A rainy day fund beckons, but Lamont insists on fiscal reforms

Ned Lamont’s biggest challenge as governor is likely to be devising and then selling fellow Democrats in the General Assembly on the “structural changes” he says are necessary to break Connecticut’s cycle of chronic budget deficits.

Connecticut’s swelling budget reserves are a temptation for lawmakers weary of the austere budgets that have cut municipal aid, social services and education in recent years. But the governor-elect says tapping the reserves would be a temporary fix, delaying the hard choices necessary to permanently stabilize the state’s finances.

“There’s a tendency to want to spend [the reserves] and defer the tough choices we know we have to make,” Lamont said in an interview with CT Mirror. “But you know how volatile our income taxes can be. If the bottom falls out … we ought to be ready.”

Tension over the extent to which the state should use the growing budget reserves, commonly known as the “rainy day fund,” already is evident, posing an early test for Lamont, who has yet to outline what he means by “structural changes,” a phrase he frequently employed during the campaign.

Lamont said Friday that his position on the rainy day fund has not changed, but that doesn’t mean his fellow Democrats necessarily agree.

“It really is premature to take that off the table,” House Speaker Joe Aresimowicz, D-Berlin, said of using the reserves. “I’m open to using some of it, and I believe my caucus wants to at least have the discussion.”

Lamont, 64, takes office on Jan. 9 as Connecticut’s 89th governor and its first in a century to succeed a member of his own party in an open race for governor. Recounts are still underway in two races, but Democrats will be in clear control of both chambers of the General Assembly after two years of a tied Senate and closely divided House.

Since winning the election, Lamont has repeatedly warned against using the Rainy Day Fund as a solution to a projected budget shortfall — or seeking higher taxes.

“I’ve been pretty clear. We’re not raising tax rates, period,” Lamont said last week.

Throughout the campaign, Lamont hammered at the need to bring stability to state finances that have been plagued by deficits and inconsistency. Relying on the reserves now would hamstring the state in an economic downturn, while weakening the political resolve to make necessary changes in state spending, he said.

“I don’t know whether we’re in the 7th, 8th or 9th inning of this economic cycle. It’s been an extraordinarily positive economic cycle, going back nine years now,” Lamont said.

A report issued last week by the administration of Gov. Dannel P. Malloy outlined a compromise  that would allow Lamont to modestly tap Connecticut’s reserves to avoid tax hikes — and still leave a sizable fiscal cushion to guard against the next recession. Other deficit-mitigation options Malloy cited in his transition budget included canceling tax cuts on the books that have yet to take effect.

Tax breaks for businesses, consumers, single income taxpayers and retirees all have been enacted and repealed in recent years before they could be implemented. For example, a massive sales-tax-revenue-sharing plan with cities and towns passed in 2015 was cut deeply before it even took effect 12 months later, and currently delivers less than one-fifth of what was promised.

And projections last month from Malloy’s administration warned the Special Transportation Fund may not have sufficient revenues by 2021 to enable Connecticut to borrow for highway, bridge and rail repairs without paying significantly higher interest rates.

“We need a reliably, balanced budget and not just for this year, but for the future,” Lamont said.

Similar arguments have been made in recent years by the Connecticut Business and Industry Association, and other business leaders who argue it is undermining the state’s efforts to grow its economy.

But there’s still a problem with the approach Lamont espoused on the campaign trail. The numbers don’t add up — at least from a historical perspective.

New projections last week that incorporated rising revenue estimates still warn that state finances are headed for major deficits in the next two fiscal years, unless adjustments are made.

The projected shortfall stands at $1.7 billion — about 9 percent of the General Fund — for the first full fiscal year of the Lamont administration, which begins July 1. The potential deficit in the second year is $2.3 billion, or 12 percent.

Lamont must submit his plan to close those gaps in mid-February. Governors and legislatures have not closed a shortfall of this size without revenue increases since the state income tax was enacted in 1991.

