The next state budget picture grew murky Tuesday after top legislative leaders announced majority Democrats would not formally adjust the preliminary $26 billion plan for the upcoming fiscal year.
House Speaker Matt Ritter and Senate President Pro Tem Martin M. Looney said legislators still would invest $300 million to $400 million extra in higher education, social services and health care as planned, with at least $100 million coming from the last vestiges of federal pandemic relief.
But to make that work, Democrats also would have to shift $200 million or more around within the preliminary budget without changing the bottom line. They also would have to ignore holes within that plan, including insufficient funds for mandated pension contributions.
The net effect would be to shrink next year’s anticipated surplus from the budget constraints or “fiscal guardrails” that Gov. Ned Lamont frequently touts. In other words, the plan won’t work unless Lamont, who consistently has argued against fiscal gimmicks, looks the other way.
Further complicating matters, this approach also eliminates any possibility of a new state income tax credit for households with children this year. Any proposal that alters tax revenues could not be done without a more formal budget adjustment process.
“At the end of the day, core priorities will see a $300 million to $400 million increase,” Ritter told The Connecticut Mirror. “The advocates for higher education will be very, very happy with what the legislature produces.”
Fiscal guardrails have legislature boxed into a legal corner
What the legislature usually produces in even-numbered years is detailed revision of a budget plan started one year prior.
Connecticut legislators, who have budgeted in two-year cycles since the mid-1990s, adopt each spring — in odd-numbered years — a final budget for the fiscal year starting that July 1 and a first draft for the fiscal year after that.
Then, in even-numbered years, they usually overhaul that draft, often making wholesale changes.
But legislators have increasingly struggled to craft budgets in all years since 2017, despite an unprecedented explosion in state revenues. The 2017 budget controls, commonly called “fiscal guardrails,” have generated huge surpluses while tightening the reins on how most resources can be spent.
[What are Connecticut’s ‘fiscal guardrails’? We’ve outlined them here]
Legislators found ways around that from 2020 to 2023, largely by tapping various federal pandemic relief grants, which are exempt from the guardrail restrictions.
But that relief has nearly been exhausted.
This year, when legislators returned to review their first draft of the 2024-25 budget, majority Democrats said it came it short in several crucial areas.
The regional state universities and community colleges, which already have raised tuition and cut staff, collectively need $63 million next year to avoid more pain. Similarly, the University of Connecticut is seeking about $120 million to support its main campus in Storrs, its satellite campuses and its health center in Farmington.
Lawmakers also want to channel more resources into private, nonprofit social service agencies, child care and Medicaid.
Unfortunately, that first draft budget, which barely fit under a spending cap designed to keep expenditure growth in line with household income and inflation, now exceeds that cap under revised estimates by about $30 million. In other words, if the preliminary 2024-25 budget is formally reopened, the first step would be to cut $30 million, not to add the $300 million to $400 million legislative leaders want.
The Lamont administration said Tuesday that there likely is more than $100 million in pandemic relief still available, but the final tally isn’t complete.
Ritter and Looney had explored complementing that pandemic funding with an accounting maneuver to move as much as $170 million in annual interest on the state’s $3.3 billion budget reserve outside of the spending cap and to invest it in core programs.
But Lamont and Republican legislators objected to revenue intercept.
Moving money could leave some programs underfunded
So how could Democratic legislators get another $300 million to $400 million for core programs if the spending cap won’t allow any more regular expenditures, and if there’s only about $100 million in pandemic relief that can be spent outside of the cap?
They will try to shift existing dollars around.
Close to $200 million from debt service, retiree health care and other line items could be shifted next year into higher education, social services and Medicaid without harming any programs, legislators say.
But other areas besides popular core programs need extra money too.
The General Fund spending is nearly $230 million over budget. Medicaid is the single biggest contributor to that overrun. And analysts expect many of those cost overruns to continue next fiscal year.
Analysts also say the preliminary 2024-25 budget needs an extra $156 million to cover required increases in pension and other retirement benefit contributions.
Democrats don’t have plans to shift more funds into these problem areas. But Connecticut still would have to meet Medicaid and pension obligations, even if it hasn’t adequately budgeted for those costs.
And sales tax receipts this year are coming in $225 million below the level projected for next year, leaving analysts fearful that next year’s anticipated level is too high.
Lamont would have to bend on ‘fiscal guardrails’ to make Democrats’ plan work
Ignoring these problems doesn’t mean state finances would end up in the red next year.
The preliminary $26 billion budget for 2024-25 included a built-in operating surplus of nearly $300 million.
A second program that saves revenue from volatile income and business tax payments is projected to capture another $450 million next year, and leaders expect that estimate to grow given the robust stock market performance over the past nine months.
Together that represents a roughly $750 million budget safety net.
But that cushion, which the guardrails system normally would use to pay down the state’s pension debt, could get chopped down considerably if the governor endorses his fellow Democrats’ plans.
Lamont spokeswoman Julia Bergman said Tuesday “We will be working with legislative leaders in the coming weeks to review their plan and ensure we remain within an honestly balanced budget.”
But House Minority Leader Vincent J. Candelora, R-North Branford, said the Democrats’ approach clearly circumvents the spending and savings rules set forth in the guardrails.
