Lawmakers to offer CT budget that pushes back on ‘fiscal guardrails’

Though potentially massive cuts in federal aid loom, Connecticut’s General Assembly can’t tackle that crisis until it first solves another.

State budget caps that amassed huge surpluses since 2017 have taken a heavy toll, leaving big challenges for funding education, health care and social services.

The legislature’s Appropriations Committee will begin trying to plug those gaps Tuesday when it proposes a spending plan for the next two fiscal years. That blueprint will set the stage for final budget negotiations with Gov. Ned Lamont later this spring or summer as the picture from Washington becomes clearer.

In the meantime, state legislators will use every loophole and maneuver available to bend these budget caps — or “fiscal guardrails” — without breaking them.

• The committee will assume raises for most state employees, due this July 1, won’t be negotiated on time.
• Legislators will propose reforming one “guardrail” immediately — moving about $300 million earmarked to reduce pension debt back into the General Fund this fiscal year.
• As Lamont did, the panel will endorse creating a big, new off-budget account to expand child care services while circumventing a spending cap that keeps budget growth in line with household income and inflation.
• It also will follow Lamont’s lead and under-fund guaranteed health benefits for retired state employees by almost $230 million.

Even with these maneuvers, the committee’s spending plan will postpone — yet again — a major increase in Medicaid rates for physicians who treat the poor. The last broad-based rate adjustment plan took effect in early 2008, and critics say many children and adults enrolled in Connecticut’s HUSKY program effectively are uninsured, unable to find doctors willing to accept more Medicaid patients.

But the committee plan will maintain enhanced funding for special education while reversing planned cuts to basic grants for about 80 K-12 school districts.

"We need to stop looking at the storm down in Washington and look at the storm that’s here in Connecticut,” said Rep. Toni E. Walker, D-New Haven, co-chair of the Appropriations Committee. 

“There are a lot of things that need to be addressed,” said Sen. Cathy Osten, D-Sprague, the panel’s other co-chair, who added the panel tried to stabilize those programs most at risk before expected federal cuts blast big new holes in numerous state programs.

“I’m not a hair-on-fire kind of person. I’m not exaggerating anything,” she added. “But the things that are being cut at the federal level are going to have a big impact on the people.”

With Congress aiming to slash federal spending by $880 billion per year, state officials project losses in Medicaid funds alone could range from almost $200 million to about $1 billion. And that doesn’t include anticipated losses in special education, public health and addiction services, and federal aid to Connecticut municipalities.

But state programs already have been forfeiting big dollars for nearly a decade.

‘Fiscal guardrails’ have taken a toll

Connecticut has closed the past seven fiscal years with an average of $1.8 billion left over — a whopping total equal to roughly 8% of the General Fund and far more than legislators from both parties envisioned in 2017 when they enacted a broad array of budget caps.

Lamont’s administration projects Connecticut will close the current fiscal year — its eighth under the so-called “fiscal guardrails” system — with a similar, $1.8 billion cushion.

Those windfalls don’t mean state government can spare all those funds.

Critics say the “guardrails” system falsely characterizes hundreds of millions of dollars in annual income and business tax receipts as too “volatile” — meaning they fluctuate too much from year to year and shouldn’t be spent on ongoing problems. Instead, these revenues, which have been used to build reserves and whittle down pension debt, have grown steadily.

The leaching of resources from education, health care and social services has been mitigated somewhat by the nearly $3 billion Congress gave Connecticut in 2021 to repair damage caused by COVID. Lamont and the General Assembly have been doling out chunks of these pandemic grants, including more than $500 million this fiscal year, to these core programs. 

But nearly all that relief has been exhausted. 

While Democrats in the legislature’s majority have been vocal critics of the caps, they aren’t the only ones who’ve struggled to follow them.

Lamont, a fiscally moderate Democrat who praised the caps repeatedly, conceded in February that the program for saving “volatile” revenues should be scaled back. He proposed moving about $300 million annually, starting next year, from the save category into safe-to-spend.

While Republicans insist the “guardrails” be left untouched, their votes haven’t matched their statements.

The GOP voted overwhelmingly with Democrats in late February to order an extra $40 million in aid to local K-12 districts to mitigate a crisis in special education — despite warnings from Lamont that expenditures already were on pace to exceed the spending cap.

Panel finds more for K-12 education, social services, child care

The Appropriations Committee wants to continue that extra $40 million in special education grants in each of the next two fiscal years. Lamont’s budget included the extra funding, but not until 2026-27. 

That’s because the governor’s biennial plan, which appropriates $27 billion across all programs in the first year, falls a razor-thin $1.8 million under the spending cap. The $28.2 billion proposed for 2026-27 falls a more comfortable $261 million under the limit.

