Gov. Ned Lamont frustrated fiscal conservatives and progressives alike this week when he agreed to legally exceed Connecticut’s constitutional spending cap for the first time since 2007.

Republican legislators and others on the political right slammed the fiscally moderate governor, calling his action the first step down a path that would return Connecticut to the 2010s, an era marked by several state tax hikes.

But many of Lamont’s fellow Democrats and other liberals say the relief he approved was akin to sharing a few crumbs from a lavish table. The spending cap deal offered a tiny amount of temporary flexibility, allowing General Fund spending to increase by 1% extra — and only in the next budget. After that, the spending cap, which keeps budget growth in line with household income and inflation, falls back in place. 

“This ‘emergency’ means that Gov. Lamont can no longer call himself a strong believer in the spending cap,” said Carol Platt Liebau, president of the Yankee Institute, a conservative policy group based in Hartford. “Is our leadership really telling us that not one single dollar can be cut from a state budget of $55.7 billion” proposed by the Appropriations Committee?

Meanwhile, progressives add, education, health care, social services, municipal aid and other core programs that have been slipping for years — or decades — will enjoy modest increases in some cases or lose ground in others.

“We refused to really deal with the future,” said Sen. Gary Winfield, a New Haven Democrat and a member of the Appropriations Committee. “I think, in fact, we’ve been completely irresponsible in this respect.”

CT finances are much healthier now than during last cap exception

To say state government is better prepared to handle a spending cap exception now than it was in 2007 is an understatement.

The first line of defense against any recession, the rainy day fund, is in far better shape. 

Connecticut entered the 2007-08 fiscal year with a nearly $1.4 billion in reserve, equal to about 8.5% of the General Fund, according to state budget records. It currently holds more than $4.1 billion or 18%.

Former Gov. M. Jodi Rell’s spending cap exception came in June 2007 as government prepared to close the fiscal year with a $269 million surplus equal to almost 2% of the budget. Lamont expects to wrap 2024-25 with $2.4 billion unspent, or 10%.

At first glance, the pension systems for state employees and municipal teachers almost two decades ago were in similar shape as the current ones. Analysts estimated Connecticut had enough assets to cover 62% of pension obligations to state retirees and 63% to teachers entering the 2007-08 fiscal year, compared to 56% and 62%, respectively, now.

But the state counted on an average annual return of 8.5% on its pension investments back then, very aggressive assumptions that inflated the funds’ values by billions of dollars. Connecticut has since lowered those expectations to 6.9% and crafted plans to retire pension debt more gradually by around 2050.

And Lamont and the General Assembly have made $8.6 billion in supplemental pension payments since 2020 using surplus dollars, on top of the more than $3 billion the state must contribute annually. Connecticut reduced pension debt faster than did any other state in 2022, analysts from The Pew Charitable Trusts reported earlier this year.

Unlike how it handles pensions, the state still doesn’t save the full amount needed to cover health care benefits retired to state employees. And by not doing so, it effectively shifts millions in costs, plus interest, onto future generations.

House Republicans chastised Lamont and majority Democrats last month for shorting this contractual obligation by $228 million in their respective budget proposals for the next two fiscal years. State Comptroller Sean Scanlon, a Democrat and former legislator, said this week he still hopes to mitigate that as he negotiates with the state’s Medicare Advantage insurance carrier.

But Connecticut didn’t pre-save anything to cover this benefit in 2007, nor would it require state employees to set aside anything else until 2009.

Further, concessions agreements with unions in 2011 and 2017 would expand those employee contributions, require the state to begin saving annually for retiree health care, and scale back program and pension benefits for future hires.

Lamont draws sharp response from conservatives

The Lamont administration recently pledged that the next state budget would not deviate from responsible fiscal principles that have been the governor’s hallmark since taking office in 2019.

“Our fiscal house has been rebuilt to weather an economic downturn,” said Jeffrey Beckham, Lamont’s budget director and secretary of the Office of Policy and Management. “Now is not the time to tear it down.”

Beckham added that the next two-year budget “must ensure that state spending is sustainable and will not lead to future tax increases or service cuts.”