Lamont’s hopes for major cost-savings in salary and benefit expenses hinge on state employee unions granting their fourth round of concessions in a decade.

Union leaders have urged Lamont to consider tax hikes on the wealthy instead. Their last concessions deal, which was ratified just 18 months ago, exempts most union members from layoffs for another two years.

Those are the factors prompting legislators to look for relief from the rainy day fund. The state has $1.2 billion in its emergency reserves and is projected to add another $900 million to its savings after the fiscal year ends on June 30.

If Lamont and the legislature emptied those reserves, deficit projections that total $4 billion over the next two fiscal years combined could be reduced to $2 billion — or about $1 billion per year.

That’s still a considerable problem, but much less severe. On the other hand, it would mean Connecticut would risk facing the next recession with no fiscal cushion — a potential budget catastrophe.

The caution issued by Aresimowicz about not ruling out the rainy day fund was echoed last week by other Democrats.

Rep. Brandon McGee, D-Hartford, said his community “is very grateful to the state” for the debt assistance granted in 2017 that helped the capital city avert insolvency, but observed that if Connecticut retreats in any major way from its municipal aid program it is putting the fiscal health of many communities — not just Hartford’s — at risk.

“How are we going to support municipalities with these deficits if we don’t touch the rainy day fund? “McGee asked.

And while businesses want a predictable state tax structure, McGee added, cities and towns need a reliable system of grants. “It’s hard to forecast anything at the local level if the state is wavering,” he said.

Nowhere has that “wavering” been more evident over the past two decades than in the PILOT, or Payment In Lieu Of Taxes, grants that reimburse communities for a portion of the revenue they lose on tax-exempt property.

In statute, PILOT grants are supposed to replace about 45 percent of the funds communities lose because they can’t tax state property.

In 2010, communities got $74 million, or just 28 percent, of the $264 million they lost on state property, according to the Connecticut Conference of Municipalities. 

That ratio steadily has been reduced, and this fiscal year cities and towns received just $50.3 million — or 14 percent — of the $356.2 million they couldn’t collect.

Similarly, the grants designed to replace 77 percent of taxes lost on private, nonprofit colleges and hospitals also have been whittled down.

Municipalities received $115 million, or 43 percent, of the $271 million they couldn’t collect from colleges and hospitals in 2010. By this fiscal year, communities got only $98 million  — or 23 percent — of $432 million in lost tax revenue.

But some Democratic legislators also are wary of tapping the emergency reserves.

Rep. Jonathan Steinberg, D-Westport, said Connecticut simply cannot risk facing the next recession — whenever it arrives — without some fiscal cushion.

It has been nearly a decade since the April 2009 bear market — the low point of the last recession. History suggests, and Lamont has as well, that Connecticut likely is closer to its next downturn than to the previous one.

“I think every municipal leader has to be realistic,” Steinberg said. “There is no easy path to $1.7 billion in budget cuts. Cities and towns will be affected.”

Sen. Cathy Osten, D-Sprague, a fiscal moderate who co-chairs the Appropriations Committee, said she hasn’t met with the governor-elect yet, but the math suggests Democrats need to find a grand compromise.

“I don’t believe that we’re going to be able to accomplish everything. We won’t be able to keep things as they are today and keep the rainy day fund and not increase revenue,” she said.

And Osten noted this applies to more than just municipal aid.

This past spring, lawmakers reversed themselves on two key health care programs.

After fierce public outcries, legislators from both parties repealed new limits on the Medicare Savings Program last spring for low-income seniors and the disabled — with no plan to cover the added costs next year. 

Similarly, lawmakers reversed themselves and scrapped tighter eligibility rules for the Husky A program that would have ended health coverage for more than 13,000 working poor adults with children.

Connecticut needs greater stability in its safety net as well, Osten said, adding that many legislators from both parties campaigned on these health care policy moves this fall, assuring constituents that the programs were safe.

“I think we are all going to have to be more middle-of-the-road than what I am hearing,” she said, “when it comes to the rainy day fund, municipal aid, and the budget.”