“It’s a sad day from a [Democratic] party that prided itself for not mirroring the federal government,” he added. “The spirit of these caps isn’t to budget into a recession.”
“It’s more of a passive way of overriding the fiscal guardrails,” said Senate Minority Leader Stephen Harding, R-Brookfield. “I believe we have an obligation to open [the budget] up and make the adjustments which are necessary.”
Harding added that likely means cutting some spending for some programs.
“We’d have to find some efficiencies in some areas,” he said.
Skipping formal budget adjustments isn’t unprecedented
If legislators don’t formally adjust the 2024-25 budget, it wouldn’t be the first time they’ve opted not to revise the second year of a biennial plan.
The 2020 legislature adjourned in early March because of the arrival of the coronavirus pandemic, dropping any budget adjustment plans in the interest of public health.
And in 2008, the Democratic-controlled legislature and Republican Gov. M. Jodi Rell also wrapped the session without a thorough overhaul of 2008-09 fiscal year finances. With the Great Recession approaching and the preliminary 2008-09 budget out of balance, lawmakers and Rell couldn’t agree on whether to solve the projected shortfall with tax hikes or spending cuts.
They did add $31 million to bolster two programs, but otherwise the $18.4 billion plan was left unchanged.
Child tax credit advocates disappointed
Meanwhile, advocates for a new child tax credit said Tuesday that Connecticut’s poor and middle-class families still needs this relief badly, and the state can afford it.
Although analysts say the state’s operating budget has a very slim surplus this fiscal year, ranging from $25 million to $109 million, that doesn’t include another $479 million that would be saved through the program that captures volatile tax receipts. This would mark the seventh consecutive year of a large overall surplus under the guardrails system.
But a recent study from Lamont’s administration found Connecticut’s already regressive tax system swung even more sharply onto the backs of its poorest residents during the coronavirus pandemic’s first year in 2020.
The lowest-earning 10% effectively spent almost 40% of their income in 2020 to cover state or municipal tax burdens, more than five times the rate faced by Connecticut’s highest earners, according to the tax incidence analysis released by the Department of Revenue Services.
The 39.9% state and municipal tax rate effectively paid by the poorest 10% also was up dramatically from the nearly 26% rate assigned to that same group by a 2022 DRS tax fairness study, which analyzed data from 2019.
Meanwhile, taxpayers in the two middle groups paid 13% and 11.5%, respectively, of their income to cover tax burdens in 2020, up from 9.2% and 8.6% in 2019.
Tax reform advocates had asked for $300 million to be returned to thousands of families through a $600 per child credit. But others said they would accept a much smaller credit, even as little as $50 per child, with the understanding it would be gradually increased annually.
“Connecticut families have faced an effective inflation rate of 18% in their cost of living in the last two years,” said Lisa Tepper Bates, president and CEO of the United Way of Connecticut. “Substantial pandemic-era federal tax benefits that have supported family budgets in recent years are gone. Our families have lost thousands of dollars in support.”
“The governor and legislative leadership have figured out ways to pass bold policies in past years,” added Emily Byrne, executive director of Connecticut Voices for Children, a progressive policy group also strongly advocating for a child tax credit. “We’ve seen the impossible happen. This year, Connecticut’s hardworking families are counting on everyone coming together once again to increase early care funding and create of a state-level child tax credit. These are smart investments that reduce poverty and provide needed financial relief to help make our state a little more affordable.”
The leader of a statewide coalition of more than 80 faith, labor and civic organizations said there is no need to scale back any form of support for working families in the next budget, given the huge, overall state surpluses Connecticut has enjoyed in recent years.
“We expect more from our Legislators,” said Norma Martinez HoSang, organizing director of Connecticut For All. “We can’t take the same approach to fund our state as a kid looking for loose change under the couch. Especially not when we are staring down another year of massive surpluses. While Connecticut families are struggling with mounting bills and relentless inflation, elected officials have the opportunity to make the lives of the working class easier. We can’t afford to wait another year to invest in the critical programs that keep our state moving forward.”
Will Lamont, legislators spar over ‘fiscal guardrails’ next year?
Lamont and Democratic legislative leaders have faced increasing pressure this year to adjust the guardrails system, not only from advocacy groups but also from rank-and-file Democratic legislators.
Critics argue the system is skewed too heavily toward saving, leaving core programs — many of which suffered from decades of under-funding prior to the guardrails adoption in 2017 — to languish unnecessarily.
No legislators have proposed repealing the guardrails entirely, just adjusting the parameters to permit some added spending.
Ritter has warned repeatedly that legislators would seek to end the guardrails, which the state has pledged to keep in place until mid-2028, if leaders remain so inflexible that core programs suffer while the state’s coffers are flush.
“If we end up in a situation where we’re being asked to make big cuts to the core programs where you have that pile of cash [on the side], then yes, that’s going to be a problem,” he said Tuesday.
Looney said he believes a more comprehensive review and debate over the guardrails likely will be needed next year. In odd-numbered years, the legislature is in session for five months, compared to the three-month session in even-numbered years.
“We have to realize that seven years have passed since 2017” when the guardrails first were adopted, Looney said. “We have to look at the entire thing and have it reflect our current situation.”