis, federal pandemic relief money is running out, and we can’t settle for short-term fixes. Our elected leaders must modify the fiscal rules to make them truly fiscally responsible, which requires not just paying down debt and building savings but investing in critical programs and services like childcare, healthcare, and home energy costs.”

Gian-Carl Casa, President & CEO, CT Community Nonprofit Alliance, praised the report for offering data-driven research that supports modifying the state’s budget controls. He said that the state needs to better balance providing vital services with paying down long-term debt.

“Every recent fiscal accountability report from OPM and OFA show the state will bring in huge surpluses this year and into the future,” he said. “At the same time, the legislature struggles to work around outdated controls to appropriate adequate funding for programs like nonprofits, whose contracts with the state have been underfunded for decades. Connecticut has the money to support critical community programs. This report shows that the time for change is now, and we know from our own polling that the public supports it.”

Balancing fiscal discipline with an emphasis on adequately funding essential services at the local level, such as education, could ease significant tax burdens and promote better economic outcomes across the state, says Connecticut Council of Municipalities Executive Director and CEO Joe DeLong.

“I applaud the in-depth analysis of the report from the Yale Tobin Center regarding Connecticut’s focus on fiscal stability through the use of the established fiscal guardrails,” DeLong said. “Our hope is that this report will encourage thoughtful and passionate discussions during the upcoming legislative session on the impact of the guardrails in their current form.”

Chris Collibee, communications director for the state Office of Policy and Management, said Thursday that the report ignores a key benefit of the state’s fiscal guardrails – they protect the state’s essential services.

In an emailed statement, Collibee said:

“This report ignores the benefits of the guardrails in supporting and protecting essential services. Spending in the General Fund and municipal aid has grown on average by 3.5% every year since the adoption of those guardrails. Further, as noted in our recent Fiscal Accountability Report, additional pension contributions over the past five years have reduced the state’s required contributions to its pension systems by $730.6 million annually for 25 years. That has freed up resources in the budget to enable the largest income tax cut in state history and provide significant increases in spending on education, municipal aid, healthcare, and social services. Connecticut has made progress in funding its significant unfunded liabilities, but even with the substantial recent deposits to the pension funds, the state remains among the least funded systems in the nation. Much more work remains to pay down these historical liabilities. 

The various caps will also help to insulate Connecticut when the next economic downturn happens(see slide 11 of OPM FAR presentation PowerPoint Presentation), helping state leaders avoid repeating some of the painful choices that were made during past economic downturns such as raising taxes and cutting services, both of which economists will argue governments should not do to speed up recovery. Other states around the country right now are facing difficult budget decisions that involve cutting services and increasing taxes (see slides 21 and 22 of the OPM FAR presentation), decisions we are well-positioned against having to undertake in our state.  Thanks to the protections built into our budgeting process, Connecticut has turned a corner from the mistakes of the past and has created honest, sustainable budgets that serve the state’s residents.

On the other side of the aisle in the General Assembly, Republican legislative leaders have been, for several months, issuing news releases in support of the fiscal guardrails, blaming the Democrats in advance for breaking the fiscal guardrails, suggesting that they can “kiss the smart fiscal guardrails goodbye next year,” (Oct. 11), that Senate Republicans pledged to “defend fiscal guardrails that Dems will try to dismantle,” (Nov. 13), and urging Gov. Ned Lamont to “be unwavering” in his defense of the state’s fiscal guardrails (Dec. 2).

“The fiscal discipline measures Republicans and Democrats agreed upon are not broken. They don’t need ‘fixing’,” the Republicans wrote. “But they are already under attack by majority Democrats in the state legislature even as the caps are delivering tax cuts and lowering our credit card bills.”