Not everyone, though, shares the administration’s confidence.

“Get your pocketbooks, your wallets ready,” Senate Minority Leader Stephen Harding of Brookfield said earlier this week, predicting Lamont’s cap exception would be the first step toward eventual fiscal chaos. “You’re going to give over more of your money [to] the state of Connecticut.”

Sen. Heather Somers of Groton, ranking GOP senator on the Appropriations Committee, said, “We have a governor who has literally folded like a lawn chair over this.”

Lamont, who told business leaders in mid-January that the spending cap was “sacrosanct,” has invalidated his fiscal credentials, according to the Yankee Institute.

Liebau noted that the $55.2 billion budget Lamont proposed for the upcoming biennium also maneuvered around the spending cap in other ways. The plan would shift $300 million outside the formal budget — and cap rules — to fund early childhood development. It also would borrow $60 million for a municipal grant to cover road repaving and winter snow removal. Borrowing and debt service payments also are outside the spending cap system.

“Connecticut’s residents and businesses can’t afford an increased tax burden,” Liebau added, “but after this, more taxes are what they should expect. This is no way to run a lemonade stand, much less a state.”

Rell launched big new investments. Lamont, not so much

Lamont also faces criticism, of a different kind, from progressive groups and many Democrats in the legislature’s majority.

The emergency he declared allowed legislators to spend $284 million more this fiscal year than the cap allowed, chiefly to cover a shortfall in the Medicaid program and ensure that health clinics, nonprofit social service agencies and other providers who treat the poor would be paid on time.

But Lamont could have used his declaration to also increase allowable spending in each of the next two fiscal years to grow by the same $284 million, plus roughly another 5% or $14 million.

He opted not to do so.

Instead, the administration pledged to allow legislators to carry about $255 million to $260 million of this fiscal year’s surplus into the coming biennial, giving them modest, temporary spending cap flexibility.

These carry-forward dollars originally were appropriated in this fiscal year, so spending them in either of the next two won’t count against cap limits in the coming biennium. But once those surplus dollars are spent, any extra spending cap room is gone.

Democrats already are making plans in the new budget they’re negotiating with Lamont to scale back planned increases in Medicaid rates and special education aid to K-12 schools. 

By early Thursday evening, Lamont still hadn’t announced a deal with SEIU 1199NE, which set a Tuesday strike deadline for about 6,400 workers serving 51 nursing homes and nearly 200 group homes. Union members work for private employers whose chief funding source is Medicaid payments, meaning the prospects of a strike hinge on state budget negotiations.

House Speaker Matt Ritter, D-Hartford, predicted the private nonprofit agencies that deliver the bulk of state-sponsored social services, which already lose hundreds of millions annually because state payments haven’t matched inflation for years, will be disappointed with the new budget.

The reason, he said, is that the $255 million to $260 million one-time surplus transfer Lamont will allow in the next two-year budget is nowhere close to sufficient, or sustainable enough, to support the major investments many legislators insist are necessary.

Rell, however, launched two huge new investments in 2007 by allowing $690 million in over-cap spending in the first year of a biennial budget. Adjusted for inflation, that represents almost $1.1 billion in 2025 currency.

And Rell ordered that $690 million spending cap exception to continue in perpetuity. Based on cap rules, that extra spending capacity also increased annually, usually between 2% and 4%, to keep pace with growing household income or inflation.

Rell, a Republican, agreed with a Democratic-controlled legislature that this ongoing infusion of cash was needed to provide one of the largest increases in local education funding in state history, a $261 million boost over two years, which represents more than $400 million now after adjusting for inflation.

Officials in 2007 also ordered a $323 million annual increase in Medicaid payments to providers that treat the poor.

That investment, worth almost $500 million now, is the last across-the-board Medicaid rate hike the legislature has approved.

 A 2019 analysis by KFF, the health care think-tank formerly known as Kaiser Family Foundation, found that Connecticut’s Medicaid rates for most specialists ranked 42nd among all states.

