Gov. Ned Lamont says last fiscal year will be remembered as "transformative" for state finances. Yehyun Kim / ctmirror.org

Gov. Ned Lamont proposed a new state budget Wednesday that shifts hundreds of millions of dollars in federal pandemic relief outside of normal appropriations, funds a middle-class property tax relief program and makes major new investments in social services, health care, education and economic development.

After remaining quiet on the question of hazard pay for nearly two years of the coronavirus pandemic, Lamont pitched $20 million for bonuses for front line state workers who were at risk during the pandemic.

On paper, the $24.2 billion plan Lamont offered for the next fiscal year increases General Fund spending by 2.5% over the preliminary plan for 2022-23 that he and the legislature enacted last June. And it’s 8% higher than approved spending for the current fiscal year.

But neither of those figures takes into account a larger plan to free up hundreds of millions federal pandemic relief that Lamont also would now wants spend in the coming fiscal year.

That would effectively elevate the proposed spending increase beyond $2 billion, or 10%.

But even given the proposed surplus spending, Lamont said the current budget is on pace to finish June 30 with more than $1.2 billion left over that could be used to pay down pension debt.

“Budget deficits have become record-breaking surpluses, our budget reserve fund is now overflowing, and we are able to pay down our pensions, borrow more money at less cost and return millions of dollars to middle-class families for the first time in a generation,” Lamont said Wednesday in his annual budget address.

“Just as I wouldn’t let the state be defined by a chronic fiscal crisis, I will not allow it to be defined by a COVID crisis. Despite the intense headwinds of a global pandemic, we have made significant progress with more jobs created, more families moving into our state, and more opportunity for all.”

Senate President Pro Tem Martin M. Looney of New Haven, D-New Haven, praised the governor for loosening the purse strings.

“Governor Lamont’s budget is justifiably optimistic and recognizes the reality that we have some inadequately met needs from our recent years of challenging budgets,” he said.

But Republicans pointed to political shenanigans.

“This budget is more about politics than anything else,” Senate Minority Leader Kevin Kelly of Stratford wrote in a joint statement with the deputy GOP leader, Sen. Paul Formica of East Lyme. “At a time when the majority of Americans are living paycheck to paycheck, Governor Lamont is playing a high stakes shell game and proposing a drastic spending increase and abandoning the very protections that turned our state’s financial health around.”

“Governor Lamont has completely lost touch with the issues facing the residents of Connecticut,” said Madison businessman Bob Stefanowski, who lost the 2018 gubernatorial election to Lamont and is seeking a rematch this year. “Optimism is important but it also needs to be based in reality.”

Relief for property taxpayers and retirees

The linchpin of the governor’s latest budget involves a two-step program to ease property tax burdens, chiefly on low- and middle-income households.

“Our working families and middle-class households deserve a break, especially from Connecticut’s most regressive tax,” Lamont said. “Property taxes relentlessly come due in good times and bad, and they hit the middle-class especially hard.”

The governor would lower the current cap on municipal tax rates on passenger and commercial vehicles from 45 mills to 29 mills (one mill equals $1 in tax per $1,000 of assessed value). And while only eight of the state’s 169 cities and towns currently levy tax rates above 45 mills, the lower threshold would affect 103 communities.

To ensure municipalities with rates higher than 29 mills don’t lose funds, Lamont’s plan would appropriate an extra $160 million per year to keep them whole.

Connecticut currently offers a $200 income tax credit to middle-class households to offset property tax burdens, but it has been limited since 2018 to seniors or to families with children. The governor’s plan would restore eligibility to all households within income limits and would boost the credit to $300.

The property tax credit has been a sore point for Lamont throughout his administration.

He promised during the 2018 gubernatorial campaign to deliver relief worth about $375 million per year by the third year of his term. But he delayed fulfilling that pledge after realizing he couldn’t deliver it and keep state finances in balance without raising taxes on wealthy households.

The governor also proposed two more state tax cuts that, combined, will add another $52 million per year.

