Connecticut’s legacy of debt weighed heavy on Lamont’s first budget

Gov. Ned Lamont’s first budget address to the legislature on Feb. 6, 2019

To say Gov. Ned Lamont set high goals for his first budget would be a tremendous understatement.

The new governor hoped to avert a $3.7 billion shortfall — ending a decade-long cycle of deficits in the process – deliver property tax relief to the middle class, keep income tax rates stable, preserve the rainy day fund and avoid asking unions for their fourth round of major concessions in 10 years. He also wanted an extensive tolling program on cars and trucks – despite a campaign pledge to steer clear of the former – to finance a major transportation rebuild.

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“Let’s fix this damn budget once and for all,” Lamont challenged legislators back on Jan. 9, his first day on the job, saying he wanted a budget as sustainable as it is ambitious.

What Lamont found was that fixing Connecticut’s budget meant grappling with the state’s enormous debt — an $85 billion problem amassed over more than seven decades. And that debt would ultimately force him to make as many compromises as would the unruly legislature.

When the smoke cleared, Lamont had closed the shortfall, kept income taxes flat, grown the reserve, spared municipalities and social services from reductions, settled a long-running legal feud with Connecticut’s hospitals, and averted a major nursing home strike.

But to do it, there were painful trade-offs.

Even more pension debt will be heaped on Connecticut’s children because of this budget, and when forced to choose between an income tax surcharge on the rich and a campaign pledge to deliver property tax relief to the middle class, Lamont deferred the latter. At the same time, he reached for a battery of smaller sales and other tax hikes that largely target the middle class, frustrating progressives in his own party.

“Let’s fix this damn budget once and for all.”

Gov. Ned Lamont

Unions were spared another round of concessions while pledging to help state officials reduce health care costs without weakening overall benefits. But Republican lawmakers, who questioned whether Lamont was too aggressive in his savings projections in this area, accused the administration and unions of moving the cost-cutting process behind a shroud of secrecy this summer.

Lamont amended his transportation plan twice because of objections to tolls on cars, and its fate is still uncertain as legislative leaders talk about a possible January session to adopt a scaled-back plan aimed at charging only commercial trucks.

And the two-year state budget also was balanced with a little bit of last-minute politics. Lamont and his fellow Democrats circumvented a decade-old statute designed to prevent what some call “wishful budgeting” – assuming taxes will produce even more revenue than fiscal analysts have forecast. In this case, Democrats are counting on $90 million per year in annual income tax receipts to balance the budget, even though nonpartisan analysts had not projected this growth.

‘Posturing the state for growth’

“The governor is extremely focused on posturing the state for growth,” said Office of Policy and Management Secretary Melissa McCaw, Lamont’s budget director.

This budget both enabled that growth and, more than anything, helped change the debate at the Capitol, McCaw added.

Connecticut governors raised income tax rates in 2009, 2011 and 2015 as a painful recession, weak recovery, and massive pension and other retirement benefit debt regularly produced huge deficit forecasts. Over the same period, officials raised the annual income tax burden on middle-income filers by hundreds of millions of dollars by whittling a credit for property taxes from $500 to $200 – and by excluding households without kids from claiming it.

Ryan Caron King :: Connecticut Public Radio

Lamont administration budget director Melissa McCaw briefing the media on the administration’s first budget.

Even when budgets were balanced, analysts warned, those plans only were good for one or two years at most. After that, unless major adjustments were made, state finances would fall deep into debt, they warned.

Lamont, who inherited a budget headed for annual deficits between 8% and 10% in his first two years, insisted it was crucial to avert these shortfalls without raising income tax rates.

“I will present to you a budget which is in balance not just for a year, but for the foreseeable future,” he declared during his first address to lawmakers. “ … I want to be clear – no more funny math or budgetary gamesmanship.”

But that wasn’t good enough.

Even Lamont’s critics said the goal, while admirable, showed the new governor didn’t fully appreciate Connecticut’s debt.

Debt costs, including pension payments and bonded debt, eat up nearly 30% of the General Fund – about three times what they consume in other state budgets. And many years, particularly over the past decade, they have grown faster than state revenues have.

“There’s never been a reckoning with that.”

Deputy House Minorty Leader Vincent Candelora

The problem “is overwhelming,” said Deputy House Minorty Leader Vincent Candelora, R-North Branford. “There’s never been a reckoning with that” since the last recession ended in 2009.

Still, Lamont’s first budget leaves behind a smaller problem than he inherited. Nonpartisan analysts say when this two-year budget ends, state finances, unless adjusted, would run $2.4 billion in the red in 2022 and 2023 combined.

That’s about two-thirds the size of the $3.7 billion gap that Lamont inherited.

Past budgets helped Lamont build CT’s reserves

Much of the heavy work in balancing Lamont’s first budget was done by his predecessor, Dannel P. Malloy and the 2011 and 2015 Democrat-controlled legislatures, which enacted major tax hikes.

