Lamont proposes loosening guardrails, boosting child care in $55.2B budget

Gov. Ned Lamont unveiled a $55.2 billion biennial budget Wednesday that would loosen Connecticut’s fiscal “guardrails,” launch a major early childhood development initiative, provide a $50 income tax cut and restructure hospital taxes to secure more federal aid.

The plan also would boost Medicaid rates for caregivers, corporation taxes and transit fares, invest in special education and preserve already-planned increases in town aid.

The budget would spend almost $27 billion next fiscal year, up 3.8% from current levels, then jump another 4.6% to $28.2 billion in 2026-27.

Thanks to a controversial maneuver that shifts about $300 million outside of the budget, the governor’s proposal falls a razor-thin $1.8 million under the spending cap in the first year and a more comfortable $261 million under the limit in 2026-27.

Lamont’s blueprint begins what’s anticipated to be a four-month-long debate with lawmakers over Connecticut’s fiscal priorities. The General Assembly, which will offer its own budget recommendations in late April, is expected to adopt a compromise plan with the governor in early June.

Reforming the ‘guardrails’ to help children

Lamont, a fiscal moderate, has been sparring with his fellow Democrats in the legislature for more than a year about whether to revise the budget caps that have generated unprecedented savings since 2017 — windfalls that critics say have come at the expense of education, health care and other core programs.

“The governor has heard the concerns about the fiscal guardrails and whether they might be too restrictive in terms of setting aside revenue that might otherwise allow us to provide for the needs of our residents in the operating budget,” Lamont’s budget director, Office of Policy and Management Secretary Jeffrey Beckham, said during a late-morning briefing.

Since 2017, the legislature has barred itself from spending an average of $1.4 billion in annual income and business tax receipts on the grounds they are too unstable, fluctuating greatly from year to year. Ironically, this system has consistently generated massive surpluses while the supposedly unstable revenues have grown steadily.

After years of insisting this “volatility adjustment” didn’t need reform, Lamont agreed to revise the limit, proposing that an average of nearly $300 million per year be restored to the safe-to-spend category. Besides freeing up more resources to bolster programs, the change also would safeguard Connecticut in the event President Donald Trump and the new Congress reduce aid to states later this year, as many Connecticut legislators fear.

“We have earned the opportunity to rethink the volatility threshold, which are tax revenues considered too unpredictable to spend on operating expenses, that can also create big deficits in the out years,” Lamont told legislators in his budget address.

But Lamont also needed to work around a second “guardrail” to dedicate more funds to early childhood development, something both he and legislators have prioritized since the industry suffered serious financial losses during 2020 and 2021, the first two years of COVID.

The governor proposed creating a new Universal Preschool Endowment. Because it would exist outside of the formal budget, it would be exempt from the spending cap, which keeps budget growth in line with household income and inflation.

The governor proposed that $300 million of this fiscal year’s $443 million projected surplus be deposited into the new endowment. Future operating surpluses also would go into this program.

The state then could expend up to 10% of the endowment balance in any given year on child care and related initiatives.

The governor also is recommending that nearly $26 million be spent in the next biennial budget to support the Office of Early Childhood and the state’s Birth-to-Three program.

Connecticut has hundreds of special funds outside of the budget, though most hold very small amounts of money. But this Universal Preschool Endowment could be attacked by fiscal conservatives who would see it as a move to circumvent the spending cap. 

Still, the governor said, “I continue to be a strong believer in the spending cap, which simply restates the obvious: you can’t spend more than you earn.”

Seeking to compromise, Lamont is insisting that legislators extend all the budget caps. They currently are set to expire on June 30, 2028, unless lawmakers act. The governor now wants those “guardrails” in place through mid-2038.

And because Connecticut pledged in its covenants, or contracts, with bond investors only to adjust these “guardrails” in limited fashion, the volatility adjustment change could not be made unless 60% of the House and Senate — rather than just a simple majority — agree.

Plan draws mixed reviews; leaders fear special session over federal aid

Lamont’s budget, and particularly his new position on the budget controls, drew mixed responses.

State Comptroller Sean Scanlon, a Democrat who largely has defended the budget controls to date, backed Lamont’s decision to seek reforms, noting Connecticut was in much worse fiscal shape eight years ago when the “guardrails” were adopted.

