This story has been updated.

The General Assembly was poised to adopt a $28.1 billion state budget this weekend that orders major new investments in municipal aid and affordable childcare and restructures Connecticut’s tax on hospitals to leverage more federal aid and assist the industry.

Legislators did not include Gov. Ned Lamont’s proposal for a $200-per-person tax rebate this October, nor any of the major tax-cutting proposals offered by either party. But the final plan does create a new income tax credit for caregivers and sales tax break for school supplies.

Lawmakers also increased rates for doctors and other providers who treat low-income patients, added funds for nonprofit social service agencies and established a universal free breakfast program in Connecticut schools.

The new budget technically falls under the spending cap that keeps budget growth in line with household income by a razor-thin $600,000 next fiscal year, which represents a fraction of 1%. But to get there, Lamont and legislators had to add about $85 million to the amount of allowable spending normally permitted under the cap. They also had to shift hundreds of millions of dollars in annual payments to hospitals outside of the formal budget and spending cap systems.

The Democratic-controlled Senate began its budget debate around 1:45 p.m. Saturday. The House, where Democrats also hold a majority, was expected to tackle the plan Saturday evening.

Big new investments in town aid and affordable childcare

The linchpin of the new plan involves $270 million in additional aid for cities and towns and a $300 million to $350 million investment in affordable childcare.

That includes $100 million in one-time aid for non-education programs and $170 million for schools that communities could expect year after year.

Lamont said this week the package would stipulate that municipalities that already have set their local budgets can re-open those documents and use the extra state aid to lower taxes if they choose.

“This is probably the best budget we have seen for municipalities in decades,” said Sen. Cathy Osten, D-Sprague, co-chairwoman of the Appropriations Committee.

“We’re doing everything we can, because I know how expensive life is right now,” the governor said as he touted the plan earlier this week.

Legislative leaders say many local school districts are in fiscal crisis, reeling not only from vanishing federal pandemic relief but also rising energy and healthcare expenses.

Surging costs for early childhood education mean many low- and middle-income families can’t have two spouses employed. The new budget also deposits $300 million to $350 million in a new trust to dramatically expand affordable childcare program slots.

Legislators and Lamont launched the program last June, also with a $300 million deposit.

House Speaker Matt Ritter, D-Hartford, called the childcare investment “a gamechanger” for Connecticut’s economic future.

To fund this childcare investment and the $270 million in extra town aid, though, legislators will tap a special savings program that Connecticut has used since 2017 to reduce pension debt and build reserves.

State fiscal analysts projected Thursday that this program, which captures a portion of state income and business taxes, will hold about $2.1 billion by the fiscal year’s end on June 30.

The state has paid down about $10 billion in pension debt using this program since 2020 but still owes more than $33 billion, which is one of the largest burdens, per capita, in the nation.

Few direct tax cuts despite lots of proposals

This year’s General Assembly session was dominated by talk of making Connecticut more affordable, specifically by cutting taxes.

And while investments in municipal aid and affordable childcare could translate into savings for many households, direct relief in the form of tax reductions largely was bypassed.

Lamont’s plan for a late-October, $500 million one-time rebate was dismissed as a reelection gimmick.

But legislative leaders also abandoned proposals for new income tax credits for renters and poor and middle-class households with children, despite strong support from rank-and-file lawmakers.

Despite aggressive budget caps that have forced annual surpluses of roughly $1.9 billion — equal to about 8% of the General Fund — Lamont and some legislative leaders were fearful that big ongoing tax cuts would imperil funding increases ordered in recent years for town aid and affordable childcare.

The governor and leaders also fear new pressure on state finances coming from Washington.

Based upon cuts ordered last July by Congress and President Donald Trump, Connecticut, starting in the next budget cycle, must accept huge cuts to Medicaid and other human service programs or use hundreds of millions of state dollars annually to offset vanishing federal funds.

Lawmakers did order a few small tax cuts and repealed what amounted to a tax break for corporations.

A new sales tax exemption on school supplies will save consumers about $7 million per year.

And residents providing at-home care for relatives would be able to claim an income tax credit to offset certain expenses. This would save filers collectively about $2 million per year.

