Connecticut’s “fiscal guardrails” have barred lawmakers from investing an average of $1.4 billion annually in core services since 2017 on grounds that the tax receipts are too unreliable to spend. But a new analysis Tuesday from Connecticut Voices for Children concluded that as much as half of the captured funds have been incorrectly characterized as “volatile.” Meanwhile, despite Connecticut’s reputation as a high-tax state, government spending here lags the nation and New England, as does economic growth, according to data presented online during the New Haven policy group’s 24th annual Tax and Budget Forum. “We’re at a moment when the fiscal controls don’t need to be as rigorous as their initial design,” Emily Byrne, Connecticut Voices’ executive director, told The Connecticut Mirror.  Caps on spending and borrowing, along with programs that mandate huge surpluses built into the annual budget, were designed to help Connecticut live within its means, “not harm families and hamper economic growth, which is unfortunately what’s happening in practice.” Reforming the ‘volatility adjustment’ The main engine behind the more than $12 billion in surpluses Connecticut has amassed since 2017 is the “volatility adjustment,” a provision that limits how much legislators can spend from quarterly income and business tax receipts. Much of this revenue, historically, has been tied to capital gains and other investment earnings, and has fluctuated significantly from year to year. In concept, the program would capture big dollars some years, less in others, and sometimes nothing. Instead, it has captured close to $1 billion or more in six of its first seven years. The only year it collected less was 2020 — when the coronavirus pandemic began — and it still took in $530 million. It’s taken in an annual average of $1.4 billion, an amount that exceeds 6% of this fiscal year’s entire General Fund, since 2017. And state analysts project it will grab $1.4 billion again this year and close to $1.3 billion in each of the next three. The 2017 legislature, toward the end of an exhaustive nine-month budget debate, decided that any revenues from these categories that exceeded $3.15 billion — the amount they generated in the 2016-17 budget — would be too unstable to spend. But 2016-17 proved to be one of the weakest-performing tax years in a decade and a half. And while the $3.15 billion threshold is adjusted annually to reflect growth in personal income, increasing numbers of legislators and other critics say the original threshold was flawed and has skewed the entire system. Connecticut Voices’ research and policy director, Patrick R. O’Brien, wrote in his analysis for the forum that, had Connecticut used a rolling five-year average of income and business tax receipts to set the threshold for “volatile” revenues, the legislature could have spent $486 million of the $1.4 billion that has been put beyond their reach annually since 2017. And if a 10-year average had been used, more than half of the “volatile” revenue, $755 million, would have been classified as safe to invest in education, health care, childcare, social services, municipal aid or tax cuts. Gov. Ned Lamont, who frequently calls these budget controls “fiscal guardrails,” has steadfastly opposed efforts by many of his fellow Democrats in the House and Senate majorities to scale back these savings efforts. Some moderate Democratic legislators and most Republicans also side with Lamont. But top Democratic leaders insist some compromise must be found this year to stem deterioration of core programs. Critics point to Medicaid rates that haven’t been adjusted in comprehensive fashion since early 2008, or community college tuition rates that were 11% higher this fall than just two years ago. Legislators also say funding for early childhood development and social services for people with disabilities or those facing mental illness also is slipping. O’Brien’s report examined the spending issue on a broader scale. The new budget controls began in the 2017-18 fiscal year. Between 2018 and 2022, the last five years of data available from the U.S. Census Bureau, state and municipal government spending in Connecticut represented, on average, 16.3% of personal income. By comparison, similar spending in New England states averaged 20.1% while nationally the average was 21.7%. Further complicating matters, Connecticut has pumped an average of $4.6 billion per year into its pension programs for state employees and municipal teachers between 2018 and 2024, an amount equal to 20% of this year’s General Fund and a rate far beyond the national norm. Connecticut amassed a huge pension debt between 1939 and 2010 by not saving properly, but several analysts have said that problem can’t be solved by one generation in a few years. Even given the amount of money Connecticut has poured into the program, it isn’t expected to cover all unfunded liabilities until well into the 2040s. Connecticut Voices is recommending that Lamont and legislators revised the volatility adjustment threshold to reflect either a five- or 10-year average of the key tax receipts. Spending cap changes also recommended But that wouldn’t necessarily allow officials to spend more right away. The state spending cap, which has existed in various forms since 1991, allows most segments of the budget to grow as fast as household income or inflation, whichever is larger. That cap also has been criticized for years for several reasons. In most years, more than eight out of 10, the five-year average growth in personal income metric the state uses is greater than the prior year’s inflation rate. But personal income growth in Connecticut has been subpar since the cap began 33 years ago. The recovery in personal income growth in Connecticut following all four of the recessions since then has averaged 8.8% less than the national average, and 4.6% below the New England average, according to O’Brien’s report. If Connecticut’s income had grown as fast as the country’s, the $26 billion state budget permitted under the cap this fiscal year would exceed $32.7 billion, O’Brien projected. But by not investing more in education, workforce development, child care, municipal aid to help towns lower property taxes, and other key programs, Connecticut’s economic growth is likely to remain sluggish, spending cap critics charge. And when inflation does outpace income growth — and that metric is used to drive added spending — the state budget still gets shortchanged, according to O’Brien’s report. That’s because the spending cap formula doesn’t rely on a comprehensive inflation rate but rather on one that ignores energy and food costs. Connecticut Voices recommends that legislators adjust the cap rules to allow for a more comprehensive inflationary adjustment and to replace the statewide personal income growth rate with a national income growth rate. Connecticut’s spending cap rules can be adjusted with a 60% vote of approval from both the House and Senate and with the consent of the governor.  Lamont has urged legislators to live within the existing spending cap since he first took office in 2019. But he also has allowed the General Assembly repeatedly to maneuver around that cap in recent years, using hundreds of millions of dollars in emergency federal pandemic grants, which aren’t subject to cap restrictions, to bolster core programs when the “fiscal guardrails” block the use of traditional revenues. The administration also notes that Connecticut still has more than $35 billion in unfunded pension obligations, making it one of the most indebted states in the nation. “The various caps will also help to insulate Connecticut when the next economic downturn happens,” Lamont’s budget spokesman, Chris Collibee, said last week when another policy group suggested reforms to budget controls. He added these caps are “helping state leaders avoid repeating some of the painful choices that were made during past economic downturns such as raising taxes and cutting services.” But the roughly $2.8 billion in pandemic relief Congress granted state government here through the American Rescue Plan Act has nearly been exhausted. Higher education and various social service programs are expected to face cuts in the next budget if state officials don’t replace that expiring federal aid. Connecticut Voices officials argue that can’t happen without adjusting budget controls. “Policymakers have an ability to provide tremendous financial relief to Connecticut residents,” Byrne added. “By not making adjustments … they’ll be choosing to ignore the needs of our state’s children and hard-working families.”