Connecticut had just $212 million in its rainy day fund, equal to roughly 1% of the General Fund back then, and now has a record-setting $4.1 billion equal to 18%. Another $8.6 billion in surpluses since 2020 has been used to pay down pension debt, and Lamont expects that total to stand at $10 billion after the current fiscal year ends on June 30.

“Ten years ago, Connecticut was in fiscal crisis,” Scanlon said. “Today, thanks to Gov. Lamont and the legislature’s leadership, and our commitment to fiscal responsibility, Connecticut’s finances are the strongest they’ve been in decades.”

But Lamont also had critics across the political spectrum — some saying his “guardrails” reform would weaken Connecticut’s finances, and others saying it didn’t go far enough.

“I think it lacks leadership,” said House Minority Leader Vincent J. Candelora, R-North Branford. “For somebody who fought so hard to protect these ‘guardrails,’ he’s willing to ram right through them.”

Chris DiPentima, CEO of the Connecticut Business and Industry Association, added that the string of surpluses driven by budget controls has bolstered business confidence considerably.

“While we support the governor’s efforts to expand child care affordability and accessibility for families, there are better ways to accomplish this goal within the budget,” he said. “Those guardrails provide much-needed stability, certainty and predictability.”

Carol Platt Liebau, president of the Yankee Institute, a Hartford-based conservative fiscal policy group, said that “by weakening [budget controls], the governor and legislature are breaking their promises to Connecticut’s hardworking residents and businesses and leaving them vulnerable in the event of a downturn.”

Lamont also took a hit from the Connecticut Working Families Party. State Director Sarah Ganong called his plan “a weak and evasive response to the political moment in our country and falls short of meeting the deep need felt by so many Connecticut residents. … A budget lacking full-scale reforms to the ‘fiscal guardrails’ and lacking substantial revenue options through tax increases on the wealthiest Connecticut residents is woefully inadequate to meet the moment.”

Meanwhile, the governor’s fellow Democrats in the legislature’s majority repeated their fears that, even with the added fiscal flexibility Lamont proposed, lawmakers will be back in special session this summer or fall to deal with federal aid cuts ordered by Trump and Congress.

Trump has offered a radically different vision for funding the government than past presidents. About a week ago, a memo from the administration that was soon blocked by a federal judge threw Connecticut nonprofits, health care systems and municipalities into chaos and confusion. The memo suggested that there would be a freeze on federal funding across many agencies.

“We don’t know to the extent of the federal tsunami that we are facing, but what the governor has set is a snapshot in time,” said House Speaker Matt Ritter, D-Hartford. “It’s a reasonable beginning for our budget process.”

Ritter said that the state is financially well-prepared for potential disruptions from the federal government. But even so, there is only so much Connecticut could withstand. 

“We are prepared,” Ritter said, referring to the state’s budget surplus and budget reserve fund. “Could we handle minor reductions? Yeah. Can we handle utter chaos and destruction? No.”

The General Assembly will try to adopt a state budget before its regular session ends on June 5.

“Unless we have all the federal information we need prior to that date, it’ll be impossible to do something that won’t have to be adjusted later,” said Senate President Pro Tempore Martin Looney, D-New Haven.

Modest relief for middle class households

The new budget also reflects Lamont’s concerns that low- and middle-income households continue to struggle.

He and legislators approved one of the largest tax cuts in state history two years ago with Connecticut’s first income tax rate reduction since the mid-1990s. This time he proposed more modest relief.

The governor would boost the income tax credit that offsets a portion of municipal property tax bills from $300 to $350. He also wants to increase eligibility.

Currently, only single filers earning less than $49,500 and couples below $70,500 receive the full credit. The governor’s plan raises those thresholds to $70,000 and $100,000, respectively. In addition, singles earning less than $130,000 and couples below $160,000 would earn at least a partial credit.

“We are trying to help our mayors and first selectmen hold the line on property taxes, which are high compared to our peers,” Lamont said in his address.

The governor also would save workers millions over the next two years combined by repealing license fees in fields facing labor shortages. Occupations that would be affected include nurses, dental hygienists, mental health clinicians, occupational and physical therapists, paramedics, electricians, HVAC technicians, plumbers, sheet metal workers, and teachers.