“There are about 773,000 caregivers in Connecticut, and they are spending an average of about $7,200 out of pocket annually to help keep their loved ones independent,” said Nora Duncan, director of the Connecticut chapter of AARP. “They pay for wheelchair ramps, assistive technology, transportation, paying for prescription drugs and more. Ultimately, their efforts help keep people off taxpayer-funded higher levels of care. A caregiver tax credit is good for families and taxpayers.”

Lawmakers are asking Connecticut’s corporations to pay more after collections this year dropped $420 million below expectations and $166 million below receipts from the last budget cycle.

Connecticut links its state corporate tax system to the federal code, as do several other states. And since Congress and President Donald Trump last July extended federal corporate tax breaks that had been set to expire, Connecticut’s receipts from big business have slumped badly.

The new state budget orders changed to decouple from the federal code, and analysts project that will restore $104 million to Connecticut’s coffers by the 2027-28 fiscal year.

But the Connecticut Business and Industry Association said Saturday that the state has missed a chance to attract more companies.

“As other states in our region have also scaled back this improvement to the tax code, Connecticut had the opportunity to position itself as the best state in the region for relocating and expanding manufacturing facilities and jobs,” said Chris Davis, CBIA’s vice president of public policy.

A five-year effort to secure more federal funds for hospitals

The package includes a new five-year taxing arrangement with hospitals that lawmakers hope will leverage more federal dollars for the industry.

Hospitals currently pay $820 million annually to Connecticut, which returns those funds, plus $124 million more, to the industry.

This back-and-forth arrangement, which most states employ and Washington allows, technically counts as state health care spending and qualifies Connecticut for additional federal Medicaid payments.

The state comes out about $505 million ahead annually by keeping the majority of extra aid from Washington.

But hospitals, which say they collectively lose $1.5 billion annually due to Medicaid payments that fail to meet the full cost of delivering service, say they need more help.

The new deal calls for hospitals to pay $154 million more next fiscal year and get $240 million extra back from the state.

By the fifth and final year of the deal, the industry will be paying $1 billion more than its current level and getting an extra $1.7 billion back.

The state’s annual gain of $505 million would remain constant for the next five years.

Legally exceeding and working around the spending cap

Lawmakers and Lamont have struggled to live within the spending cap throughout the governor’s tenure, which began in 2019. Nearly $3 billion in emergency federal pandemic relief grants sent directly to state government, which could be spent outside the formal budget system, eased some cap pressures between 2021 and 2025.

But that money is mostly spent.

To accommodate their plan to increase town aid, legislators and Lamont agreed to increase the maximum level of spending allowed under the cap by $85 million. Such an exception can be made under current law provided the governor declares a fiscal emergency in writing and 60% of the Senate and House vote in favor of the budget.

Still, officials also needed a few fiscal gimmicks to work around the cap, as they have in recent years.

The new spending plan also shifts hmore than $960 million in payments to hospitals outside of the formal budget and spending cap systems.

Had those funds not be shifted outside of the formal budget, appropriations would be up 8%, said Sen. Ryan Fazio of Greenwich, ranking GOP senator on the Finance, Revenue and Bonding Committee and a gubernatorial candidate.

“At a certain point, enough is enough,” he said. “It’s wrong, it’s bad economic policy and it’s ensuring decades to come of economic stagnation.”

And Lamont and Democratic egislators budgeted nearly $1 billion to cover retiree health care costs, about $90 million less than what Comptroller Sean Scanlon projects will be needed to meet the contractual obligation.

The state has a reserve fund holding more than $130 million to cover unanticipated expenses in this area. But officials had to tap that recently after Scanlon noted retiree health care had been underfunded in the current budget by roughly $39 million.

And if the comptroller’s projections come to pass again in the next budget cycle, the reserve could be nearly depleted.

Connecticut must pay the retirement benefits based on its contract with the union. But by appropriating less than the required level, legislators and Lamont can, effectively, keep the formal budget lower relative to the spending cap.

The State Employees Bargaining Agent Coalition, which represents nearly all major bargaining units in state government, recently issued a statement urging the governor and legislators to pursue a more direct solution: reform a spending cap system that labor says already saves too much money to the detriment of core services.

