The case for Connecticut’s fiscal guardrails

Executive Summary

In 2017, Connecticut faced a severe budget crisis that prompted significant fiscal reforms known as the fiscal guardrails. These reforms established mechanisms to control spending and revenue streams, directing a share of revenue to a Budget Reserve Fund (BRF).

The BRF is capped at 15% of the state’s revenue, with any surplus above this cap allocated to Connecticut’s largest and most underfunded pension systems: the State Employee Retirement System, SERS, and the State Teacher Retirement System, STRS. These supplemental contributions, in addition to the yearly Actuarially Determined Government Employer Contributions (ADEC), have resulted in the allocation of $7.7 billion from budget surpluses to the pension funds since 2017. This strategic approach to pension debt amortization has already decreased annual required contributions by approximately $170 million, positioning both pension plans on a path toward full funding.1

The surplus contributions have markedly improved the financial health of Connecticut’s pension plans, but challenges remain.

SERS and STRS have membership bases covering approximately 5.6% of the state’s population. Since the fiscal guardrails were implemented, SERS, with 57,327 retirees and beneficiaries, has seen its funded ratio increase from 36% in 2016 to 50.4% in 2023. Despite this improvement, SERS still faces $20 billion in unfunded liabilities.

Similarly, STRS, with 39,843 retirees and beneficiaries, improved its funded ratio from 56% in 2016 to 59.8% in 2023, but still has $16.4 billion in unfunded liabilities.

The modeling in this Yankee Institute-Reason Foundation report indicates that if no economic recessions happen in the next 30 years, SERS and STRS could achieve full funding by 2046 through traditional state employer contributions alone. However, if the state continues to make additional annual contributions of at least $1 billion for SERS and $800 million for STRS from surplus revenues, full funding could be reached nearly a decade earlier, by 2037 and 2038, respectively. This acceleration of the pension debt payment would save Connecticut $6.77 billion in interest costs over 30 years, accounting for inflation.

The stress testing modeling scenario indicates that the occurrence of two economic recessions before 2053 could impede full funding, with STRS reaching only 90.3% and SERS 86% by 2053. Even with supplemental contributions, two recessions and their subsequent impact on state revenue could leave SERS with $4.4 billion and STRS with $3.9 billion in unfunded liabilities — and increase total pension contributions dispersed until 2053 by $51.48 billion.

While recessions may delay SERS and STRS from becoming fully funded, supplemental contributions will still move SERS and STRS into firmer financial standing.

The fiscal guardrails have reversed decades of pension underfunding, improving Connecticut’s creditworthiness and financial stability.

This stronger financial position reduces the risk of future tax increases and allows for responsible tax reforms or increased social spending. Therefore, keeping the fiscal guardrails intact is a responsible fiscal policy that benefits the state’s employees, residents, businesses, and taxpayers.

Revoking the guardrails would breach bond covenants, part of Connecticut’s legal documentation with bondholders — putting the state in technical default. This could trigger the downgrading of its bond rating, permanently increasing borrowing costs and stifling the state’s ability to raise capital from private markets.

This report by Yankee Institute and Reason Foundation evaluates Connecticut’s fiscal reforms and their impact on the state’s public pension systems, particularly SERS and STRS. It provides an in-depth analysis of these pension funds’ historical context, status, and outlook—highlighting the fiscal guardrails’ impact.

The study also includes the interactive Reason Foundation-Yankee Institute CT Pensions Dashboard, capable of exploring a wide range of economic scenarios related to reducing pension debt, available at ct-pensions.reason.org.

The study and dashboard are built upon dual pension models of the State Employee Retirement System and the State Teacher Retirement System that account for the assumed rates of investment returns, payroll growth rates, cost-of-living adjustment provisions, and mortality assumptions, among dozens of other variables.

Full policy brief: The case for Connecticut’s fiscal guardrails

Connecticut Pensions Dashboard