The volatility cap in the Connecticut state budget imposes a threshold for certain types of revenue, above which any excess must be deposited into the Budget Reserve Fund (BRF) and excluded from general appropriations. The goal is to smooth out unstable revenue streams and reduce the state’s reliance on one-time cash influxes.
However, the cap requires the deposit of revenues in the BRF even when the state faces deficits, causing unnecessary cuts to essential programs like education and municipal aid. The legislature's Office of Fiscal Analysis predicts required deposits of about $550 million in FY 2020-2021, despite deficit projections of about $3 billion. Because the threshold is set too low, it will divert ordinary revenue growth into the BRF, preventing needed investments.
A better cap would incorporate the following elements of the volatility cap adopted with bipartisan support in 2015 that had been set to take effect in 2021:
- Raise the volatility threshold;
- Index the threshold to grow with average revenue, rather than average income;
- Increase the look-back period from five years to ten years; and
- Remove the requirement of BRF deposits in years with projected deficits.