Throughout his six years as governor, Ned Lamont’s support for the budget caps he fondly calls “fiscal guardrails” has been unwavering, despite growing fears they are leeching big dollars from core programs.
The Democratic governor’s loyalty will be tested this week as never before when he proposes his new biennial budget to the General Assembly.
Simply put, Lamont is beset on all sides, facing far more pressures and demands than the “guardrails” will accommodate.
The billions in federal pandemic relief that patched many budget holes since 2021 have all but vanished. Meanwhile, returning President Donald Trump threatens to siphon away hundreds of millions more in aid from Washington.
Lamont has enough room under the spending cap to cover inflation and growing fixed costs — like Medicaid and teachers’ pensions — but little else.
Unionized state employees and workers at nursing and group homes — key constituencies Lamont needs if he wants to run for a third term in two years — are up for raises this year.
Democratic legislators have demanded new investments in health care, education and child care, but Republicans insist Lamont adhere strictly to all budget controls.
And while the governor doesn’t face the unpleasant task of proposing tax hikes, he enters the new budget with more variables and unknowns than Connecticut officials have faced since the “guardrails” were enacted more than seven years ago.
Is Lamont preparing to work around ‘fiscal guardrails?’
“I don’t ever remember [facing] anything to this degree,” Rep. Toni E. Walker, co-chair of the Appropriations Committee since 2011, said of the fiscal challenges facing Lamont and lawmakers this year.
Even in 2011, when newly elected Gov. Dannel P. Malloy inherited a $3 billion budget deficit, officials at least knew what they were confronting, Walker said.
This time around, Connecticut has huge piles of untouched cash. But a wall of legal and political rules keeps those dollars unspent. At the same time, state government is hemorrhaging federal funds — and how deep that cut goes might not be known for many months.
“We always had some idea of where we were going … and what we had in front of us” before this year, Walker added.
Still, when Lamont opened the 2025 legislative session on Jan. 8, he appeared unfazed by the impending challenges.
Maybe there’s some flexibility.
Gov. Ned Lamont
“As always, our north stars are affordability and opportunity, holding down costs of energy and health care and education, allowing you to keep more of what you earn,” he said in his State of the State Address.
But just one week later, a small crack appeared.
Appearing Jan. 15 before the Connecticut Business and Industry Association, Lamont assured leaders the spending cap, which keeps most budget growth in line with household income and inflation, was “sacrosanct.”
But the cap isn’t the only “guardrail” posing a problem. Connecticut has saved an average of $1.8 billion annually since the controls began in 2017, pocketing an amount equal to 8% of the current General Fund.
The primary driver of those surpluses, which were used to build reserves and pay down pension debt, is a mechanism known as the “volatility adjustment.” It forces lawmakers to save a portion of income and business tax receipts on the principle that these revenues fluctuate too wildly from year to year.
But critics, particularly Lamont’s fellow Democrats in the legislature’s majority, say the volatility adjustment is badly flawed and captures hundreds of millions in stable tax receipts along with the volatile dollars — a dynamic that is weakening government’s most essential services.
When Lamont spoke with reporters following his address to business leaders, he left the door open to changing the volatility adjustment.
“Maybe there’s some flexibility,” he said, noting Connecticut will have used 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.”
And while moving funds outside of the state budget — and beyond the purview of the spending cap — wouldn’t legally violate the “guardrails,” it might be the only option, absent open reform, to redirect dollars from the volatility adjustment into education, health care and other programs.
But if the governor takes that approach, it would quickly generate charges of fiscal gimmickry, and the Republican legislators and business leaders who’ve been his most ardent allies in defending the “guardrails” could become foes.
“There’s the letter of the law and the spirit of the law, and I would argue … Republicans are much more interested in the spirit of the law,” said Senate Minority Leader Stephen Harding, R-Brookfield.
Chris DiPentima, CEO of the Connecticut Business and Industry Association, said “guardrails” replaced repeated budget deficits and tax hikes with surpluses and even some tax cuts.
“There’s this energy and positivity now” among businesses, he said, adding that even with housing, energy and food costs remaining high, confidence in state government has grown — and shouldn’t be undermined.
Growing demands from lawmakers complicate Lamont’s task
The “fiscal guardrails” aren’t the only political consideration Lamont faces.
The governor hasn’t said yet whether he’ll seek a third term. But labor, and state employees in particular, remain one key element of his base. And since midway through his first term, Lamont has provided healthy wage hikes.
State workers this fiscal year are receiving their fourth straight 4.5% hike. That includes a 2.5% general increase and a step hike, which typically adds 2 percentage points of value, for all but the most senior workers.
All major union contracts expire after this fiscal year. If they got similar raises in the next budget, that would cost roughly $120 million per year.
And matters are further complicated because caregivers at nursing homes and group homes, as well as those providing home-based services, also are due for pay hikes. The private businesses that employ these workers receive most funding through Connecticut’s Medicaid program, so state government effectively determines their raises as well.
SEIU 1199 NE, the state’s largest health care workers union, says compensation for these jobs barely exceeds minimum wage, leading to a severe shortage of caregivers since COVID first struck Connecticut in 2020.
We can’t lose ground.
Sen. Cathy Osten, D-Sprague, co-chair of the appropriations committee
Similarly, the hundreds of community-based nonprofits that deliver the bulk of state-sponsored services to people with disabilities and other vulnerable residents insist they lose hundreds of millions of dollars annually because state payments haven’t kept pace with inflation.
