After years of endorsing Connecticut’s budget “guardrails,” Gov. Ned Lamont will propose a $55.2 billion, two-year budget Wednesday that maneuvers around these caps to invest big dollars in child care and offer a modest $50 income tax cut for middle-class households, according to sources familiar with the plan.
Wary of huge cuts in federal aid under President Donald Trump, Lamont will seek more from corporations while proposing new caps on Medicaid and looking to restructure Connecticut’s hospital tax in hopes of drawing more help from Washington.
Both higher education and social services would see their traditional state funding increase. But overall assistance for public colleges and universities is down with the expiration of emergency federal pandemic grants, and funding for the nonprofit agencies that deliver most social services won’t rise above current levels until 2026-27, also due to vanishing COVID grants.
Lamont, who will release his full proposal at 10:30 a.m. Wednesday and address legislators shortly after noon, also put down a marker to bolster special education. But the $54 million earmarked for K-12 districts wouldn’t be provided until the second year in the new biennium.
The governor’s proposal is the first stage of what’s expected to be a four-month-long debate with lawmakers that also includes committee recommendations and a final compromise budget typically enacted in early June.
But this year’s debate is beginning differently than all others, given that Lamont has opened the door, albeit modestly, to reforming the budget controls that have dominated state finances for nearly a decade.
Lamont: ‘Maybe there’s some flexibility’
Despite Lamont’s dedication to spending and borrowing caps and other budget controls, many of the governor’s fellow Democrats in the legislature argue the system has been leeching hundreds of millions of dollars out of core programs and forcing excessive savings.
Critics pointed to rising tuition at public colleges and universities, municipal aid that hasn’t kept pace with inflation, and some of the lowest Medicaid rates in the nation that leave doctors unwilling to treat poor patients.
When he spoke with reporters on Jan. 15, three weeks before his budget was due to lawmakers, Lamont did not rule out reforming the so-called “volatility adjustment” that bars spending portions of income and business tax receipts on grounds they fluctuate too wildly from year to year. Ironically, the program has produced very consistent and hefty savings — an average of $1.4 billion annually, which exceeds 6% of the current General Fund.
“Maybe there’s some flexibility,” he said then about reforming this budget mechanism, noting Connecticut will have used “guardrails”-driven surpluses to cancel $10 billion in pension debt by next July. “We have a lot less risk in our budget than we had six years ago.”
The governor’s budget seeks to openly reform that “volatility adjustment” by allowing close to $300 million annually to be reclassified as stable revenue that is safe to spend. But because Connecticut pledged in its covenants, or contracts, with bond investors only to adjust these “guardrails” in limited fashion, the change could not be made unless 60% of the House and Senate — rather than just a simple majority — agree.
On Nov. 6, one day after Trump defeated Vice President Kamala Harris in the presidential election, Lamont said his own party lost sight of middle-class struggles.
“Democrats lost a lot of working families,” the governor said. “And it ought to be a wake-up call that we ought to be fighting for the middle class and fighting for them every day.”
Boosting child care and cutting the income tax
Lamont also proposed a second maneuver around the “guardrails,” but this one is more subtle.
Both he and lawmakers have prioritized early childhood development in recent years, noting the industry suffered serious financial losses during 2020 and 2021, the first two years of COVID.
But Connecticut’s spending cap, which keeps budget growth in line with household income and inflation, wouldn’t allow the increases Lamont and lawmakers were seeking.
Though full details weren’t available late Tuesday, sources said the governor could move a portion of this fiscal year’s projected $443 million surplus — and possibly surpluses in future years — outside of the formal budget and into Connecticut’s Children’s Trust Fund. The transfers then could be disbursed incrementally for many years to come without being subject to the spending cap.
Connecticut has hundreds of special funds outside of the budget, though most hold very small amounts of money. But this plan likely would be attacked politically by some fiscal conservatives who could see it as a move to circumvent the spending cap.
Any transfers of this fiscal year’s surplus into the children’s trust would be particularly controversial. The CT Mirror disclosed in mid-January that about $240 million in interest the state earned by investing emergency federal pandemic grants since 2021 had been kept out of the General Fund. Before this fiscal year ends on June 30, the total interest tally should reach $340 million and will be considered surplus.
The Lamont administration directed the treasurer’s office to move those dollars into the General Fund on Jan. 7, and lawmakers from both parties said legislators should have had access to that interest right away.
The governor likely will get less pushback, however, on his plan to help middle-income families with tax relief.
Lamont, who capped one of the largest tax cuts in state history two years ago with Connecticut’s first income tax rate reduction since the mid-1990s, proposed more income tax relief this time, albeit in much more modest fashion.
He would boost the income tax credit that offsets a portion of municipal property tax bills from $300 to $350. He also proposed broadening the eligibility limits so more middle-income households could take advantage.
Lamont also repeated a proposal offered in 2024 that involves repealing initial license application fees in understaffed fields, including nurses, teachers and child care workers.
Asking corporations for more, restructuring the hospital tax
Though trying to beef up Connecticut’s workforce, Lamont will seek modestly more from its largest employers, sources said.
Proposed changes to the corporation tax would generate more than $160 million in each of the next two fiscal years.
The governor also would retain 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.
Lamont also wants to revisit the state’s hospital tax, a controversial levy that officials and the industry have grappled with for a decade-and-a-half.
Lawmakers and Gov. Dannel P. Malloy created it in 2011 as a tax in name only. The industry paid $350 million then to the state, which responded by redistributing all those funds, plus another $50 million, back to hospitals.
Connecticut didn’t lose out because these supplemental payments helped the state to leverage hundreds of millions of dollars annually in federal Medicaid reimbursements — a back-and-forth arrangement encouraged by Washington and employed by most states.
But as Connecticut’s recovery from the last recession plodded along far more slowly than officials anticipated, Malloy and lawmakers gradually increased the tax, scaled back the supplemental payments and forfeited huge federal dollars in the process — and triggered a lawsuit from hospitals.
Shortly after taking office in January 2019, Lamont brokered a settlement that, while not restoring the original arrangement, eased burdens on hospitals.
Full details on this aspect of the governor’s budget were not available late Tuesday, but sources said the administration was seeking to make changes that would trigger more Medicaid payments from Washington.
Special education wins, higher ed loses, nonprofits are a toss-up
Sources said traditional state aid for public colleges and universities would grow modestly in the governor’s plan — with a huge qualifier.
Since 2021, Connecticut has been using its $2.8 billion in pandemic relief granted by Congress through the American Rescue Plan Act to shore up various services, including higher education.
This fiscal year alone, about $510 million in ARPA funds are supporting state programs. And most of those dollars were invested not in one-time ventures but in ongoing services including higher education, early childhood development, behavioral health and other social programs.
Once the ARPA dollars are removed, sources said, higher education would see overall funding shrink under the governor’s plan. Higher education officials have been anticipating this, and both the University of Connecticut and the Connecticut State Colleges and Universities system are expected to draw down on their reserves if they’re forced to cover the gap.
Similarly, the hundreds of community-based nonprofits that deliver the bulk of Connecticut’s social services to clients with disabilities and other vulnerable residents got more than $100 million in ARPA funding this fiscal year. But those funds are now gone.
Sources said Lamont proposed rate hikes in each of the next two fiscal years for nonprofits. Their overall funding next fiscal year, once ARPA funds are gone, would be below current levels. But they would rise above them in 2026-27.
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.