This story has been updated.

As progressive legislators brace for a watershed debate this year on tempering Connecticut’s aggressive savings policies and investing more in education, human services and town aid, conservatives counter that the left’s true objective is unrestrained spending.

Though no legislator or interest group has proposed repealing the so-called “fiscal guardrails,” defenders say the liberal endgame isn’t reform — it’s evisceration.

Fiscal moderates and conservatives say there’s evidence to back their fears, and it’s found in Connecticut’s not-that-distant past.

They point specifically to the mid-2000s, the last time state government enjoyed a prolonged revenue boom. Lawmakers spent billions in one-time surplus dollars supporting ongoing state programs and backing pork-barrel projects in their home districts. This and the Great Recession of 2007-09 set up the state for a decade marred by huge tax hikes, frequent deficits, shrinking programs and economic malaise.

“When there’s money available, there’s always a temptation to spend it,” said Carol Platt Liebau, president of the Hartford-based Yankee Institute, a conservative public policy group. “It would be a shame if state officials went back on the gains that have been achieved [since 2017] and imposed additional burdens on generations to come in pursuit of a short-term fiscal sugar high.”

Those gains Liebau cited stem partly from a nine-month-long budget battle resolved about eight years ago. A bipartisan coalition of lawmakers created a lean new state budget with a more stringent cap on spending, complemented by a new limit on annual bonding; an automatic built-in annual cushion representing hundreds of millions of dollars; and an aggressive program that has blocked lawmakers from spending a huge portion of income and business tax receipts.

That last component has proven most controversial, given that it has stripped more than 6% annually, on average, from the General Fund since 2017, on grounds that the revenues are too unreliable to spend. Ironically, the savings generated by this “volatility adjustment” have been far larger — and far more dependable — than the crafters of this budget mechanism ever envisioned.

These budget controls, collectively, have generated almost $12.5 billion in surpluses in their first seven years. They’ve boosted a meager $212 million rainy day fund to a record-setting $4.1 billion reserve equal to 18% of the General Fund while allowing for roughly $8.6 billion in supplemental payments against Connecticut’s hefty pension debt.

Before ‘guardrails,’ surpluses weren’t used often to curb debt

But even after adjusting for inflation, reserves and surpluses like these were unheard of in decades past.

Part of the reason was Connecticut originally imposed much tighter limits on how much money state government could stash.

During the 1990s and earlier, the rainy day fund could not exceed 5% of the value of the General Fund, which represents about 90% of the overall state budget and covers the bulk of annual operating costs.

That limit jumped to 10% following the recession of the early 2000s, reached 15% shortly after the Great Recession and went to 18% last year.

But even when money was left over, legislators and governors didn’t often use these surpluses to curb debt, despite decades of not properly saving for pensions and other retirement benefits and allowing bonded debt to escalate to one of the highest levels in the country.

Democrat-controlled legislatures and Republican Gov. John G. Rowland used more than $320 million in surplus in 2001 to pay cash for school construction and rail transit equipment, avoiding debt. But they also doled out about $225 million in total surpluses between 1998 and 1999 in the form of tax rebates, a move later decried by many legislators from both parties as political stunt rather than prudent spending.

But between the 2003-04 and 2007-08 fiscal years, Connecticut’s coffers were particularly flush. Between the dot.com crash sparked by the failure of many online start-ups and the Great Recession driven by the collapse of the nation’s housing market, Connecticut ran up $3.6 billion in potential surpluses, according to records from the comptroller’s office and the legislature’s nonpartisan Office of Fiscal Analysis.

But Rowland — who left office in July 2004 amid an impeachment inquiry — Gov. M. Jodi Rell, who succeeded him, and legislators would deposit just 38% of that windfall, about $1.38 billion, in the rainy day fund during this five-year period.

The remaining $2.25 billion or nearly two-thirds of the rest would be spent.

More importantly, while $10 million would be used to begin saving to cover billions in unfunded liabilities tied to retiree health care benefits, nearly all the rest would be spent on areas other than debt.

Most of these one-time surplus dollars would support ongoing programs in future budgets, forcing future legislatures to slash many of these investments when the economy slipped, revenues plunged and cash-starved pension funds demanded larger and larger contributions.

But officials in the mid-2000s also routinely spent surplus funds on local projects that helped boost incumbents’ popularity back home.

In 2007, the legislature spent $790 million out of a more than $1 billion surplus. Along with hefty transfers to support programs in the next two fiscal years, surplus dollars were dedicated such items as an arena study in Hartford, a fuel cell project at Middletown High School, a science literacy and genomics program at Connecticut College in New London, recreational fields in Griswold and the Fairfield Arts Council.

And the spending cap wasn’t an obstacle either. While Gov. Ned Lamont told business leaders earlier this month that adhering to the cap was “sacrosanct” in his mind, political pressure to adhere to the cap was much less in the 1990s and 2000s.

Rowland and the legislature exceeded the state’s spending cap — which could be done legally with the governor’s permission and a three-fifths vote in the House and Senate — five times during his 9 1/2 years in office. Rell, teamed up with Democrat-controlled legislatures to do it twice more, in 2005 and in 2007.

