PERSPECTIVE - The Bond Lock: A Threat to Connecticut´s Economy

by Ray Noonan and Rachel Silbermann Connecticut's future lies in opening new pathways to economic growth and opportunity for businesses, families, and communities. To achieve these goals, Connecticut needs a predictable and coherent fiscal policy that enables lawmakers to make the strategic choices that can spur economic growth. Unfortunately, a set of fiscal restrictions added to the budget in the final hours of negotiations last year might bring significant uncertainty on future fiscal policy and leave legislators unable to respond to current and future crises.

The fiscal restrictions - spending cap, bonding cap, volatility cap, appropriations cap, and Bond Lock - place a set of rules to guide Connecticut´s fiscal policy. When well-designed, fiscal restrictions can help create a strong foundation for the state´s budget practices, enabling legislators to focus on forward-looking investments to generate opportunity and spur economic growth. When hastily designed, however, restrictions may constrain fiscal policy to the point of making it wholly ineffective. 

One of the fiscal restrictions, the Bond Lock, might have this effect. The Bond Lock as a policy is untested to the point it could introduce unprecedented levels of uncertainty and potential instability to Connecticut´s fiscal future. The Bond Lock stipulates that, whenever the state issues a bond after May 15, it must vow not to change any of the new fiscal restrictions for the life of the bond except in extraordinary circumstances. As bond covenants are legally binding contracts, the Bond Lock will force the state to keep the fiscal restraints in place, preventing the governor and legislature from pursuing critical investments. In effect, it will prevent lawmakers adapting the budget for any changes—expected or unexpected—for more than a decade.

The consequences of the Bond Lock go beyond limiting the General Assembly´s fiscal authority. The uncertainty created by a broad-reaching bond covenant, once in place, could potentially damage Connecticut's credit rating and increase our borrowing costs. Under the Bond Lock, any attempt by the General Assembly to fix or amend its own fiscal rules would face the risk of expensive litigation and penalties. Even if the state were to prevail, the prospect of having state obligations tied in court might be enough to scare investors away.

National experts and bond rating agencies have warned that the Bond Lock could increase uncertainty. The Tax Policy Center pointed out that locking in strict fiscal restrictions might have unexpected long-term impacts, warning that enforcing them through bond documents brings new risks. Moody´s has talked about how the Bond Lock reduces budgetary flexibility. According to their analysis, the impact of the Bond Lock on Connecticut´s long-term credit rating is unclear. S&P wrote about how a violation of a bond covenant would create questions on who can sue the state and how.

Recent events show that the scenario of a possible Bond Lock violation is far from unlikely. Both the Democratic and Republican budget proposals introduced last week include provisions that, were the Bond Lock implemented, would break the fiscal restrictions: the Democratic plan proposed spending over the limit, while the Republican plan included some changes to the volatility cap. Either of these budget proposals would have left the state open to litigation if the Bond Lock were already in place.

Fortunately, the General Assembly is currently considering a bill (H.B. 5590) that mitigates the immediate impact of the Bond Lock by delaying its implementation on the spending cap and bonding cap and requiring various state agencies to study the cap. The bill does not, however, delay the implementation of the Lock to the volatility cap or appropriations cap, leaving the state still open to all of the uncertainty and risk associated with the Bond Lock.

We believe that the potential impacts of the Bond Lock warrant a full delay without exclusions. The General Assembly must fully evaluate and implement a set of fiscal restrictions that can genuinely produce lasting budgetary stability without taking on new credit risk, leaving it at the mercy of litigation-happy investors.

Connecticut needs an economy built on equitable opportunity to remain competitive. Our future lies in our cities, our workforce, and our willingness to connect and engage with the world at large. The Bond Lock, paired with the other fiscal restrictions, would undermine Connecticut´s fiscal reputation and would leave our state unable to respond to current or future challenges. We urge the General Assembly to assert its authority and repeal the Bond Lock this session.


Ray Noonan is Associate Policy Fellow and Rachel Silbermann, Ph.D. is Fiscal Policy Fellow, Connecticut Voices for Children.  The organization's mission is to ensure that "all Connecticut children have an opportunity to achieve their full potential regardless of race, income or zip code."