Gov. Ned Lamont delivers his first budget address in March 2019.

After safeguarding Connecticut’s budget reserves for three years, Gov. Ned Lamont will propose budget revisions Wednesday that shift more than $800 million from the state’s coffers into new and expanded programs, according to sources familiar with the plan.

Making this move, without shattering the spending cap, will involve shifting a huge chunk of federal COVID relief aid outside of the budget, which could put the governor at odds with Republicans and moderate Democrats in the legislature.

But even if lawmakers consent to Lamont’s plan, which includes a property tax relief initiative and expanded investments in public safety, Connecticut still would be in good shape to balance its books when the pandemic relief expires in 2024.

‘We’re in the best financial shape … in a long time’

“I’m not one for hyperbole, but I think we’re in the best financial shape this state has been in in a long time,” Lamont said Tuesday during a pre-budget talk with municipal leaders at the Connecticut Council of Small Towns’ annual meeting in Southington.

Lamont didn’t offer town leaders details of the package but had announced some details in the days leading up to the talk.

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.

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.

Lamont also had announced new funding 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.

But sources familiar with the governor’s proposal said it also would boost investments in mental health, child welfare services, higher education and job development.

On paper, Lamont will propose roughly a 2% increase to the preliminary $23.85 billion budget he and lawmakers adopted last June for the 2022-23 fiscal year.

But to fund all of the new initiatives, Lamont needs a larger increase than that — and a way around the spending cap.

The nearly $24 billion budget he and legislators already established for 2022-23 falls below the statutory limit by a razor-thin $36 million — a fraction of 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.

How Lamont cracks open CT’s piggy bank

That’s where the federal funding comes into play.

Congress sent $3 billion via the American Rescue Plan Act [ARPA]  directly to state government last year to help with Connecticut’s recovery from the coronavirus.

Lamont and lawmakers used $1.8 billion of it in the biennial budget — $600 million in the first year and $1.2 billion in the second — to help keep it in balance. The rest was assigned to be spent, off-budget, on health care, education, economic development and other pandemic-related needs.

Sources said the governor now wants to increase the amount of ARPA dollars spent outside of the budget. He specifically wants to take about $800 million of the $1.2 billion originally committed to the 2022-23 fiscal year and spend it outside of the budget and the cap.

That would also punch an $800 million hole in the state finances starting next July, but that hole is relatively easy to fill. In fact, Lamont has several places he can look for the funds. 

First, there’s a rainy day fund that has grown from $1.2 billion when the governor took office in January 2019 to a record-setting $3.1 billion now. The reserve currently stands at the legal maximum, equal to 15% of annual operating costs.

Second, analysts are projecting the current fiscal year will close on June 30 with nearly $2.5 billion in additional black ink.

With the rainy day fund already full, that surplus normally would be earmarked to pay down pension debt, as Connecticut did last fall with the $1.6 billion left over from 2020-21.

But there’s a “carry-forward” process through which the legislature could take funds from this fiscal year’s projected surplus and make the funding available in 2022-23. Because those funds originally were appropriated for this fiscal year, they wouldn’t count against next year’s spending cap.

“We’ve pushed hard to keep our rainy day fund in place,” Lamont told town leaders, promising them that his budget would leave the state prepared for any economic downturn to come.

Based on revenue projections that analysts for the legislative and executive branches released in mid-January, state finances are no longer projected to be in deficit in 2024, when the federal pandemic relief expires.

Analysts are optimistic that revenue projections will improve yet again when they revisit the numbers in late April after the income tax filing deadline.

“That means you, as municipal leaders, ought to know that we won’t have to raise taxes. We won’t have to cut municipal aid” in the next recession, Lamont added. “We’ll be in pretty decent shape.”

Plan could face pushback from both parties

The Democratic governor’s plan still could spark pushback from lawmakers from both parties.

Some Democrats want to see more substantial tax relief for low- and middle-income households than what the governor has proposed.

Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance Committee, is pushing to create a $600-per-child credit within the state income tax.

Connecticut and other states accepting federal ARPA dollars are limited in how much tax relief they can offer this year and next. Congress wants to make sure the funds are used to cover COVID expenses, rather than to finance tax cuts.

But state legislators might be able to approve tax cuts now and schedule them to take effect in a year or two when the federal money is gone.

Scanlon called the governor’s tax proposal “A good start” but added “there’s a lot more we should be looking at.”

House Minority Leader Vincent J. Candelora, R-North Branford, predicted Republicans would be very wary of any plan to boost spending by nearly $800 million — by both circumventing the spending cap and draining funds earmarked to reduce the state’s considerable pension debt.

“He is now attempting in the wake of a reelection year to curry favor with those organizations that he has wholly abandoned,” Candelora said, adding that Lamont “is essentially rewriting the entire budget” to do so.

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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.