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February 5, 2020

Lamont keeps state spending lean to build reserves against next recession

Photo | CT Mirror/MARK PAZNIOKAS OPM Director Melissa McCaw laid out the details of Gov. Ned Lamont’s $22.3 billion budget proposal Wednesday.
By Keith M. Phaneuf | CT Mirror

Gov. Ned Lamont proposed a lean $22.3 billion budget Wednesday that would push Connecticut’s emergency reserves close to $3 billion while keeping taxes largely flat.

The plan, which focuses on job creation, would raise revenue by canceling $28 million in previously approved tax relief for Connecticut businesses, by creating a tax amnesty program for certain insurance companies and establishing a new surcharge on those who pay state taxes, fees and other charges with a credit card.

It also would raise the new state tax on vaping while banning flavored products, including menthol, and tighten eligibility for the state’s new debt-free community college program.

The budget does not fulfill Lamont’s 2018 campaign pledge to provide $165 million in new income tax relief for low- and middle-income households. The administration claims Connecticut cannot afford the relief at this time, even though fiscal projections for the 2020-21 fiscal year are better now than they were when Lamont made the pledge two years ago.

“The budget you have before you today is financially responsible and pro-growth,” Office of Policy and Management Secretary Melissa McCaw, Lamont’s budget director, said during a mid-morning briefing. 

The latest budget proposal would grow General Fund spending in the 2020-21 fiscal year by 3.7% over the current year, which is a 0.6% increase over the preliminary 2020-21 budget he and lawmakers approved last May.

Most of the new spending in Lamont’s plan would cover rising state employee health costs, larger-than-anticipated state pension contributions, a growing demand for Medicaid services and a potential shortfall at the University of Connecticut Health Center.

Lamont’s budget holds aid to cities and towns largely flat, though it does allow a previously approved increase for the state’s largest grant — the Education Cost Sharing program — to move forward. This would boost aid to communities by $50 million next fiscal year.

Connecticut already enjoys a record-setting $2.5 billion rainy day fund, yet it still does not match the level recommended by Comptroller Kevin P. Lembo and other fiscal watchdogs to safeguard state programs and tax rates against the next economic downturn.

By keeping spending lean and continuing to save a portion of state income tax receipts tied to investment earnings, McCaw projects the reserve — which currently represents 13% of annual operating expenses — would grow beyond $2.9 billion after the next fiscal year ends in mid-2021.

The recommended level is 15% of annual operating costs, which is roughly $3 billion.

“This administration and Governor Lamont feel it is critically important that the budget reserve fund not be tapped,” McCaw said.

An equally important focus of the new budget, she said, is to grow the state’s economy.

The plan reinvigorates the Office of Workforce Competitiveness to create a unified, statewide strategy for training and developing new workers. The budget adds about $700,000 for new staffing.

The governor also kept a pledge to establish a new “earn-as-you-grow” tax credit for businesses seeking to add jobs. Companies adding at least 25 new full-time jobs over two years, with income at or above 85% of median household income, would receive a break. The program would be capped, meaning Connecticut would not provide more than $40 million in annual tax relief.

McCaw noted that the plan makes no cuts to social services nor to health care providers. But it also lacks any additional operating funds for the community-based nonprofits that provide the bulk of Connecticut’s social services.

Since 2002, state spending for nonprofits has grown by about 10%. After adjusting for inflation, nonprofits say they have lost money.

The CT Community Nonprofit Alliance projects it would take an extra $462 million per year to make them whole. They recently asked the governor and legislature to gradually increase funding over the next five years for an average of about $92.4 million extra per year.

Though Lamont has said he will support legalization of recreational marijuana use and taxation of cannabis sales, the new budget does not assume any revenue from this initiative.

The governor proposes that no sales occur before July 2022. In the interim, the Department of Consumer Protection and the state’s Equity Commission would study the challenges of legalization and make recommendations for implementation to the 2021 General Assembly.

Other components of the governor’s new budget include:

  • A “clean slate initiative” that would automatically clear certain Class C and D misdemeanors and certain drug convictions after a waiting period of seven years.
  • New restrictions on debt-free community college. A means test would be instituted to weed out students with sufficient resources. The program also would be limited to students who enroll full-time in courses within one year of graduating from high school.
  • $75,000 for new clerical support for the Connecticut Retirement Security Authority. The funding would also allow Lembo to assume operational control of the struggling agency charged with overseeing a new state-run retirement savings program for private-sector workers.
  • Allowing candidates who receive public grants to run for state office to use a portion of those grants to cover child care services.

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