But the new governor also benefited from Republicans.

While GOP lawmakers balked at submitting budget proposals this past year, prompting charges of political cowardice from Democrats, they made an important contribution during the last budget cycle.

Two Democrats, Comptroller Kevin P. Lembo and Sen. John Fonfara of Hartford both had crafted proosals to force Connecticut to begin saving huge chunks of income tax receipts in those years when capital gains and other investment-related earnings are soaring. Their fellow Democrats in the House and Senate majorities had been slow to embrace this concept.

But it was Republicans who insisted, in a bipartisan budget adopted in late 2017, that this savings initiative be incorporated into the state’s finances.

“We gave him a positive surplus to start his term. I think we gave him all the tools he needed.”

Senate Minority Leader Len Fasano

And while they’ve been sluggish for much of the time since the last recession, those revenues have taken off over the past two years.

“We gave him a positive surplus to start his term,” said Senate Minority Leader Len Fasano, R-North Haven. “And he’s got virtually guaranteed money most years” that can’t be spent.

“I think we gave him all of the tools he needed,” Fasano added.

Regardless, Lamont put those soaring tax returns to good use.

Hospitals are happy – towns, nonprofits, not so much

The rainy day fund has grown from $2 billion to a record-setting $2.5 billion, enough to cover about 13% of annual operating costs and still leave Connecticut a sizeable bulwark against the next recession.

The governor also used some of those funds to help negotiate a settlement with the state’s hospitals. The industry sued in 2015, charging that the state’s provider tax was excessively abusing hospitals in an attempt to leverage federal Medicaid dollars for Connecticut.

The settlement provides tax stability for hospitals through 2026 and eliminates a $4 billion risk to the state. Connecticut will pay $1.8 billion up front, but just over half will be reimbursed by Washington.

More importantly, legislators say, it will position hospitals to again grow and add jobs.

“Hospitals are terrific job creators for the state of Connecticut and we want to make sure we have a hospital industry that is thriving,” said House Majority Leader Matt Ritter, D-Hartford, who praised Lamont for the deal.

Arielle Levin Becker :: CTMirror.org

Connecticut Hospital Association CEO Jennifer Jackson, center, during a press conference with House Minority Leader Themis Klarides and Senate Minority Leader Len Fasano in 2015, the same year the hospitals sued the state.

McCaw noted that the administration also spared municipal aid and nonprofit social services from cuts in a very lean budget.

And while the administration helped lead a successful effort to raise the state’s minimum wage to $15 per hour by 2022, it also increased eligibility for HUSKY A Medicaid program for working poor adults with children.

Still, some of those who were shielded by Lamont see things differently.

Nonprofit leaders were frustrated that Lamont refused their request to share as much as $100 million from the rainy day fund with an industry whose state funding has been stagnant for more than a decade.

Community-based nonprofits, who provide the bulk of state-sponsored social services, say growing caseloads throughout much of the recovery have strained their resources to the limit.

“Community nonprofits continue to be inadequately funded, as they have been for more than a decade, as demand for vital community services has only grown,” said Gian-Carl Casa, president and CEO of the CT Community Nonprofit Alliance.

And municipal leaders balked this past summer as Lamont congratulated himself repeatedly for getting a state budget adopted “on time” – meaning before the regular 2019 session ended in early June.

But Lamont and the legislature failed to get an important complement to the budget finished, and it still is pending.

The governor held hostage the bond package – a two-year portfolio of projects that the state could finance long-term with bonds – until lawmakers resolved the transportation improvement and tolling issues.

“I think it’s unfortunate they are playing political games with municipal aid at the Capitol.”

Betsy Gara
Connecticut Council of Small Towns 

And while that is dominated by capital works, such as highway and bridge maintenance and building projects at public universities, it also includes a significant portion of Connecticut’s municipal aid.

In fact, as pressures on the budget grew over the past decade, legislatures increasingly shifted some town aid onto the state’s credit card. Based on last year’s grant amounts, $150 million in non-education aid is bonded, including $60 million used for summer road repaving, fall tree-clearing and winter snow removal.

With all of this money still stuck in political limbo, local leaders say the administration doesn’t understand that the full budget never was really completed.

“I think it’s unfortunate they are playing political games with municipal aid at the Capitol,” said Betsy Gara, executive director of the Connecticut Council of Small Towns. “It makes it almost impossible to plan for the future of our communities if we don’t know when funding will be released.”

Wealthy governor butts heads with progressive Democrats

Lamont also took considerable heat over his first budget from some of his fellow Democrats, particularly those on the far left.

The governor, a wealthy Greenwich businessman, was more concerned, they said, with ensuring rich taxpayers don’t leave with the state than with shielding the most vulnerable.

The administration balked last spring when the Democrat-controlled Finance, Revenue and Bonding Committee proposed an income tax surcharge on capital-gains earnings. The surcharge would only apply to filers whose overall annual income exceeded $500,000 and would have raised an estimated $260 million per year for the state.

