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April 13, 2023

Baby Bonds gridlock threatens Democratic unity on next CT budget

State Treasurer Erick Russell

State Treasurer Erick Russell has been crisscrossing Connecticut for the past two months, passionately advocating for “Baby Bonds,” an unprecedented wealth redistribution program that would invest $600 million in the future of the state’s poorest children.

But during a recent Sunday political affairs show appearance, Russell spent more than three-and-a-half minutes discussing Baby Bonds — and less than 20 seconds discussing its chief obstacle, Gov. Ned Lamont.

“The governor’s office, I believe, has kind of taken the position that they don’t want to bond for the full [Baby Bonds] program,” Russell told Fox 61 journalist Jenn Bernstein during his March 19 appearance on The Real Story, adding he’s talked with the governor and lawmakers about other funding options. “We’ve had really productive discussions.”

The new treasurer, who took office in January, has been hoping to rescue from political limbo a program advocates call crucial to stemming Connecticut’s expanding wealth and income inequality.

Simultaneously, Russell is taking great care not to inflame an issue that has pitted the governor — a wealthy Greenwich businessman — against many progressive Democratic lawmakers while threatening to stall adoption of the next state budget.

“We’ve seen the wealth gap and disparity in our state grow year over year over year,” said Russell, a Democrat from New Haven, one of Connecticut’s poorest cities.

U.S. Census data consistently ranks Connecticut as one of the most extreme states nationally in terms of income inequality.

The only two tax fairness studies the state has conducted, one in 2014 and the second just last year, both show the combined state and municipal tax systems disproportionately burden low- and middle-income households. Those earning less than $75,000 annually effectively pay three and four times the rate of Connecticut’s richest families.

Legislators say access to health and child care, affordable housing, education and economic opportunity are increasingly limited, not only in urban centers but in much of rural eastern Connecticut.

Russell’s predecessor, Hartford Democrat Shawn Wooden, thought he’d scored a big win in the battle to close these gaps two years ago when lawmakers passed — and Lamont signed — a measure creating the Baby Bond Trust.

It empowered the treasurer to place $3,200 in trust for each baby born after July 1 and covered by HUSKY, the state’s Medicaid program. That’s more than 15,000 kids annually.

The funds would grow over the lives of these children, who could tap these resources between the ages of 18 and 30, provided they’re living in Connecticut, for one of four purposes:

  • To buy a home;
  • Pay for college or some other form of post-secondary education;
  • Start or invest in a Connecticut business;
  • Or save for retirement.

Russell said each child’s bond likely would be worth between $11,000 and $24,000, depending on when the funds are accessed.

Equally important, the treasurer was empowered to borrow $50 million annually — by issuing bonds — to finance the program for 12 years, from 2023 through 2034.

Things changed last spring, though, when Democratic legislative leaders accommodated Lamont and removed the treasurer’s direct authority to borrow the funds. The revisions the legislature enacted — as part of an omnibus budget and policy bill — stipulate the borrowing can’t happen unless first approved by the State Bond Commission.

That’s a huge qualifier.

The commission is the chief gate-keeper of government’s credit card. The 10-member panel is chaired by the governor, who has sole authority to set its agenda. It decides how much of the billions of dollars in financing lawmakers propose annually actually gets borrowed.

If the bond commission doesn’t give the green light to finance baby bonds, the program has no money to distribute.

“This is probably not appropriate for bonding,” the Democratic governor said last week when asked about the status of Baby Bonds.

With more than $88 billion in bonded debt and unfunded retirement benefit obligations — stemming from bad savings habits stretching back to the late 1930s — Connecticut is one of the most indebted states in the nation.

And that’s despite racking up more than $9 billion in budget surpluses since 2017 and using two-thirds of that windfall to whittle down pension debt.

Rather than borrowing to start a trust fund that will assist poor children 18 years in the future, “I prefer things that help people right now,” such as free workforce training and the debt-free community college program, the governor said.

Legislators are talking this session about investing more in child care, social services, municipal schools and higher education. But if they also can find room in the next budget to launch a trust fund for poor children, Lamont said, that can be discussed.

“At this stage of the game, you’ve got to set priorities,” Lamont added.

And the governor isn’t alone in making that point.

Sen. Tony Hwang of Fairfield, ranking GOP senator on the legislative subcommittee that oversees most non-transportation bonding, supports Baby Bonds.

But Connecticut currently has more than $15.3 billion in outstanding bonding authorized by the legislature — borrowing approved by law that hasn’t actually happened yet. That’s roughly 10 times that amount of bonding the state actually is projected to issue this year, mostly for capital projects.

If financing for Baby Bonds can’t wait, then advocates should postpone borrowing for other programs. If a trust fund program is going to be paid for in cash in the budget, then other programs must do without, Hwang said.

“It’s about living within our means,” Hwang said.

But the leaders of the legislature’s Appropriations Committee say financing a trust fund program for poor children with cash from the state budget — rather than with borrowing — isn’t really feasible.

Since 2017, Connecticut has operated with a spending cap that is more stringent than the original version crafted to complement the new state income tax in 1991.

This new cap has fewer exceptions. Aid to poor communities and contractually required contributions to pension funds — which once were exempt from cap limits — are not. 

“We just don’t have the room” for Baby Bonds in the budget, said Sen. Cathy Osten, D-Sprague, co-chairwoman of appropriations.

Her fellow co-chair, Rep. Toni Walker, D-New Haven, a strong advocate for Baby Bonds, agreed that borrowing is the best approach.