“Our arbitrary fiscal roadblocks are Connecticut’s largest obstacle to investing in the future of all working families,” the coalition wrote in a statement.

Investing in health care and social services

The new budget continues taking modest steps to increase rates for physicians and other providers who treat Medicaid patients.

Officials added $15 million to the Medicaid budget one year ago and will invest another $60 million starting July 1. But that is far shy of the $300 million legislative leaders have said is needed to fix a system that wasn’t adjusted comprehensively between 2008 and 2025.

Further complicating matters, legislators directed the state Department of Social Services to find $25 million in savings next fiscal year in the Medicaid program, but didn’t specifiy how that should be achieved. That means the department may scale back that $60 million increase in provider rates to help achieve that savings.

Health care advocates complain Medicaid patients often cannot find doctors willing to treat them because the compensation is so poor. 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.

Similarly, the community-based nonprofits that deliver most state-sponsored social services to people with disabilities and patients struggling with mental illness and addiction say they lose hundreds of millions annually under state payment schedules that haven’t kept pace with inflation for decades.

The budget would boost funding for nonprofits by $138 million next fiscal year, though $32 million of that increase would be given only to providers serving clients with intellectual or developmental disabilities.

The funding “will continue to address long term underfunding for vital programs that serve tens of thousands of Connecticut residents,” said Gian-Carl Casa, president and CEO of the CT Community Nonprofit Alliance, who said most social service programs remain 30% behind inflation.

“Connecticut continues to bring in more in tax receipts than is needed to balance the state budget,” Casa added. “In these critical times, we continue to advocate for stronger, sustained support to safety net programs.”

Public colleges and universities likely will tap reserves

Lawmakers and the administration have been pressuring higher education units to curb costs now that the federal pandemic grants Connecticut used to supplement their operating budgets between 2021 and 2025 have largely expired.

The Connecticut State Colleges and Universities system particularly has come under fire for holding close to roughly $700 million in reserves, which represents more than half of its annual operating budget.

The new state plan would boost assistance for CSCU, which includes regional state universities, community colleges and online Charter Oak State College, to nearly $508 million — a $28 million jump that would force the system to tap reserves to maintain current services.

The University of Connecticut has maintained a much smaller fiscal safety net than has CSCU but also will likely have to tap its savings starting July 1.

Aid for UConn’s main campus in Storrs and its regional branches would drop from $268 million this fiscal year to $257 million in 2026-27.  Similarly, the committee would drop funding for UConn Health in Farmington from $143.5 million to just over $141 million.

Free school breakfast, funds for Shoreline East, and other budget components

The new budget also marks a successful conclusion to Lamont’s two-year effort to provide free breakfast at all Connecticut public schools for all students, allocating more than $12 million for that initiative.

Many supporters of the initiative want both breakfast and lunch to be available free to all students.

James Williams, a lobbyist for the American Heart Association, said that while it still supports a broader benefit, “Connecticut is taking an important step towards ending food insecurity and improving student performance” with the free breakfast initiative.

“Thousands of families across the state are struggling to put meals on the table,” Williams added. “Federal funding cuts to food assistance programs, which will take effect later this year, will only make that situation worse.

The budget also commits $4 million to the Shoreline East rail service next fiscal year. Lamont has said Connecticut no longer can maintain the subsidies it does the rail service because of limited use. Ridership along the Shore Line East route has struggled to rebound from service cuts imposed during the COVID-19 pandemic. Transportation Committee Chair Christine Cohen, D-Guilford, said that she ultimately would like to see service along Shore Line East restored to pre-pandemic levels, though she noted that would cost an estimated $28 million. 

“We have a long way to go to get us there,” Cohen said. “We’re slowly getting back to service levels and optimizing service to get commuters back to the line.” 

Other components of the new budget include:

• Directing the Lamont administration to study the feasibility of creating a “Connecticut Option” – a government-backed health insurance plan to assist consumers who’ve lost federal assistance to purchase private coverage. A report is due back to lawmakers next January.

Connecticut Mirror reporter John Moritz contributed to this story.