While the new state budget that begins July 1 poses tough – yet manageable – challenges, they pale in comparison to those facing state officials seven months from now.
Ask Gov. Ned Lamont and the legislature’s Democratic majority how they’ll close a projected $4 billion gap over two years — likely with nothing left in the rainy day fund — and they’ll usually deflect with the same answers.
Maybe Congress will approve more aid for states.
Perhaps the economy will rebound quickly.
But dig a little deeper, and it becomes clear the business-sensitive governor and his more liberal base are headed in opposite directions.
Lamont last week was assuring business leaders it’s time to rein in spending and keep taxes stable.
“If the economy comes back by the end of this calendar year, we’ll be in pretty good shape, which means we’ll have to tighten our belts,” Lamont told business leaders from Westport and Weston last week during a teleconference meeting.
At the same time, Democrats on the Appropriations Committee were quizzing department heads, making sure they’re not pinching pennies and curtailing services amidst a social and health care crises.
“Connecticut is hurting – it’s hurting dramatically,” said Rep. Toni Walker, D-New Haven, co-chair of the Appropriations Committee, who began meetings with department heads last week. “We cannot afford to hurt it any more.”
For the rest of this calendar year, Walker said, that probably means a difficult balancing act, but not an impossible one.
Connecticut is hurting – it’s hurting dramatically. We cannot afford to hurt it any more.”
But the new fiscal year, which begins on July 1, faces a whopping $2.7 billion projected deficit. That’s more than 13% of the General Fund and — more importantly — about $400 million more than Connecticut expects to have in its rainy day fund after June 30.
Lamont suggested last month that Connecticut could wipe out any remaining red ink after draining its reserves by suspending some previously approved tax cuts and by cutting labor costs.
Union leaders, who noted public-sector workers also are struggling and have granted concessions three times since 2009, refused to ask employees to forego raises this summer.
Neither Lamont nor legislators want a budget fight as the pandemic begins to ease — at least for now — in Connecticut. No one is pushing hard for spending cuts or tax hikes to help balance the 2020-21 fiscal year.
Even without union concessions, Connecticut could close an operating deficit of $400 million or less by borrowing. The state finished paying off its $1 billion operating debt from the last recession three years ago.
But things get much harder in February, when the governor and legislature have to start crafting a new two-year budget.
The administration projects revenues will be down at least $2 billion in each fiscal year starting in July 2021, a daunting prospect made even more challenging given Connecticut’s reserves likely will be gone by then.
I’m doing everything I can to make sure that the business community knows that they got the first business governor in a long time in this state. And the thing I really prize more than anything else right now is fiscal stability.”
Sen. Cathy Osten, D-Sprague, the other co-chair of the Appropriations Committee, insists that it’s premature to talk about the next biennial budget.
Not until we find out what the next federal package is,” she said. “I think we need to see where we are first.”
But even if Congress does approve more aid to states, it likely won’t be enough if a recent forecast from economists at Arizona State and Old Dominion universities is correct.
That projection was much uglier than the Lamont administration’s, saying states can expect — on average — a 20% revenue drop. And Connecticut, with its heavy reliance on personal income taxes, can expect to lose 33%, or more than $6 billion, per year.
The last time Connecticut faced a potential shortfall even close to that, in 2011, then-Gov. Dannel P. Malloy and the legislature ordered one of the largest tax hikes in state history, increases designed to raise more than $1.8 billion per year.
Like legislators, Lamont also isn’t anxious to look too far ahead on the fiscal calendar.
“If the economy falters again later in the fall, if there’s a surge or something, you know, it’s a jump ball,” he said.
This is when officials’ subtle messages become more important.
Lamont, a wealthy Greenwich businessman who pledged to deliver property tax relief to the middle class, left it out of his first budget, instead broadening the sales tax and killing a progressive income tax hike on the capital gains of Connecticut’s top earners.
When talking with Fairfield County business leaders last week, Lamont emphasized keeping taxes predictable.
“I’m doing everything I can to make sure that the business community knows that they got the first business governor in a long time in this state,” he said. “And the thing I really prize more than anything else right now is fiscal stability.”
But if tax hikes aren’t on the table and if a third round of federal aid isn’t massive, Connecticut is facing unprecedented cuts to core services and programs.
And while legislators don’t want to talk about tax hikes — right now — they’re making it clear they don’t want to cut core programs, now or later.
Diet during disasters is equal to death. In the midst of disaster, our realities have changed. We have to invest and rebuild.”
Tax hikes aren’t realistic this summer with hundreds of thousands of residents unemployed as many businesses remain closed or just partly reopened, Walker said. But those same conditions mean health care, social services, job training and aid to municipalities is more essential than ever.
“You don’t balance the budget by cutting services from people that are already drowning,” she said.
Republicans, normally more open to cutting spending than Democrats, also are wary about slashing too deeply right now.
“Cost-cutting, no matter when you try it, is difficult,” said Sen. Paul Formica of East Lyme, the ranking Senate Republican on the appropriations panel. “First we need to know how this [pandemic] has affected agencies directly.”
Osten’s fellow Democrats in the Senate majority last week called for sweeping reforms to health care, education, housing and economic development to reverse longstanding racial injustice.
They also concede the full agenda, developed in response to the recent killing of George Floyd by Minneapolis police, could not be implemented without major new spending.
“Diet during disasters is equal to death,” Sen. Saud Anwar, D-South Windsor said, adding that government needs to focus more during these crises on helping society’s most vulnerable than on keeping tax rates stable. “In the midst of disaster, our realities have changed. We have to invest and rebuild.”