This story has been updated.

The General Assembly and Gov. Ned Lamont likely will tap a special savings program at unprecedented levels to ensure Connecticut’s next budget provides major boosts to municipal aid, affordable child care and tax relief, according to sources close to negotiations.

But officials will be challenged to maintain and boost these investments one year from now. That’s because various loopholes they’ve used to work around state budget caps are closing simultaneously, even as aid from Washington shrinks precipitously.

“We’re going to get to a balanced budget,” Lamont said late Wednesday afternoon after meeting privately with legislative leaders for nearly three hours in his Capitol office. “We talked about some of our towns and cities that are having a really tough time. … We’re in a good place.”

Chris Collibee, the governor’s budget spokesman, did not discuss specifics. But he said, “A budget that addresses the needs of today, invests in tomorrow and is sustainable in future years remains our focus.”

The top leaders of the legislature’s Democratic majority emerged confident of finding a way to increase education funding. They declined to say Wednesday how much more could be provided but have said repeatedly in recent weeks they want at least $150 million extra for local schools.

“We’ve agreed to make a substantial increase in ECS funding,” House Speaker Matt Ritter, D-Hartford, said, referring to the Education Cost Sharing program that is the state’s chief operating grant to local districts.

The leaders warned there remain substantial details to address and talks with the governor would resume Thursday.

“I think we’re very close” to an agreement to boost education aid, said Senate President Pro Tem Martin M. Looney, D-New Haven. “But you don’t have a deal until all the pieces come together.”

More for town and child care, despite the spending cap

Democratic leaders have been saying for months that doing more for cities and towns — and their school systems in particular — is one of their highest priorities.

They added Wednesday that Bridgeport, Hartford and Hamden were in urgent need of further aid to close shortfalls in education budgets, but they were unsure if those needs could be fully met without major grant formula changes or special appropriations.

Tariff-driven inflation, rising energy costs and vanishing federal aid have pushed many districts into fiscal crisis. And leaders say they want at least $150 million extra for school systems, as well as some boost in non-education aid.

Legislators and the governor invested $300 million last June in a new endowment to expand affordable child care, and many Democratic legislators also have been pushing to match that contribution this year, or at least to come close.

At first glance, Lamont and legislators have plenty to spend on town aid and many other priorities.

Though revenue projections won’t be updated until April 30, analysts say early trends following the April 15 tax-filing deadline show more than $200 million in growth, though numbers still can fluctuate significantly over the next week.

The savings program that withholds a portion of income and business tax receipts from the budget now is on pace to capture more than $2 billion this fiscal year, up from the $1.8 billion analysts estimated in January.

But those dollars are supposed to be used to build reserves and reduce pension debt. And a budget cap that keeps spending growth in line with household income also appears to block major new investments.

The child care endowment, however, was created outside of the formal budget and spending cap, and officials could redirect funds from the savings program to early childhood education.

But most aid to cities and towns is regulated by the cap system. This is where legislators and Lamont are expected to get creative.

Connecticut will receive about $90 million next fiscal year from a 1% sales tax surcharge on certain prepared meals. Sources said those funds could be redirected via an accounting maneuver to municipalities for non-education programs. And because they were intercepted before technically arriving in the state’s General Fund, they would not count as spending subject to cap rules.

To get more state aid to local schools, lawmakers could take advantage of a long-planned change in the cap system.

To tighten overall spending, the 2017 legislature decided mandatory payments into the pensions for state employees and municipal teachers no longer would be exempt. Contributions to the employees’ fund fell under cap rules in the 2022-23 fiscal year. But those for teachers don’t start until this July.

That means lawmakers could order a one-time raid of $150 million — or whatever other amount they want to give school districts — from the $2 billion savings program and use those dollars to prepay a portion of next fiscal year’s mandated contribution to the teachers’ pension.

That would create $150 million or more in room under the cap next fiscal year to accommodate extra school aid.

And the pre-payment wouldn’t violate the cap, provided it was made soon, since contributions to the teachers’ pension don’t count against spending limits until July 1.

House Speaker Matt Ritter, D-Hartford, has said repeatedly this year that legislators have taken big steps in recent budgets to enhance education aid and support a child care industry that was badly weakened by the coronavirus pandemic.

But while the speaker said continued investments in these areas are essential to ensure Connecticut remains affordable for working families, legislators won’t gut the savings program and other budget caps they launched nine years ago.

“There’s no way we’re not paying down our” pension debt, he said, noting Connecticut still maintains of the largest budget reserves of any state. And it still has more than $300 million set aside, in addition to its $4.3 billion reserve, to offset deep federal cuts to human service programs.

Lamont’s tax rebate likely to shrink if it survives

The governor, a fiscally moderate Democrat, has been loath to tamper with state budget caps since he took office in 2019.

Connecticut, which failed to properly save for more than seven decades prior to 2011, has one of the highest pension debt burdens in the nation, owing more than $33 billion.

Still, that burden would be $10 billion greater were it not for surplus dollars Lamont and lawmakers poured into the program over the past six years, and the administration expects more than $1 billion from the current savings program to be deposited this fall.

Collibee said Connecticut has become “a case study in how sustainable budgeting plus political follow-through can materially change a state’s fiscal outlook,” adding the governor won’t allow state government to deviate from this path.

But the governor, who is seeking reelection to a third term this fall, likely must compromise in this area, since he also wants to temporarily ease savings efforts.

Lamont in February pitched taking $500 million from the savings program to finance a $200-per-person tax rebate in late October, just days before the election. The governor says a one-time rebate is fiscally safer than ongoing tax cuts, given federal cuts in Medicaid assistance would cost Connecticut hundreds of millions annually through the early 2030s.

Legislators from both parties counter the state can afford to dole out some lasting tax cuts given all it’s saved.

Sources said the rebate remains up for discussion. But if it survives, it likely would be reduced from $500 million to at least $300 million.

Hospital funds also headed outside budget cap

The governor and Democratic legislative leaders also are expected to embrace a House Republican proposal to move big annual payments to hospitals outside of the cap.

Each year, Connecticut collects hundreds of millions of tax dollars from the industry and then returns those funds as part of a complex arrangement to qualify for extra federal Medicaid funding. Most states employ this back-and-forth arrangement that Washington long has encouraged.

House Republicans last week said Connecticut should move roughly $700 million in payments outside of the spending cap system to create room for more town aid.

That depends on state and hospital officials reaching a new deal, with the current taxing arrangement about to expire.

Connecticut officials are pressing the industry to do more to control care costs and forgive more debt from low-income patients.

The Connecticut Hospital Association “is actively engaging with administration officials and lawmakers on opportunities to slow the growth in health care spending and further build on existing financial assistance policies, which are already some of the most generous policies in the nation, built through years of collaboration with the state to enhance transparency and consumer protections,” the CHA wrote in a statement.

But the industry also insists the new taxing arrangement must recognize a federal Medicaid system that each year covers less of provider’s costs.

CT Mirror reporter Mark Pazniokas contributed to this story.