Sen. Cathy Osten, D-Sprague, the Appropriation Committee’s other co-chair, says the nonprofit industry is in crisis and can’t absorb more hits.
“We can’t lose ground,” she said. “That’s No. 1.”
House Speaker Matt Ritter, D-Hartford, and Senate President Pro Tem Martin M. Looney, D-New Haven, held a press conference last week and insisted that Connecticut must find $250 million over the next three years to bolster Medicaid rates for physicians willing to treat poor patients.
Those rates haven’t been adjusted collectively since 2007, and critics say many patients on Medicaid effectively are uninsured because so few doctors will treat them.
“We know that these low rates mean that folks are struggling to access the health care that they need,” said Rep. Jillian Gilchrest, D-West Hartford, co-chair of the Human Services Committee. “We’re not going to let that happen anymore.”
Lawmakers also have been pushing for more resources for local special education programs. The Connecticut Association of Public School Superintendents estimates districts face a $90 million gap next fiscal year between the cost of serving students with special needs and available state funding for these programs.
The Trump factor and life after ARPA
For the past four years, Lamont had been spared from choosing between these types of spending demands and the aggressive budget controls that generate the huge surpluses he likes.
Since 2021, Connecticut has been doling out the $2.8 billion in emergency pandemic assistance it received from Congress through the American Rescue Plan Act. These ARPA dollars could be used for a wide array of purposes outside of the budget and weren’t restrained by the spending cap or any other “guardrails.”
But now that aid is nearly all exhausted.
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 such as higher education, early childhood development, behavioral health and other social programs.
Lamont doesn’t have room under the spending cap next year to cover fixed costs, inflation and raises for state employees and other workers, let alone to replace all those vanishing federal funds with state dollars or to cover most new investments legislators want.
That doesn’t mean these programs won’t receive more dollars. It just means Lamont will have to work around the budget controls if he wants to meet most demands.
Doubling down on our fiscal policies will only siphon off the critical tax dollars we need to safeguard ourselves against the Trump administration.
Norma Martinez HoSang, Director, Connecticut for All Coalition
And the governor also must keep one eye on Washington, because the outlook for federal funding could still get worse.
Trump already has signaled his desire to tighten spending, particularly involving aid to states. Many legislators fear that changes to the Medicaid system could result in Connecticut losing hundreds of millions of dollars annually.
The new federal fiscal year doesn’t start until Oct. 1, though, meaning state legislators will have no details from Trump and Congress when Lamont proposes his next state budget Wednesday, and Connecticut officials may not know much more before the regular General Assembly session closes on June 4.
If Connecticut bends its “guardrails” too much, and if Trump pulls back aid dramatically, the double-whammy could quickly unbalance state finances.
Connecticut For All, a progressive coalition of more than 60 faith, labor and other civic organizations, noted that as one of the wealthiest states in the nation, Connecticut has the resources to handle all of these challenges, provided Lamont is willing to save less and pay down debt more slowly.
In other words, Connecticut can survive cutbacks in federal aid and still properly fund schools, health care and social services, but not if it insists on closing each year with the $1.8 billion budget surplus it’s averaged since 2017.
“It’s clear that Connecticut has to be prepared for major shakeups in the billions of federal dollars we rely on to support a myriad of programs, and the only way we can do that is by reforming our fiscal roadblocks and creating new progressive tax revenue to allow for investment in our communities,” said Norma Martinez HoSang, coalition director. “Doubling down on our fiscal policies will only siphon off the critical tax dollars we need to safeguard ourselves against the Trump administration.”
Talk of tax cuts expected to be modest this year
Given all the pressures on state finances, talk of tax cuts is expected to be relatively quiet.
Lamont and legislators already ordered big relief in 2022 and 2023, including the first income tax rate reduction since the mid-1990s.
Still, some modest proposals to assist taxpayers are expected this time around from Lamont.
Every family should be able to provide for and care for their children.
Rep. Kate Farrar, D-West Hartford
Last year, the governor recommended about $3.5 million in relief by removing initial application fees in understaffed fields including nurses, teachers and child care workers. It wasn’t approved, but many legislators expect to see that proposal offered again.
Lamont also has recommended modest tax cuts for corporations and small businesses in several of his budgets since taking office in 2019.
But the governor’s latest plan is not expected to endorse the relief plan generating the most interest among majority Democrats in the legislature: a child tax credit.
Roughly 70 Democrats have introduced or co-sponsored bills to establish a new state income tax credit for low- and middle-income households with children. One of the most popular proposals involves a $600-per-child credit that provides a maximum benefit of $1,800 per household.
“Connecticut’s high cost of living and our unfair tax code are hurting families and our economy,” said Rep. Kate Farrar, D-West Hartford, one of the lawmakers spearheading this effort. “Every family should be able to provide for and care for their children.”
The United Way of Connecticut has been pushing for several years for such relief, noting Connecticut is the only state with a broad-based income tax that offers no tax assistance based on children.
Lisa Tepper Bates, president of the Connecticut chapter, predicted the tax-cutting debate would be robust, regardless of what Lamont proposes. She noted many first-year legislators based their campaigns on a pledge to support a child tax credit and know they enjoy strong public backing.
“That is what they have been hearing from voters directly as they wore out their shoe leather and knocked on doors,” Bates said.
And while Lamont is understandably concerned about the impact Trump could have on federal grants and state government finances, many Connecticut residents are worried about how cutbacks in Washington could increase costs on their own households, Bates added.
“The flexible cash that a child tax credit would provide to families would help to fill whatever hole opens” in their household budget, she said. “People understand that costs have gone up.”