State legislators have just begun to digest the $55.2 billion, two-year budget Gov. Ned Lamont delivered Wednesday, let alone decide everything they will embrace or oppose.
But they couldn’t miss the concession: the budget caps that Lamont calls “fiscal guardrails,” provisions that were untouchable just last May, were on the table.
And while the fiscally moderate governor didn’t move as far as some of his fellow Democrats hoped, the overture was appreciated.
“He made an opening gesture that I think went a long way in our caucus,” House Speaker Matt Ritter, D-Hartford, said Wednesday evening.
Senate President Pro Tem Martin M. Looney, D-New Haven, who has compared the impact of these budget controls, in recent years, to that of a “straitjacket,” also said Lamont scored points with his fellow Democrats in the legislature’s majority.
“I was very gratified by his statement,” Looney said, adding Lamont did more than propose Connecticut scale back the massive savings it’s run up in recent years. The governor aimed his new proposed investments at programs most in need: child care, special education, increased access to health care for the poor and affordable housing.
“He hit on all of the major themes.”
Conceding all ‘volatile’ revenues aren’t that volatile
The governor offered a compromise on one of the budget controls that has drawn the most criticism in recent years, a mechanism known as the “volatility adjustment.”
This cap specifically bars legislators from spending a portion of income and business tax receipts on the grounds that they are too erratic, coming in big one year and plunging the next.
But the 2017 legislature, which crafted this proposal amid a nine-month-long budget battle, didn’t research revenue trends deeply. It set a simple standard: Any receipts from these “volatile” areas that exceeded 2016-17 levels were too risky to spend. (That threshold was adjusted annually to reflect inflation.)
But a January 2024 analysis by The Connecticut Mirror showed 2016-17 was one of the weakest fiscal years for these “volatile” tax areas in a decade and a half. In other words, it was easy for tax receipts to out-perform 2016-17 levels and fall, inaccurately, into the too-erratic-to-be-spent category.
Since 2017, the volatility adjustment alone has captured an average of $1.4 billion — and never less than $530 million in a single year. That $1.4 billion grab represents more than 6% of this year’s General Fund.
Meanwhile, other programs are struggling in this era of big budget surpluses.
Community college tuition this fall is up 11% from two years ago. At regional state universities, it’s grown 7% over the same cycle.
Connecticut hasn’t broadly adjusted Medicaid rates for doctors who treat low-income patients since 2008. 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.
And funding for social services and municipal grants haven’t kept pace with inflation for a decade or more.
When asked by the CT Mirror about the volatility adjustment 13 months ago, Lamont said people could “fuss” over how the mandated savings was calculated, but overall, “I think we’re OK.”
But on Wednesday, the administration’s tone had changed as it offered to shift roughly $300 million from the “volatile” and off-limits category into OK-to-spend.
“Gov. Lamont and his administration have met with and listened to concerns from residents, businesses, nonprofits, educational leaders and others across our state as this proposed budget was developed,” the administration wrote in its budget introduction.
Lamont put it more succinctly in his address to lawmakers, saying, “We have earned the opportunity to rethink the volatility threshold.” The administration notes that Connecticut has added nearly $4 billion to its reserves since 2017 and pumped another $8.6 billion in surpluses into its once cash-starved pension funds.
Republican legislative leaders predicted voters, particularly those who remember the big state tax hikes of the 2010s, would be disappointed with Lamont’s proposals.
“I think it lacks leadership,” said House Minority Leader Vincent J. Candelora of North Branford. “For somebody who fought so hard to protect these ‘guardrails,’ he’s willing to ram right through them.”
Senate Minority Leader Stephen Harding of Brookfield called the creation of a preschool endowment outside the budget a fiscal gimmick, and said Lamont’s willingness to open the door to more spending was easier than pressing Democratic legislators to make tough choices.
“It’s very convenient to me that he’s here today trying to balance the budget and he needed to change the volatility adjustment,” Harding added.
But state Treasurer Erick Russell, a New Haven Democrat, has encouraged legislators to find a balance between responsible saving and investing in core programs that will bolster economic opportunities and the quality of life in Connecticut.
“I think [Wall Street credit] rating agencies and investors care most about our commitment to responsibility and making quality investment in … people in our state,” Russell said Wednesday, adding he’s confident Lamont and the General Assembly will maintain that crucial balance.
Lamont works around the spending cap
The governor also offered middle ground Wednesday on another challenging budget control blocking investments in core programs.
Connecticut’s spending cap forces annual growth to keep pace with increases in household income or inflation, whichever is larger.
But the problem is some program costs typically grow faster than both, eat up all space under the cap and leave few dollars for everything else.
Lately, state employee raises have hovered around 4.5% per year. And until recently, required contributions to the pension funds also regularly outstripped both household income and inflation growth.
Lamont had called the spending cap “sacrosanct” during a Jan. 15 address to business leaders.
But the governor, recognizing strong legislative support for early childhood development programs, recommended taking $300 million from this fiscal year’s projected $443 million surplus and placing it into a new Universal Preschool Endowment. Future years’ operating surpluses also would go into this program, which could expend up to 10% of its balance annually.
And because it would exist outside of the formal budget, it would be exempt from the spending cap.
Lamont has discussed revenue transfers to such funds in the past as fiscal “gimmicks.” But Wednesday he told lawmakers Connecticut had to enhance child care, an industry that has struggled financially since COVID first struck the state in 2020.
“For countless families, the cost of child care can be not only burdensome but also keep them out of the workforce,” he said in his budget address.
Ritter: Lamont’s proposal went beyond the numbers
Still, what the governor offered legislators Wednesday in terms of reforming the budget controls was modest as far as the numbers go.
The $300 million per year Lamont offered to move out of the volatility adjustment and into the General Fund represents slightly more than one-fifth of what’s been declared unspendable since 2017.
And even as he tried to keep big savings rolling in, Lamont also challenged lawmakers to extend these budget controls through 2038. The state is committed legally to follow them only through mid-2028.
CT For All, a progressive coalition of more than 60 faith, labor and other civic organizations, described the governor’s plan as “incremental change that lacks a true understanding of the crisis at hand.”
Still, Ritter said majority Democrats were left with the feeling Lamont is open to conversations, even though the speaker is doubtful lawmakers want to think about extending the “guardrails” provisions before 2028.
“It’s a pretty good start,” Ritter added, “and I give him credit.”