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May 15, 2024

Five reasons why CT’s strange budget journey won’t repeat itself

ANDREW LARSON | HARTFORD BUSINESS JOURNAL The State Capitol.
By Keith M. Phaneuf, CT Mirror

Supporters and critics alike of the new state budget that starts July 1 concede the path legislators took to craft the plan was unconventional.

The $26 billion budget that takes effect July 1 was adopted 11 months ago, the second year in a biennial plan.

Traditionally, that second-year budget is adjusted a few months before it takes effect as new needs and problems are identified. And with huge surpluses projected through 2028, and plenty of pressing concerns in higher education, social services and health care, many legislators wanted to spend more.

But budget controls — labeled “fiscal guardrails” by Gov. Ned Lamont and others — stood in the way. 

A spending cap not only blocked new appropriations but demanded $30 million in cuts. That was hard for many lawmakers to take, given that analysts were predicting one of the largest surpluses in Connecticut history for the upcoming fiscal year. 

But the “fiscal guardrails” stipulated that this black ink — a $300 million operating surplus built-in and $1.2 billion in volatile revenues captured by a special savings program — couldn’t be spent. Those funds are supposed to be used to bolster reserves and pay down pension debt.

Formally adjusting the budget also meant complying with the state constitution’s balanced-budget requirement. That was a problem, because legislators learned this spring that some accounts in their preliminary budget for 2024-25 had sprung some leaks.

They’d accidentally short-changed mandatory pension fund contributions by $155 million, and Medicaid accounts also lacked sufficient funds. In any formal budget adjustment, these gaps would have to be plugged before any funds could be added to higher education or other core programs.

Legislators could have overcome all these problems in a formal budget process simply by modifying the fiscal guardrails. But Lamont, a fiscally moderate Democrat, and minority Republican lawmakers opposed any changes to budget controls.

Instead, majority Democratic legislators and the governor crafted a plan to circumvent them by working outside of the budget.

More than $370 million in temporary, federal pandemic relief grants was used to bolster higher education, social services and health care. 

And $110 million from the outgoing year’s surplus was transferred to 2024-25. This would mitigate the shortfalls created by not properly funding pensions and Medicaid. 

Legislative leaders and Lamont also knew next year’s $300 million built-in operating surplus and $1.2 billion collected from volatile revenues would easily cover any remaining cost-overruns, even though those dollars are supposed to saved, not spent.

“The reality is, ultimately, I think the legislature may determine what a budget is,” House Speaker Matt Ritter, D-Hartford, said on the last day of the General Assembly session last Wednesday.

And while the speaker conceded this year’s approach was different, he said repeatedly that the budget controls weren’t enacted so that enormous surpluses could be generated even as some of government’s highest responsibilities — education, health care and social services — were allowed to suffer.

GOP lawmakers cried foul, insisting that the spirit of the budget rules had clearly been violated, and possibly the letter as well, and are awaiting an opinion from Attorney General William Tong.

“Budget gimmicks are back in style under one-party Democrat rule at the state Capitol,” said Senate Minority Leader Stephen Harding, R-Brookfield. “The responsible fiscal guardrails that Republicans fought to put in place in 2017 have been broken.”

But regardless of what Tong opines later this spring, there are five reasons why this unconventional approach likely won’t happen again any time soon.

Pandemic aid won’t be available after this year

State government in Connecticut received $3 billion from Congress through the American Rescue Plan Act of 2021, and $2.8 billion of that came with tremendous flexibility, available to support most types of appropriations in the state budget.

But all state agencies must have assigned ARPA funds for use by Dec. 31 of this year. When the 2025 General Assembly session convenes next January and lawmakers and the governor begin working on the next biennial budget, there won’t be ARPA funds available to utilize outside of the spending cap.

Legislators will need to plug more gaps in next few years

Further complicating matters, there’s a good chance legislators will have bigger problems than pension contributions and Medicaid cost overruns in the next two years.

Most of the $370 million in temporary ARPA dollars assigned last week to higher education and other core programs will cover ongoing costs — expenses that will have to be covered with state dollars a year from now when the federal pandemic aid is exhausted.

But that’s not the only problem of this kind legislators created.

That $370 million simply was the last and most recent tranche of ARPA funds assigned.

Before this spring’s budget debate even had begun, legislators already had assigned $149 million from temporary sources — ARPA and past budget surplus — to support the University of Connecticut, the UConn Health Center, regional state universities, community colleges and the online Charter Oak State College.

Colleges and universities all have ordered significant tuition and other fee hikes for this fall and are proceeding with plans to trim programs and staff.