The first involves accelerating an already approved plan to phase out income taxes on pension and annuity income for individuals receiving less than $75,000 per year and couples receiving less than $100,000.

Lamont also would expand an existing business tax credit for companies that help their employees repay student loans.

Not every group got the tax relief it wanted, though.

Connecticut businesses are on the hook this fall for close to $1 billion in debt the state ran up to keep its unemployment insurance trust financially afloat during the pandemic.

Lamont and legislators agreed last year to apply $155 million in federal COVID grants to cover some of that debt. But business leaders countered that with a huge rainy day fund and budget surplus, Connecticut could apply far more to spare companies a big tax hike with the economy still fragile.

“While the Governor’s budget proposals offer some measure of relief for individual taxpayers, that’s only part of the prescription for rebuilding the state’s economy,” Chris DiPentima, CEO of the Connecticut Business and Industry Association, wrote in a statement. “Connecticut’s economic recovery depends on the health of our small businesses, and these budget proposals do not offer nearly enough support for smaller employers, too many of whom are struggling.”

Small businesses are facing a range of challenges on the near horizon, from hiring to inflation and paying off the state’s unemployment fund, he added.

Gov. Ned Lamont delivering the state of the state address in the state Capitol in Hartford. Yehyun Kim / ctmirror.org

Big new investments in mental health, social services and education

The bulk of the governor’s proposed new spending — more than $1 billion — would be focused on social services, education and health care.

That includes nearly $160 million for behavioral health initiatives and $175 million for home and community-based health care services, $90 million to improve air quality in Connecticut schools, $65 million in tuition assistance and other steps to bolster enrollment in state universities, and $26 million to support and enhance racial diversity in urban K-12 schools.

Lamont also maintains an existing eight-year program launched in 2018 to expand the Education Cost Sharing grant, Connecticut’s main program for assisting local elementary and secondary school districts. The proposed budget would boost ECS spending by nearly $40 million starting July 1.

The package also includes more than $72 million in new spending for a host of criminal justice initiatives.

The governor wants to double the number of officers trained annually for municipal and state police and to assist local police departments and probation offices with pandemic-related costs.

About one-third of the extra criminal justice funding would go to the Judicial Branch to accelerate the resolution of backlogged court cases.

Dealing with the spending cap

The proposed budget also includes $100 million in new funding for information technology investments and $190 million extra for workforce and economic development.

To help pay for these investments, Lamont needs to draw upon the roughly $2.5 billion surplus Connecticut is projecting for the current fiscal year, tapping almost $515 million to support 2022-23.

But he still needs more resources, and what he wants to spend already falls just $5 million below the statutory spending cap — that’s a razor-thin fraction that represents less than 1% of General Fund spending.

There is a process to legally exceed the cap, but Lamont and most legislators are seeking reelection this year, and state officials generally are wary of directly setting aside the cap.

Lamont gets around that by actually taking $640 million in federal COVID relief funds designated to support the current fiscal year away from that plan, shrinking the surplus even further.

That doesn’t mean the state will forfeit those federal dollars. They still will be spent, just in the upcoming fiscal year, and outside of the normal budget process, and therefore outside of the spending cap.

This complex process also doesn’t mean all of these new investments will go away in 2024, when the federal pandemic aid expires.

State analysts are projecting huge revenue growth will continue over the next year. And room under the spending cap may be poised to grow — in part due to the massive inflation that rocked the U.S. economy in 2021 could help Connecticut.

The state spending cap tries to keep growth for most appropriations in line with either annual inflation or a five-year average change in household income — whichever is larger. For most of the cap’s history, the income metric has been the more advantageous.

But the Consumer Price Index hit 7% for 2021 in December for the first time since 1982, according to the U.S. Bureau of Labor Statistics. By comparison, it was 1.4% in 2020.

And while the cap system allowed 3.1% growth in most appropriations this fiscal year — based on personal income — the Lamont administration projects that an inflation-based cap adjustment will permit spending to grow by more than $900 million in 2022-23 alone.

Staff writer Erica E. Phillips contributed to this article.

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Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.