Restructuring the hospital tax and boosting provider rates

The governor wants to restructure the hospital provider tax, a levy with a controversial history. He said his goal isn’t to seek more funds from the industry.

Lamont is asking hospitals to pay an extra $140 million starting in the 2026-27 fiscal year. The state would return every dollar to the industry but would redistribute the funds, giving more to poorer hospitals and less to those in strong fiscal shape. This back-and-forth arrangement, which is encouraged by the federal government and employed by most states, would enable Connecticut to qualify for an extra $94 million in federal Medicaid payments.

But while Connecticut had followed a similar approach when it created the hospital tax in 2011, then-Gov. Dannel P. Malloy and the legislature quickly deviated from that blueprint. Hospitals increasingly were asked to pay more while getting less back from the state, prompting the industry to sue.

Shortly after taking office in January 2019, Lamont brokered a settlement that eased burdens. 

His new budget essentially asks hospitals again to trust that increased taxes won’t lead to fiscal abuses by the state down the road.

The Connecticut Hospital Association warned Wednesday the tax could be problematic, particularly given that Lamont also is seeking new caps on the out-of-network payments hospitals can charge patients.

“Gov. Lamont’s budget proposal contains policies that are devastating to hospitals, their workforce, and their patients,” the association wrote in a statement. “We ask Gov. Lamont to reconsider these proposals and work with us to build a budget that protects patients, supports care delivery and the health care workforce, and plans for Connecticut’s future.”

The governor’s plan also includes new funding to boost Medicaid rates for physicians and other medical providers. Connecticut has not adjusted these rates in a broad-based fashion since 2007.

Lamont proposed $10.4 million in the first year of the new biennium for these hikes and $25 million in the second.

New funds for special education, planned ECS and PILOT growth continues

Lamont also kept his pledge in the new budget to recommend additional funding for K-12 districts to cover the growing cost of serving students with special needs.

The governor proposed a $40 million increase to the Excess Cost Grant, which is the state’s reimbursement model to districts for high special education costs. It also features a $14 million grant program to help districts develop ways to educate more students with disabilities in-district rather than sending them to private programs in other communities.

But districts, which said they needed about $90 million more from the state to cover growing costs, wouldn’t receive the extra money until 2026-27, the second year of the new biennium, under the governor’s plan.

Connecticut Council of Small Towns Executive Director Betsy Gara praised the governor for investing in one of K-12 districts’ greatest needs but said even more funding is needed.

“Connecticut’s municipalities pick up 65% of the state’s special education costs,” she said. “This is placing tremendous pressure on local budgets, forcing cuts in other critical services, driving up property taxes, or both.”

The state’s $2.3 billion Education Cost Sharing program, the single-largest operating grant to K-12 school districts, would continue to follow a previously authorized schedule of increases, growing by more than $157 million in the first year of the new biennium and by another $11 million in the second.

Similarly, the grant that reimburses communities for a portion of the revenue they lose because certain properties are exempt from local taxation also will grow as planned, by about $40 million over the next two years combined.

And while cities and towns are expected to welcome the additional aid, the Connecticut Conference of Municipalities notes that more state funding hasn’t kept pace with inflation for years.

For example, CCM estimates that ECS grants alone would have had to provide an extra $654 million since 2017 just to keep pace with inflation.

Higher education loses ground, social services wait to gain funds

Connecticut’s public colleges and universities took one of the biggest hits in the governor’s proposal, though at first glance it seems small.

Lamont recommended a combined $829 million next fiscal year for the University of Connecticut, its Farmington-based health center, regional state universities, community colleges and the online Charter Oak State College.

That’s down just 3.5% from state funding they received this fiscal year, absent any federal pandemic grants Lamont and lawmakers also passed onto higher education.

Once these grants are considered, overall funding for public colleges and universities is down $304 million — a problem that higher education units are expected to resolve largely by program cuts and by drawing deeply on reserves.

Similarly, the hundreds of community-based nonprofits that deliver the bulk of state-sponsored social services to people with disabilities would receive an extra $31 million in traditional state funding next fiscal year under the governor’s plan. And they would be $126 million above current levels by 2026-27.

But state officials also sent $50 million in federal pandemic grants to nonprofits this year. That means the $31 million increase in traditional funding Lamont proposed wouldn’t even match the emergency federal dollars nonprofits are losing, though the industry would come out ahead under the governor’s plan by 2026-27.

