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Wall Street just gave Connecticut another pat on the back. There’s a catch.
S&P Global Ratings on Thursday (Sept. 24) bumped the state’s outlook from “stable” to “positive,” saying there’s at least a one-in-three chance it upgrades Connecticut’s AA- rating. It’s not an upgrade or a guarantee — it’s a dangled carrot.
The carrot comes with strings. S&P said it could raise the rating if Connecticut “maintains its established fiscal guardrails in future budget cycles, further reduces unfunded pension liabilities without materially increasing debt, and demonstrates budget stability and healthy reserves.”
S&P isn’t the only agency watching Connecticut’s guardrails. Moody’s and Fitch upgraded the state in 2025, citing its fiscal management and budget policies. KBRA affirmed its AA+ rating on the state’s general-obligation bonds this week but listed further relaxation of the guardrails as a potential reason for a downgrade.
Hartford didn’t discover fiscal discipline on its own. After years of budget deficits, tax hikes and pension underfunding, Connecticut went 123 days without a state budget in 2017. Lawmakers finally reached a deal that included new spending, borrowing and savings limits. The state’s finances improved afterward, though S&P also points to Connecticut’s high incomes and diverse economy as credit strengths.
The rules exist for a reason: Hartford spent years proving what happens when politicians treat every dollar they collect as money to spend.
The spending cap limits how fast most state spending can grow; the revenue cap makes lawmakers leave a cushion instead of budgeting every projected dollar. A separate bond cap limits borrowing. When income-tax receipts spike because of capital gains and investment earnings, the volatility cap sends the excess into the Budget Reserve Fund (BRF) and, once that fund is full, toward pension debt.
Connecticut’s nonpartisan Office of Legislative Research (OLR) says the guardrails are meant to protect against economic downturns and fiscal emergencies by “keeping the state budget in balance, building up reserves and paying down debt.”
The report provides evidence that the guardrails are working. In FY26, the state transferred $1.44 billion through the volatility cap to reduce pension liabilities while maintaining budget balance and reserves. Connecticut has made $11.5 billion in supplemental pension payments to date, which S&P says have cut annual pension costs by nearly $1 billion.
Connecticut still has high pension and retiree health liabilities. But reducing those debts means future budgets will have less to pay for old promises.
The guardrails are only as strong as lawmakers’ willingness to follow them when spending pressures mount. This spring, Gov. Ned Lamont invoked emergency authority to make $813.7 million in volatile revenue available for other uses while still directing money to pensions. The package included additional aid for schools and towns, early-childhood programs, Medicaid and a fund to respond to federal cuts. That was the wrong move.
The extra school and town aid was for one year. If lawmakers want to keep it, they should find the money within the cap. Carving out another exception would weaken the rules all over again—and S&P has made clear it expects Connecticut to stick with them.
The guardrails were created to keep temporary revenue from being redirected to current priorities before Connecticut dealt with its long-term obligations. S&P warns that raising the threshold could reduce future pension paydowns.
In a Sept. 25 press release, Gov. Ned Lamont celebrated S&P’s positive outlook and said Connecticut must “remain disciplined” and avoid “repeating the mistakes of the past.” The release also quoted S&P’s expectation that the state will maintain fiscal balance and reduce long-term liabilities in the next biennium without significantly altering the guardrails.
Lamont should explain whether his administration plans to preserve them. If it plans changes, what would they be — and how would they fit with the discipline he says helped improve Connecticut’s finances?
There’s a real push to loosen the guardrails.
Comptroller Sean Scanlon argues the caps should be “adapted to meet the moment.” He estimates special-education services will cost $96 million more than the money available this year. Separately, state data he cites show 19.1% of Connecticut students were identified as students with disabilities last school year, up from under 15% eight years ago. Scanlon also argues the state can do more for schools while still paying down pension debt.
The need is real, and towns are feeling it. But rising costs do not make the guardrails optional. If lawmakers want to put more state money toward special education, they must make room for it under the cap by changing other spending priorities. The guardrails helped build reserves and pay down billions in pension debt; creating another exception would weaken the rule whenever a worthy cause comes along.
The guardrails aren’t just rules lawmakers can quietly switch off. When Connecticut sold certain bonds from July 2023 through June 2025, it promised bond buyers it would follow several fiscal rules — not just the bond cap. The pledge covers the spending, revenue and volatility caps, along with debt and bond-issuance limits.
That promise runs through June 30, 2028. It can extend to June 30, 2033, unless lawmakers vote between January and June 2028 to end it. The law allows changes only under narrow conditions: lawmakers must protect bondholders, or the governor must declare an emergency or extraordinary circumstances and three-fifths of each chamber must approve a change for that fiscal year only.
Why should taxpayers care?
Connecticut set aside $3.6 billion for debt service in FY26 — about 13.2% of its $27.2 billion budget. That’s roughly 13 cents of every budget dollar committed to paying principal and interest on past borrowing. A higher credit rating can lower the cost of future borrowing, leaving more room in the budget for other priorities.
Connecticut is still rated AA-, and S&P continues to flag its debt and pension and retiree-health liabilities. Any upgrade depends on preserving the guardrails, reducing pension debt without significantly increasing debt, and maintaining budget stability and healthy reserves.
Connecticut spent decades showing Wall Street what happens when the state fails to control its debt. Now lawmakers have a chance to show they can stick with the rules that helped put the state on a better path.
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