Rep. Jillian Gilchrest of West Hartford, co-chairwoman of the Human Services Committee, joined other Democratic leaders in January calling for a $300 million annual investment in Medicaid by 2028-29, starting with a $75 million jump next fiscal year.

Gilchrest said she’s disappointed that legislators will settle for a more modest increase, not only because many poor patients no longer can find doctors willing to accept additional Medicaid patients but because of the huge piles of cash Connecticut holds.

Besides this year’s projected $2.4 billion surplus, which equals 10% of the General Fund, analysts project budget caps will capture at least about $1.3 billion in each of the next two fiscal years.

Connecticut has funneled $12.5 billion in surpluses since 2017 to build reserves and scale back pension debt, a furious pace that far outstrips any similar effort in modern history. But those unfunded pension obligations, which topped $35 billion entering this year, still aren’t projected to be retired until about 2050. 

Gilchrest and many other Democrats say health care, education and other programs can’t keep sacrificing this much money to debt reduction much longer, let alone for two more decades.

“We have not solved the spending cap issue because our budget is still not in a good place,” she added. “We are ignoring decades of underfunding for Medicaid. … I think members are looking to make a significant investment in our state this year, and we’re tired of hearing the governor say there’s not enough money when we know there is.”

Winfield and others say Connecticut has overcompensated for fiscal mistakes of prior decades and is saving excessively now at the expense of communities, schools, health care and vulnerable residents.

While Lamont points with pride to the large surpluses achieved during his tenure, critics say these weren’t inessential funds but rather were leeched from core programs that have been dangerously undermined.

“What we have done is break a promise to people by not talking about these [surplus] overages,” Winfield said. 

Emily Byrne, executive director of Connecticut Voices for Children, said the officials here cannot ignore the spending cap’s dysfunction, given the impending huge cuts to Medicaid and other federal assistance.

“When decisions from Washington, D.C., are increasing chaos and inflation, Connecticut has an opportunity to make life easier and more affordable for residents,” Byrne said. “But this requires bold action. At a time when families are struggling to put food on the table and pay for housing and health care costs, the spending cap shouldn’t be sacrosanct.”

Rell’s cap exception preceded a huge CT tax hike

Others say Rell and the 2007 General Assembly were irresponsible.

The governor originally proposed a state income tax hike to help pay for her education aid initiative but withdrew it that same year under pressure from her fellow Republicans in the legislature.

Aggressive spending wasn’t the only problem the state faced. But that, coupled with the worst economic downturn since the Great Depression of the 1930s, brought state finances crumbling down.

By June 2009, legislators had emptied state reserves, ordered a nearly $875 million tax hike and ran up nearly $1 billion in operating debt.

The bleeding didn’t stop there.

Democrat Dannel P. Malloy inherited a budget deficit of more than 18% when he became become governor in January 2011 and approved a tax hike estimated at more than $1.8 billion a year. Four years later, in 2015, they ordered another $670 million in tax increases while canceling or deferring about $225 million in previously approved tax cuts that hadn’t taken effect yet.

Lamont often urges legislators to remember Connecticut’s past mistakes. He says sustainable budgeting enabled them to two years ago to deliver the state’s first income tax rate cut since the mid-1990s, which saves middle-class households about $300 per year.

“At the core of Connecticut’s economic turnaround is predictability and affordability, after years in which difficult economic conditions combined with challenging budgets didn’t allow for much of either,” Rob Blanchard, Lamont’s communications director, said Thursday. “The governor is committed to ensuring that our spending and revenue remain sustainable and in sync, without creating the need to raise taxes in the future.”

Ritter, who brokered this year’s spending cap compromise with Lamont, also insists on sustainable budgeting.

But the speaker added that those who say programs are strained and investments are needed also aren’t wrong. Still, Connecticut pledged in its contracts with state bondholders not to broadly alter the spending cap or other fiscal controls before July 1, 2028, though more modest adjustments can be made.

“The spending cap is tough,” Ritter said, adding it’s uncertain whether the state can avoid more exceptions or other cap workarounds for three more years. “At some point, we’re going to have to make a decision.”