Similarly, the private nonprofit agencies that deliver the bulk of state-sponsored social services to people with disabilities and mental illnesses are getting $50 million out of the final $370 million in ARPA funds.

But the CT Community Nonprofit Alliance estimated, before that award was made, that nonprofits collectively are losing $480 million per year because state payments haven’t kept pace with inflation since 2007.

As temporary funds dissolve and long-deferred problems are addressed, some legislators say the challenges awaiting the General Assembly in the next budget will range between $500 million to $1 billion. And none of those can be solved working with temporary dollars outside of the budget.

Connecticut for All, a progressive coalition of more than 60 faith, labor and civic organizations, is urging officials to modify budget rules openly to allow aggressive savings programs to be scaled back so more can be invested in core programs yearly — and not just when federal pandemic aid is available.

Connecticut For All’s director, Norma Martinez HoSang, released the following statement following last night’s conclusion to the 2024 Legislative Session:

“We are closing the books on a session that — while it could have been a lot worse — we are certainly not in a better place than we were before,” said Martinez HoSang, who predicted many legislators will pledge to invest more in core programs as they campaign for reelection this fall. “We cannot fulfill those promises without responsible and transformational adjustments to our fiscal policies.”

Spending cap growth is essential

Another reason legislators likely won’t take an unconventional approach to state finances any time soon involves the spending cap they have struggled with since the General Assembly first created one in 1991.

Lawmakers decided there should be a mechanism to keep expenditure growth in line with household income and inflation, but that system always had exceptions, such as payments on bonded debt and emergency federal aid like ARPA. 

But three-quarters of the overall budget is subject to the cap system. And there is a penalty when legislators fund programs with dollars outside of the system, as they are doing now.

Allowable spending is determined by multiplying the prior year’s total spending in capped areas by either the inflation rate or by the five-year average growth in personal income, whichever is larger.

So by funding a portion of ongoing core programs — higher education, health care, social services — with cap-exempt ARPA dollars, that reduces the amount of spending under the cap. This, in turn, shrinks the amount of spending growth that will be allowable under the cap system when the next budget is crafted.

Pressure to create a state child tax credit

Many Democrats in the legislature want a new state income tax credit for low- and middle-income families, up to $600 per child. Republicans are backing a tax deduction that would provide less relief and be available only to the middle class.

But while Democratic leaders found options this spring to spend more next year without going through the formal budgeting process, they conceded that tax cuts and other revenue changes could not be made without a formal budget adoption.

And as surpluses keep piling up, pressure to provide more tax relief for Connecticut families grows. Many progressive groups and coalitions have made the child tax credit first on their tax relief list.

“The freedom to thrive is not a privilege for the few,” the United Way of Connecticut wrote in a post-session letter. “Is Connecticut the most family-friendly state in the country? No. Not until all our children have a safe and secure foundation.”

The letter was titled “We won’t rest until CT child tax credit passes” and cited a public opinion poll that shows 73% of voters approve of this credit.

A late February analysis from Connecticut Voices for Children, a progressive policy think-tank that also strongly pushes for a child tax credit, found that even major state tax cuts in recent years haven’t prevented Connecticut’s state and municipal tax structure from imposing much higher effective tax rates on the poor and middle class than on the wealthy.

Lamont had to modify his budget principles

But perhaps the biggest reason this year’s unconventional approach to state finances won’t happen again is a political one.

Lamont has cast himself as a big defender of the budget controls and was one of the first to label them “fiscal guardrails.” But he ultimately had to compromise quite a bit to keep the peace with his fellow Democrats in the legislature.

The governor proposed formal adjustments in February to the 2024-25 budget, offering a much leaner plan than he ultimately accepted. And throughout the session he largely spoke against Democratic legislative efforts to circumvent budget rules.

Even in the final days of the session, as Lamont negotiated a deal to spend temporary pandemic aid to meet ongoing costs, his office put out a statement to the contrary.

“The governor has been clear that the proposed funding in the ARPA package must go towards one-time expenses and that any discussion of recurring expenses will take place next year,” Lamont spokeswoman Julia Bergman said. “He is proud that Connecticut has passed an honestly balanced budget every year he’s been in office.”

And at a post-session press conference last Thursday to discuss the new spending plan legislators had passed — and that he was expected to sign — Lamont stayed on-message about how he expected temporary money to be used.

“I have to remind people that ARPA is one-time money, and ARPA does not go forever,” he said. “You’ve got time to put that money to work in a consistent way, hopefully not adding to your operating expenses.”

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