Lawmakers expect lean budget from Lamont. But how lean will it be?

Ryan Caron King :: Connecticut Public Radio

Gov. Ned Lamont addressing the Connecticut legislature.

Gov. Ned Lamont is expected to propose a lean budget Wednesday that averts tax hikes while closing a major deficit and positioning Connecticut’s economy to recover from the coronavirus pandemic.

But some of the governor’s fellow Democrats fear “lean” really means austere — and that the plan will lack targeted tax relief and expanded investments in health care, social services and transportation — without which, they say, a recovery that includes all classes is impossible.

“At the end of the day, the governor will be focused on preparing Connecticut for recovery and growth,” Office of Policy and Management Secretary Melissa McCaw said of the biennial budget Lamont will unveil on Wednesday.

That includes maintaining services, protecting taxpayers — particularly in distressed municipalities — and ensuring Connecticut continues to defeat the coronavirus, she said.

But officials cannot escape the fact that state finances face steep challenges for years to come, even given a robust stock market that has — for now — mitigated the recession’s impact on Connecticut’s budget.

Analysts say state finances, unless adjusted, will run about $1.2 billion to $1.3 billion in the red, both in the fiscal year that begins July 1 as well as in 2022-23.

Some key sources of state revenue are expected to remain sluggish well after that. And the University of Connecticut’s economic think-tank warned much of the economic damage caused by the coronavirus could linger well into the 2020s.

“Our challenges are not just limited to FY [fiscal years] 22 and 23,” McCaw added. “I think there’s a balance we’re going to strike here. … It’s not going to be all or nothing.”

Cracking open CT’s piggy bank

Part of that balance, she said, involves tapping Connecticut’s record-setting $3 billion-plus budget reserve, commonly known as the rainy day fund.

Using those dollars to help plug a massive budget gap over the next two fiscal years is one thing.

But because some economic challenges remain, state officials have to be cautious about also tapping one-time reserve dollars to launch many new programs — which will cost money every year and long after reserves are gone, McCaw said.

Connecticut struggled for much of the 2010s with huge projected deficits year after year, a disturbing trend that didn’t go unnoticed by Wall Street credit rating agencies. And if the state wants to ensure its ability to take advantage of the low borrowing rates currently being offered, McCaw said, it can’t return to those days of doom-and-gloom fiscal forecasts.

Health care may expand, but Medicaid eligibility won’t

The budget director declined to provide many details about the plan Lamont will unveil Wednesday. But she said one of the initiatives that many Democrats want won’t happen — at least in the way they’ve proposed.

Progressive Democrats are pressing Lamont to expand HUSKY A, Connecticut’s Medicaid-funded health insurance program for poor households with children.

“We are not contemplating Medicaid expansion, but there are some more proposals to make health care more affordable” being developed, she said.

That may not be enough for the “Recovery Champions,” a coalition of 30 Democrats from the House and Senate majorities who want Lamont to pump billions of dollars into services and tax relief for Connecticut’s low- and middle-income households.

“Extreme conditions call for extreme measures,” said Rep. Robyn Porter, D-New Haven, who co-chairs the legislature’s Labor Committee. “It is time for us to think outside of the box.”

“The most recent election showed people really want a different direction, they want fairness, they want equity,” said Rep. Quentin Phipps, D-Middletown, co-chairman of the legislature’s Black and Puerto Rican Caucus.

According to the Department of Labor, nearly 200,000 individuals currently are receiving weekly unemployment benefits. By comparison, Connecticut lost 120,000 jobs in the last recession, which ran from December 2007 through mid-2009.

Many of those individuals lost health insurance along with their jobs. More importantly, because the federal government has enhanced state unemployment assistance for much of the pandemic — and because this aid counts as taxable income — many of these households don’t qualify for HUSKY A coverage.

This lack of coverage, progressives say, leaves thousands of Connecticut households just one serious health crisis away from economic catastrophe.

Besides expanding Medicaid eligibility, many from the party’s far-left also want to pump hundreds of millions of dollars annually into working class households through more generous state income tax credits, and by expanding municipal aid — and potentially enabling communities to lower property tax rates.

Lamont has a line in the sand on tax hikes

Ryan Caron King :: Connecticut Public Radio

Lamont administration budget director Melissa McCaw

To pay for all this, progressive Democrats are pushing for higher income taxes on the rich and a statewide “mansion” property tax on high-value homes.

McCaw and Lamont both have hinted that expanded town aid is on the table, but any type of major tax hike is not.

Raising taxes on the wealthy would prompt them to flee Connecticut, according to the governor, who has said recently that it would be a particularly bad move now, while “we have the [economic] wind to our back.”

That last statement from the governor has frustrated many Democratic lawmakers who argue the chief executive is confusing the stock market with the overall economy.

And while Wall Street has recovered all of the value it lost in the first months of the pandemic and then some, much Connecticut’s working class and small businesses remain in rough shape.

That argument is supported by state revenue data.

Lamont warned back in early May that revenues for the first year of the new budget could come in $2 billion or more below original projections.

But by January, projected tax receipts had surged, eliminating roughly 80% of the problem.

Will Lamont try to stay at stringent, pandemic-level state spending?

