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April 30, 2024

CT revenues soaring, but legislators still can’t spend them

CT-N Sen. Gary Winfield, D-New Haven, is among those who say the state should reassess the 'fiscal guardrails' that send money to reserves and to paying debt.

Progressive legislators have battled for months to secure $400 million that they insist is the minimum necessary to stem cuts next fiscal year in higher education and other core programs.

But they fear a new report due Tuesday will show double that amount — or more — is earmarked in 2024-25 to build reserves and reduce state debt, two initiatives that already have seen breakneck growth since 2018.

Gov. Ned Lamont’s budget office and the legislature’s nonpartisan Office of Fiscal Analysis must deliver their third and final consensus revenue projections for the 2023-24 budget year. And that report is expected to show very healthy growth in tax receipts from wealthy households and business partnerships. 

For the past seven years, legislators have been forced to save a significant portion of these revenues, building the rainy day fund and reducing unfunded pension obligations.

The chances of changing these budget controls before the regular session ends May 4 are nearly zero. But progressives said this year’s upside-down budget debate — early warnings of bare cupboards, followed by huge piles of untouchable cash — will fuel the push for comprehensive reforms in 2025.

“There’s an incredible amount of frustration for people that believe in government when we are told it’s impossible to do some basic components of our job when it’s so obvious the tools are being withheld from us unnecessarily,” said Rep. Josh Elliott, D-Hamden, founder of the House Tax Equity Caucus.

Many majority Democrats in the Senate and House have fought all session to secure minimum levels of funding necessary for public colleges and universities, services for people with disabilities and behavioral health treatment for children, said Sen. Gary Winfield, D-New Haven.

Since the session began Feb. 8, advocates for these groups have been told legislators could throw them a fiscal lifeline but not much more, because state budget rules won’t allow it, he said.

“We’re talking a lifeline when we have huge surpluses,” Winfield added. “It doesn’t, to my mind, make a lot of sense.”

At first glance, the General Fund — which covers the bulk of operating costs in the $25.1 billion overall budget — is on pace for a modest $86 million surplus on June 30, Lamont’s budget office reported two weeks ago.

But that doesn’t include another $478.5 million that the “fiscal guardrails” deem too volatile to spend.

The preliminary $26 billion budget for next fiscal year is in line for a similar boost. That plan was designed with an operating surplus of $300 million and projections that another $451 million in volatile revenue would be saved. 

That plan has some holes. Pension contribution line items need an extra $160 million. Surging costs in Medicaid and other programs are running $330 million over budget this year, and analysts fear a portion of those cost overruns could continue next year.

But the $750 million cushion built into the next budget is more than enough to cover those challenges.

And Tuesday’s consensus revenue report is expected to increase the volatility cushions by hundreds of millions of dollars, both this fiscal year and next. The stock markets have all performed well since the current budget began July 1. The Dow Jones Industrial Average closed Tuesday at 38,386 points, up 11.6% from 10 months ago, while the S&P 500 has gained 15% over that same period.

Since the 2017-18 fiscal year, when new budget controls — the “fiscal guardrails” — to encourage savings and end a string of budget deficits took effect, the state’s rainy day fund has grown from $212 million to a record-setting $3.3 billion.

Another $7.7 billion in surpluses since 2020 has been used to accelerate paying down Connecticut’s hefty pension debt, which topped $37 billion entering this year.

But critics say these controls are an over-correction and that the state is saving too much at the expense of core services that have long needed extra attention.

Education, health care, social services and other programs had been short-changed throughout much of the 2000s and 2010 as rising pension contributions consumed a greater share of annual state spending, they say. And the coronavirus’ arrival in 2020 only placed greater strain on many already weakened programs.

But since the rainy day fund hit its legal maximum in 2020, due partly to the budget controls, 21% of all revenues — excluding those assigned to special budget funds — have gone into the pensions.

Between 2011 and 2018, pension contributions ate up between 10.6% and 12.5% of General Fund revenues under then-Gov. Dannel P. Malloy.

When Lamont’s fellow Democrats pushed this year for added funds for core services — and particularly for higher education systems facing significant tuition and fee hikes — they ran smack into those guardrails.

A spending cap designed to keep most expenditure growth in line with household income and inflation determined the preliminary budget for 2024-25 already was over the limit by $30 million.

Some legislators in February suggested reforming the budget controls to allow more spending, but both Lamont and minority Republicans in both chambers strongly opposed any adjustments in savings levels.

Democratic legislators turned to emergency federal pandemic relief, which can be spent outside of the budget and the cap system. But Lamont originally said only $56 million of the $2.8 billion American Rescue Plan Act [ARPA] allocation Connecticut received from Congress in 2021 remained uncommitted.

Since then, Democrats have tried to identify capital projects and other initiatives backed with pandemic grants and want to instead pay for them with borrowing, thereby freeing the ARPA dollars for use next fiscal year.

House Speaker Matt Ritter, D-Hartford, has said his party has assembled about $400 million in ARPA money through this swapping arrangement. And though Lamont has frequently spoken against using one-time funds to back recurring expenses like higher education operating costs, he is expected to compromise and allow deal.

Ritter also has acknowledged that legislators won’t want to cut these programs next year, when all the federal aid has been exhausted, but that is a problem to be solved next year.

But why is Connecticut borrowing so it can use temporary federal grants to support ongoing core services when it has enough to cover those needs — possibly multiple times over — in a savings program off to the side, progressive legislators asked.

“What’s frustrating as chair of human services is hearing from people experiencing homelessness, medical providers who can’t financially afford to take Medicaid patients, undocumented immigrants who — because they’re 16 — can’t have their broken arm fixed … and try to say, to explain to them, we need to save this money,” said Rep. Jillian Gilchrest, D-West Hartford.

“Borrowing money while sitting on hundreds of millions of dollars is the definition of fiscal irresponsibility,” said Norma Martinez-HoSang, director of Connecticut for All, a progressive coalition of more than 60 faith, labor and other civic organizations. “Why are we needlessly paying interest to support one-time funding of core programs when Connecticut taxpayers are already creating hundreds of millions of dollars in surplus annually?”

House Republicans don’t support changing the budget controls, but they also took aim at the approach Democratic legislative leaders and Lamont are taking to the next budget. The GOP said last week that Connecticut could live within the guardrails system by containing the state government workforce, not expanding Medicaid and eliminating health care for undocumented residents.

Republicans also acknowledged there would be no funds to assist higher education, except by using one-time federal grants.

House Minority Leader Vincent J. Candelora, R-North Branford, called the approach Democrats were taking to state finances “an abdication of our constitutional obligation to balance the budget” and “a path right back to the irresponsible fiscal practices that dogged Connecticut for years.” 

But progressives added that if the only solution to maintaining the guardrails system is to cut programs deeply in need and send enormous annual payments to reduce pension debt, then a debate over reform next session is unavoidable.

“Sooner or later, we have to have this conversation, because we won’t be able to function,” Winfield said. 

“We just have to come out swinging at the beginning of the year,” Elliott added, “and say this is a priority of a large part of the caucus.”

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