Everything came crumbling down by June 2009, at which point legislators had emptied the rainy day fund and assigned the revenues to plug projected gaps in 2010 and 2011, ordered a nearly $875 million tax hike in 2009 and also ran up nearly $1 billion in operating debt.

Despite that, Gov. Dannel P. Malloy inherited an 18% projected budget deficit when he took office in January 2011, with nonpartisan analysts warning that spending, unless adjusted, would surpass revenue that year by an unprecedented $3 billion.

Malloy and lawmakers approved a tax hike estimated at more than $1.8 billion a year, while securing concessions from state employee unions.

And when Connecticut’s economic recovery from the Great Recession badly lagged the nation’s, Malloy and legislators ordered another $670 million in tax increases in 2015, canceled or deferred about $225 million in previously approved tax cuts that hadn’t taken effect yet and gradually whittled state agency staffing down by 10%.

“That’s what gave rise to these caps going in the first place,” House Minority Leader Vincent J. Candelora, R-North Branford said, adding taxpayers haven’t forgotten the fiscal pain the last state spending spree helped generate, even if Democratic legislators have.

“I think they lead with their hearts, not their heads,” he added.

Lamont, described as a fiscal moderate by some of his fellow Democrats, and as a conservative by others, has repeatedly argued for leaving the budget controls where they are.

“We have broken the bad habits of the past when we habitually put more and more costs on the taxpayers’ credit card for our children to pay down,” the governor told the General Assembly during his State of the State Address on Jan. 8. “And by paying down these legacy costs, we have made state employee pensions more secure.”

Budget reformers: CT is losing sight of damage to core programs

House Speaker Matt Ritter, D-Hartford, who insists Connecticut can better support core programs and still achieve budget surpluses to whittle down debt, said he appreciates Lamont’s perspective.

“I don’t disagree with the governor,” he said. “You could quickly lose your discipline if you have the wrong leadership at the helm.”

But Ritter also insisted that majority Democrats have never wanted to abandon the budget controls.

Those seeking change say there’s more to their argument than Connecticut’s bad habits have long expired. The danger, they say, is that the 2017 changes were a clear over-correction that is leeching huge resources away from Connecticut’s children, its poor, other vulnerable residents and municipalities.

“The world was not frozen in amber in 2017,” said Senate President Pro Tem Martin M. Looney, D-New Haven. “Concerns have emerged since then.”

The early years of the coronavirus in 2020 and 2021 dramatically increased financial pressure on many programs and services that already had suffered greatly from budget cuts in the 2010s, Looney said. That pressure was mitigated from mid-2021 through this year by billions in emergency federal pandemic grants, which will largely have been exhausted by July and no longer can supplant stagnant state funding.

Even programs that enjoyed increases in state assistance in recent years, such as grants to K-12 school districts, haven’t received enough to cover inflation and other mounting costs.

CT is far from done with fiscal challenges

Looney acknowledged that Connecticut still will be paying for decades on debt that was amassed over decades, some dating back to the 1930s. According to Lamont’s budget office, the state entered this fiscal year with nearly $53 billion in unfunded obligations related to pension and retiree health care programs and another $26 billion in bonded debt.

But he also noted Connecticut’s short-term fiscal position is significantly stronger than it was in 2017 when the new budget controls were crafted.

The 18% budget reserve is more than double the 8% cushion Connecticut took into the Great Recession.

The pension systems for state employees and for municipal teachers have enough assets to cover 55% and 62%of their long-term obligations, respectively, their healthiest funding ratios in years.

And analysts project the current budget controls will save close to $1.3 billion, more than 5% of the General Fund – through 2028. Democrats want to redirect a portion of those funds, leaders said. And while they haven’t discussed specific amounts, sources say the proposal likely would not target even half of that cushion.

But Senate Minority Leader Stephen Harding, R-Brookfield, said Democratic legislators showed very recently the legislature hasn’t kicked all its bad habits.

Majority Democrats adjourned the regular session last May without adjusting a state budget for the 2024-25 fiscal year that had hundreds of millions of dollars in holes.

Lamont had warned his fellow Democrats last February, months before the 2024-25 fiscal year had begun, that this budget lacked adequate funding for retirement benefits and Medicaid. But there was no room to add more funding because of the spending cap, which tries to keeps budget growth in line with household income and inflation.

Democratic legislators could have added to Medicaid and retirement programs provided they made offsetting cuts elsewhere but chose not to, Harding noted.

The current budget has a $443 million operating surplus and expects to save another $1.4 billion through the program that captures “volatile” or undependable revenues.

But actual spending is running almost $430 million over approved levels. Better-than-expected revenues are the only thing keep state finances in the black.

“That budget,” Harding said, “is emblematic of a legislature that hasn’t learned its lesson.”

Correction

An earlier version of this story incorrectly reported that Connecticut entered this fiscal year with nearly $53 billion in unfunded obligations related to pension and retiree health care programs and another billion in bonded debt. It faces another $26 billion in bonded debt.