Asking more from corporations, raising transit fares

Lamont will seek modestly more from its largest employers, proposing changes to the corporation tax that would generate more than $160 million in each of the next two fiscal years.

That includes retaining a 10% surcharge on the corporation tax that was supposed to expire after this fiscal year. But that surcharge, despite numerous mixed expiration dates, has been a fixture in state finances since 2009.

The governor also would boost fares for bus and rail passengers, arguing state subsidies have risen dramatically in recent years.

The bus fare would rise 25 cents to $2 in the 2026-27 fiscal year, generating an extra $3.7 million. The administration notes ridership remains at 84% of pre-pandemic usage levels, and the state subsidy since then has risen from $4.88 per passenger to $8.46.

Lamont also wants to raise $31.8 million over the coming biennium with a 5% increase in rail fares in each year. 

In addition, he would boost parking fees by 25% at state-owned rail stations in Stamford, Bridgeport, West Haven, Fairfield Metro, Berlin, Meriden and Wallingford, raising an extra $1.4 million per year. These fees have remained unchanged since current locations opened between 2000 and 2018. 

And the governor also would add $10 in each of the next two years to the fee for the UPass program, which gives college students unlimited access to state public transit service. This would raise $4 million extra across the biennium.

State Rep. Geraldo Reyes, D-Waterbury, spoke at a press conference on Tuesday calling for more robust investments in the state’s transit services and later criticized the governor’s proposal to raise fares. 

“Horrible, horrible, going in the wrong direction, it’s a little bit tone deaf,” Reyes said. “We’d like see the youth, especially those kids going to school, they shouldn’t even be paying for buses.” 

The Connecticut Department of Transportation most recently increased train fares by 4.5% in 2023. During the COVID-19 pandemic, the state eliminated bus fares by using federal funding to boost ridership. 

Housing

Beckham said that the state would contribute $425 million and $400 million in fiscal years 2026 and 2027 respectively, focusing on homeownership and housing development.

The investments, which Beckham called historic, would add $100 million to the Time to Own program, which offers a forgivable loan for down payment assistance to first-time homebuyers. There’s also $350 million each year for housing development, which has been a focus of the administration for the past couple of years as housing becomes more unaffordable.

It also includes $25 million to continue work through the crumbling foundations program. The program was created to help homeowners repair their housing in the north-central area of the state. About 35,000 homes in the area were built with foundations that can deteriorate over time. 

Lamont also called for more transit-oriented development, or housing near train and bus stations, and walkable communities. There is a push this session to encourage towns to establish transit-oriented districts that has met opposition from some local leaders.

Restrictive local zoning has made it difficult to build housing in Connecticut for years, housing experts say, and there are attempts this session to change that.

“We know that people want to live in Connecticut, and the reason the homes aren’t being built is because outdated zoning laws are holding back our state economy,” said Erin Boggs, executive director of the Open Communities Alliance. “By taking action to reform zoning, we can build the housing we need and give our economy a shot in the arm, with towns leading the way.”

Leadership on the Housing and Planning and Development committees said they were glad to see the governor’s focus on housing.

Planning and Development co-chair Sen. MD Rahman, D-Manchester, said he’s hopeful that more vacant commercial space can be turned into housing.

“I think it’s great that we’re putting $400 million housing, but we have to make sure that it’s going in places where it makes sense and that we are providing the towns as much health as possible,” said Planning and Development co-chair Rep. Eleni Kavros DeGraw, D-Avon.

Planning and Development committee ranking member Rep. Joe Zullo, R-East Haven, said he wants to keep planning at the local level and criticized recent legislative efforts to push towns to reform their zoning.

Other components of the governor’s two-year budget proposal include:

• $2.5 million in 2026-27 for programs supporting victims of sexual violence and child abuse.
• $2.6 million each year to support 13 new judges.
• Moving the state’s behavioral health advocate into the Office of the Health Care Advocate.
• $172,328 to the Department of Consumer Protection to fund a special investigator and staff attorney to review businesses that fail to provide customers with easy and obvious ways to cancel subscriptions.
• And $60 million to renovate state police barracks.

CT Mirror staff writers Ginny Monk, John Moritz and Katy Golvala contributed to this report.