While state tax revenues largely have boomed since 2018, that came after nearly a decade of minimal growth.

“It is a very, very unstable situation,” Walker added.

Russell said he’s been exploring options to pay for a trust fund program without borrowing, because it would save tens of millions of dollars, or more, in interest over the next decade.

House Speaker Matt Ritter, D-Hartford, who accompanied Russell on at a recent event in the capital city to promote Baby Bonds, also has been seeking alternative means to pay for the program.

“I don’t have an answer yet,” the speaker said. “If the governor doesn’t want to borrow money, he doesn’t have to borrow money, so we have to work with him on that.”

Ritter said he’s been exploring whether a trust fund program, possibly with modifications, could be funded with a combination of public and philanthropic dollars, which would lessen pressure on the state budget.

Legislatures and governors also periodically use an accounting technique known as a “revenue intercept” to work around the spending cap, and Ritter said that also is being weighed. This mechanism targets dollars before they arrive in the General Fund and assigns them for specific purposes. Because the cap only applies to budgetary appropriations, these dollars then could be used for a specific purpose, such as a trust fund for poor children, without counting against the spending cap limit.

But Lamont generally has opposed maneuvers such as revenue intercepts, which critics often call an accounting gimmick that violates the spirit of the spending cap.

Are Lamont’s budget politics forcing a showdown with progressives?
While the administration describes the governor as a fiscal moderate, some progressive lawmakers say Lamont’s budgetary politics lean farther right than that.

The affluent governor consistently has refused to support higher taxes on wealthy households and large corporations as a means to finance either tax relief for the poor and middle class or more funding for health care or social programs.

Lamont also has said he believes wealth redistribution primarily should be done at the federal level, though he has supported some measures to do so through the state tax system.

The governor’s latest proposal to reduce the two lowest marginal state income tax rates chiefly would benefit middle-income families, and he also has endorsed boosting a credit that would send an average of $211 extra back to working poor households making less than roughly $60,000 per year.

But critics say that’s far too little, given Connecticut’s extremely high cost of living and extreme income and wealth inequality — problems exacerbated by the coronavirus pandemic and by inflation that reached a 40-year high last summer.

The Federal Poverty Level — a 60-year-old metric focused chiefly on pre-tax earnings and a projected minimum food diet — holds that a family of four earning more than $30,000 annually doesn’t meet the legal standard of impoverished.

The United Way of Connecticut’s ALICE methodology — labeled with an acronym for Asset Limited, Income Constrained, Employed households — says once other key elements like health and child care, transportation, utilities and other housing costs are properly assessed, the same family needs to earn $90,660 to cover basic “survival” needs.

Nearly four out of 10 Connecticut families live below this threshold.

Baby Bonds alone won’t solve that problem either, Russell said, but an investment ultimately worth $11,000 to $24,000 could help a child reaching adulthood get a college degree, start a business, or make a similar investment that ultimately leads to greater prosperity. 

Simply put, it could be a “huge economic driver,” he said.

Would it be worth setting aside the cap, as far as Lamont is concerned?

Lamont’s budget spokesman, Chris Collibee, said, “The governor is willing to listen to ideas while ensuring that we are taking actions that provide support to families today.”

But Collibee added that “Any proposals the administration agrees to must comply with all Constitutional and statutory requirements, including the spending cap.”

What would that mean for the new biennial state budget and bond package that Lamont and the legislature must craft before the regular 2023 General Assembly session closes on June 7?

Sen. Marilyn Moore, D-Bridgeport, who co-chairs the legislative subcommittee overseeing non-transportation bonding, said no one should underestimate the strong support for Baby Bonds.

“We expect him [Lamont] to put that money out there,” Moore said, adding that expectations for this program have built since the governor signed the original Baby Bonds program into law two years ago. 

A member of the legislature’s Black and Puerto Rican Caucus, Moore said that group “is standing firm on this” and has many allies.

Sen. Mae Flexer, D-Windham, said the program also enjoys very strong support in rural eastern Connecticut, where many families rely on HUSKY and other Medicaid programs to make ends meet. Roughly half the children in her district would be eligible for the program, she said. 

“This would be life-changing for so many families,” Flexer said, adding that financial seeds planted now would bear huge economic fruit in a few decades. “What an incredible impact that can be, to wake up as an adult and have the opportunities that so many middle and upper-class people have.”

Progressive policy groups also say the popularity of Baby Bonds has spread rapidly in just two years, and many expecting mothers hope their children will receive funds in trust this summer.

“Connecticut Baby Bonds has come to symbolize the promise of what government can be — that government can be a force for good and can in fact design systems that provide real opportunity for everyone, not just for the lucky few,” said Emily Byrne, executive director of Connecticut Voices for Children. “And that’s why people across the state are still fighting for this policy.”

“Generational poverty plagues our state, holding back both individuals and entire communities,” added the Rev. Rodney Wade, pastor of Long Hill Bible Church in Waterbury and a representative of Recovery For All CT, a coalition that includes more than 70 labor, faith and community organizations statewide.

Advocates say support for Baby Bonds runs deep in the Democratic majorities in both the state House and Senate. If that issue is strong enough to fracture the group, Lamont might have to try to build a coalition with Republican lawmakers to try to pass a budget and bond package this year.

“I don’t want to play poker,” Moore said when asked to assess how vital it is, politically, to fund Baby Bonds starting this summer. “But I want that money to be allocated.”

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