And that’s not the only thing that’s changed since the pandemic began in March.

The co-chairwomen of the legislature’s Appropriations Committee, Rep. Toni E. Walker, D-New Haven and Sen. Cathy Osten, D-Sprague, both have expressed concerns over the hundreds of millions of dollars the Lamont administration has saved since COVID-19  hit Connecticut hard last March.

Connecticut’s rainy day fund actually stood at abut $2.2 billion when the last fiscal year began in July 2019 — $800 million below where it is now.

Lamont pumped up reserves, in part, by not spending $544 million last fiscal year. That’s two-and-a-half times the savings target he was mandated by the legislature to reach.

And so far this fiscal year, with five months still to go, the administration expects to save $937 million. That’s three times the level directed by the legislature as part of the normal budget-balancing process.

A big chunk of those savings was due to enhanced federal Medicaid payments, which covered costs the state normally would have to pay.

And the administration also said the pandemic forced lots of savings. For example, offices had to be closed and certain programs couldn’t be offered to maintain social distancing and public health goals.

Still, some lawmakers fear Lamont will base his new budget on stringent, pandemic levels. What happens, they ask, when all services can safely operate again, or when enhanced federal Medicaid funding goes away?

In other words, is Lamont dressing Connecticut in a budget that is adequate during a pandemic but fits like a strait-jacket afterward?

Walker, who favors expanding Medicaid eligibility, joined Osten in pushing for more funding for the non-profit community agencies who deliver the bulk of state social services.

Walker and House Speaker Matt Ritter, D-Hartford, also want to repeal a statute that would effectively end Connecticut’s longstanding practice of trying to recover public assistance by placing liens on the homes of former welfare recipients.

“It is important that we start to bring humanity back to government assistance,” Walker said.

Connecticut has a statutory spending cap that tries to keep most budget growth in line with the average increase in personal income statewide. The cap system is projected to limit growth to most areas, excluding debt and pension payments and programs backed with federal funds, to an average of 2.9% in the first year of Lamont’s new budget and less than 2.4% in the second.

McCaw said the administration anticipates no problems staying under the cap, and while there is a process to exceed it legally, the Lamont administration has ruled that out.

‘Silver Tsunami’ won’t be a budget cure-all

The governor hopes to get some financial relief from a private analysis on how to shrink state government.

The state commissioned Boston Consulting Group, the firm that helped Connecticut map out a business reopening strategy as the pandemic eased last summer, to assess a huge projected surge in state retirements.

Abut 25% of the state workforce, as much as 12,000 employees, are eligible to retire over the next two years as stronger limits on state pension benefits go into effect. The 2017 legislature mandated a study to utilize this so-called “silver tsunami” to save as much as $500 million per year.

But while McCaw said that initiative will be reflected in the governor’s budget Wednesday, no savings close to that scale is achievable in just the next two fiscal years.

Legislature must find CT’s transportation solution

Transportation advocates say the next two years are crucial for Connecticut’s roads, bridges and rail lines. Annual funding for infrastructure work already has fallen by one-third starting this year. And if this continues much longer, construction and labor leaders say, the industry won’t recover.

After lawmakers rejected his appeals over the last two years to install electronic tolls on highways, Lamont says he won’t try a third time.

A massive, five-year program to ramp up borrowing for state construction work expired last year. But experts say it will decade decades of enhanced investment to upgrade one of the oldest transportation infrastructure’s in the nation.

Connecticut now has to pay off billions of dollars it borrowed, and it still has no long-term plan to finance the budget’s Special Transportation Fund, which is headed for insolvency in 2024 or 2025.

In response, the administration already has begun to delay borrowing for the transportation building program. And while this will help keep the fund solvent — since borrowing less frequently lowers debt costs — advocates note it also will eventually delay projects.

“Once we get out to the next several years, nothing is [fully] funded,” Nate Brown, vice president of the Connecticut State Building Trades Council, told the CT Mirror last month. “It’s a construction industry issue statewide, and the men and women who rely on that as a living could have some really severe consequences going forward.”

Lamont has asked the legislature to support Connecticut joining the Transportation and Climate Initiative, a regional, two-year push to cut greenhouse gas emissions from travel.

The initiative estimates this could result in higher taxes on fuel producers — which would be passed onto motorists at the pump — adding about 5 to 9 cents per gallon by 2023.

But much of the revenue raised by those increases would be used by states to invest in public transit, electric cars and other conservation methods. It’s not projected to be a major source of funding to rebuild Connecticut’s infrastructure.

Lamont has made it clear that while he’s ready to talk solutions with legislators, and to answer questions, they have to take the lead on finding a new funding source for Connecticut’s rebuild.

“The legislature didn’t want to make a hard decision,” Lamont said. “My job this year is to give them some other ideas that would make the fund solvent.”

But if nothing else is done, “It’s going to significantly hamper the state’s ability to make any progress at all,” said Don Shubert, president of the Connecticut Construction Industry Association.

Shubert warned that construction contractors and workers could soon migrate to other states to find employment. “The construction industry pulls back as soon as it recognizes uncertainty. Drastic cuts like this cause deep adjustments in the industry,” he said.