The committee’s plan will recommend more spending than Lamont did in some other areas:

• Education Cost Sharing [ECS] grants, the main state funding program for K-12 district expenses, would gain another $8.7 million in the first year and $17 million in the second so that no community would receive a cut in funding. The existing ECS formula calls for about 80 communities to receive less in the next budget cycle.
• The private, nonprofit community agencies that deliver the bulk of state-sponsored social services for people with developmental disabilities would gain $19 million to replace expiring pandemic grant dollars Lamont and lawmakers gave them last spring.

The committee would follow Lamont’s lead and create a new $300 million account, outside of the formal budget and spending cap, to allow investments in child care services for years to come.

Lamont’s budget spokesman, Chris Collibee said only that the administration “will review the General Assembly’s budget proposal when it is officially released and then work with legislative leaders on an honestly balanced budget that complies with all legal requirements.”

Rep. Tammy Nuccio of Tolland, ranking House Republican, predicted GOP lawmakers would fight the committee proposal, which she said places too much emphasis on working around budget caps and not enough on finding ways to trim state spending.

“They’re putting in a budget that’s expanding the size of government” at the wrong time, she said.

Struggling to find dollars for Medicaid rates, retiree health care

The committee plan will not fix two other problems legislators are facing — at least not right away.

The first involves financing a major upgrade in Medicaid rates paid to doctors and other providers. A 2019 analysis by KFF, the health care think-tank formerly known as Kaiser Family Foundation, found that Connecticut’s Medicaid rates for most specialists ranked 42nd among all states, just ahead of West Virginia.

Earlier this year, Democratic legislators announced a plan to boost spending on Medicaid rates by $300 million by 2028-29, starting with a $75 million jump next fiscal year.

Instead, the Appropriations Committee spending plan hew closely to the increased spending Lamont proposed in February: adding about $10 million next fiscal year and $25 million in 2026-27 for a much more modest, incremental bump.

The second major problem involves funding for retiree health care.

Comptroller Sean Scanlon recommended that the committee find another $228 million over the next budget cycle — in addition to what Lamont proposed — to cover this contractual obligation. The comptroller made a similar recommendation to the Lamont administration in December, but the governor didn’t add the money into his February budget plan.

Scanlon said he is very hopeful those cost hikes can be reduced somewhat in the coming months. The comptroller is soliciting bids for a new Medicare Advantage provider, directing patients to lower-cost care sites and providers and negotiating savings on prescription drugs.

Like Lamont did, the committee also will wait to see how much savings the comptroller can secure before scrambling to find more dollars for this retirement benefit.

Thousands of state employees may be waiting a while for a raise

The committee plan also has no room under the spending cap to pay raises to most state workers next fiscal year, even though their contracts expire June 30.

Connecticut did reach a tentative deal recently with a small unit representing part-time teachers at online Charter Oak State College. And a raise agreement is expected soon with the state police troopers.

But Lamont has announced no wage agreement with the State Employees Bargaining Agent Coalition, which represents every major union excluding the troopers.

SEBAC unions have received about 4.5% annual raises — a 2.5% general hike and a step increase that normally is worth another 2 percentage points — for the past four fiscal years. According to nonpartisan analysts, this year’s raises cost the General Fund about $120 million.

Anticipating similar raises going forward, Lamont in February proposed adding $129 million to the reserve for salary adjustments in the 2025-26 fiscal year, and $242 million extra in 2026-27.

But if the governor and SEBAC don’t deliver a tentative deal to lawmakers before the regular session ends June 4, then the prospects of raises being approved on time are slim. 

That doesn’t mean workers would forfeit raises. A pay hike eventually ordered for 2025-26 might be delivered late — as has been done on occasion in the past.

In other words, legislators could budget nothing for raises in 2025-26, carving out $129 million in spending cap room in the fiscal year they need it most, and deliver retroactive raises in 2026-27, when the cap doesn’t fit so snugly. It just requires Lamont and the unions to take their time reaching a deal.

“Everybody has indicated to me it will not happen this year,” Osten said. 

Lamont’s budget spokesman, Chris Collibee, declined to comment on the timing of contract negotiations, as did Drew Stoner, spokesman for the coalition of unions.

Stoner added, though, that “what remains clear is the vital role our public services — and the 45,000 state workers who keep Connecticut running. With agencies across the state understaffed and federal uncertainty growing, we must do everything we can to recruit and retain the workforce needed to meet this moment. The public deserves nothing less.”

Speeding up reform of budget ‘guardrails’

Recognizing their plan has some holes, Appropriations Committee members also will try to carve out some extra dollars that could be tapped later.

While Lamont proposed scaling back one mandatory savings program by $300 million starting next fiscal year, the committee will propose that change happen right away. That would allow legislators, if necessary, to take $300 million of this fiscal year’s surplus, transfer those dollars to either of the next two fiscal years, and spend them on core programs at that time.

“I think the most important thing Connecticut can do is adopt a budget on time, fund the core things we wanted to fund, … and give people predictability,” said House Speaker Matt Ritter, D-Hartford, who said top legislative leaders also are backing the committee’s proposal to begin “guardrails” reform right away.