It died, but what lived on instead were tax hikes aimed at middle-income households.

A new prepared foods tax surcharge was adopted and initially aimed at a broader array of grocery store items than lawmakers envisioned, prompting Lamont to later order his tax department to revise instructions to retailers. There was a new 10-cent fee on plastic bags and a handful of sales tax exemptions were eliminated.

A previously approved tax cut for college graduates with technology degrees who work in Connecticut was scrapped before it could take effect.

Monica Jorge

Rep. Jason Rojas, D-East Hartford, says the state must eventually grapple with its regressive tax policies.

Similarly, Lamont dumped a campaign pledge to reinstate property tax credit eligibility for middle-income households without kids.

“Connecticut is the poster child for a growing disparity that is becoming a crisis and our budget has not reflected this crisis at all,” said Rep. Anne Hughes, D-Easton, who leads the House Democratic Progressive Caucus. “Half of Connecticut is struggling to pay the bills.”

“Connecticut is the poster child for a growing disparity that is becoming a crisis and our budget has not reflected this crisis at all.”

Rep. Anne Hughes

Rep. Jason Rojas, D-East Hartford, who co-chairs the finance committee, said the administration wasn’t alone in trying to keep income tax rates flat, noting many legislators had the same goal.

“There’s always a concern about out-migration of wealthy earners,” he said.

But, Rojas added, Connecticut relies heavily on many regressive tax policies, including property taxes at the local level and the sales and fuel taxes at the state level. At some point the problem must be addressed, he said, because simply keeping wealthy taxpayers in Connecticut won’t solve everything.

“I think there’s a general consensus in that we know our current system of taxation, in some ways, encourages inequality,” Rojas said. “I think there’s a legitimate interest among most legislators to do something about this antiquated system.”

If that regressive tax system is not addressed soon, Rojas added, the state’s future economy is at risk.

Good government meets political expediency

The future, in fact, is another major reason Lamont could keep income tax rates flat.

It was made possible, in part, by asking the next generation of taxpayers to assume an even larger chunk of Connecticut’s massive pension debt.

The governor, with permission from labor unions, refinanced the state employee pension debt for the second time in three years. He also refinanced the teachers’ pension for the first time.

These changes helped avert spiking pension contributions. But lowering contributions in the short-term only adds hundreds of millions in costs and requires future taxpayers to make up what present-day taxpayers have not contributed – as well as all the potential investment earnings that were forfeited by not making those payments.

Ryan Caron King :: Connecticut Public Radio

Toll protests were a common sight at the state Capitol last spring.

The administration focused on the “good government” aspects of the teachers’ pension refinancing, specifically reducing the assumed average rate of return on pension investments from 8% per year to 6.9%.

But it also reduced, in unadjusted dollars, the state’s contribution into the fund, from $1.3 billion last fiscal year to $1.2 billion this fiscal year and $1.25 billion in 2020-21.

“Some could argue a reduced [contribution] means we didn’t make progress,” McCaw said, adding that the administration was trying to balance many competing budgetary goals.

If the teachers’ pension had not been refinanced, costs in this area alone would have risen by $100 million this fiscal year.

And while Connecticut now expects to be paying for nearly another 30 years on its long-term pension debt, McCaw said the administration not only increased legislators’ understanding of the problem, it also created stable payment schedules.

Tolls debate exposed weaknesses of transportation program

Similarly, the tolls debate, although chaotic at times and still unresolved, also has served an educational purpose.

Lamont originally wanted more than 50 gantries spread across four major highways, tolling cars and trucks and raising $600 million to $800 million per year. The governor also irked Republicans by recommending canceling pledged transfers of certain sales tax receipts to the transportation program. This was seen as a violation, at least in spirit, of a new amendment to the state Constitution — a “lockbox” provision designed to prevent such moves.

McCaw said the administration’s proposal was fine legally, but “it clearly rang loud throughout the legislative session” that lawmakers were worried about the lock box’s integrity.

Republicans opposed all tolls and enough Democrats, particularly in the Senate, held back their support long enough to kill any idea of imposing fees on cars.

Lamont and Democratic legislators now are looking at tolling just trucks at a dozen bridges. The new, projected annual take is $230 million per year, but it’s still the linchpin in a more modest, 10-year rebuilding program.

“The real conversation now, is about how do we grow the state.”

OPM Director Melissa McCaw

Still, McCaw said, the original tolling proposal in the governor’s budget served a key purpose.

“It unmasked the structural deficits in the Special Transportation Fund and I think it helped the public to understand the extent of the shortfalls it faced,” she said.

With or without the additional sales tax receipts, McCaw added, the STF “was just buying time.”

Like the rest of the budget, she said, the tolls proposal has gone through many compromises with one guiding principal: positioning Connecticut’s economy to thrive.

“The real conversation now,” she said,  “is about how do we grow the state.”