The Bondholder’s Budget: Connecticut’s Experiment in Tax and Expenditure Limits

Abstract

In 2017, Connecticut enacted new fiscal restrictions to cap state spending, revenue volatility, appropriations, and bonding, which were to be “locked” in bond covenants and enforced via contract. This marks a startling turn in state tax and expenditure limits (TELs). Peer states have statutory or constitutional guardrails on the budgeting process, but none hands such great control to the bondholders. Now, using the threat of a lawsuit, Connecticut’s bondholders can block lawmakers from amending the fiscal caps as economic circumstances evolve over time. Far from a budgetary best practice, the fiscal restrictions are likely to impair Connecticut’s long-term economic health. Accordingly, this Paper presents several strategies for safely exiting the “bond lock” covenants and restoring budgetary control to the General Assembly.