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April 30, 2024

Lamont defends fiscal guardrails but is open to workarounds

SHAHRZAD RASEKH / CT MIRROR Gov. Ned Lamont delivers the 2024 State of the State Address at the State Capitol on February 7, 2024.
By Mark Pazniokas and Keith M. Phaneuf, CT Mirror

The differences over fiscal policies so evident at the start of General Assembly session in February are blurring in the face of a fast-approaching May 8 adjournment deadline and a shared desire by Gov. Ned Lamont and lawmakers to end the short election-year session with minimal drama.

The Democratic governor and leaders of the Democratic majority have agreed in principle to a framework that meets Lamont’s demand to keep statutory spending caps intact, while requiring him to accept the gimmickry necessary to provide the additional funds sought by lawmakers for nonprofits and higher education.

“We’ve got a week and a half and, as you get to the end, we always say deadlines force people to get together,” said House Speaker Matt Ritter, D-Hartford.

Lawmakers want to add between $300 million and $400 million to the $26 billion budget for the 2025 fiscal year that begins July 1, and the tentative deal would do that by a mix of borrowing and reallocating non-recurring federal pandemic aid for operating expenses.

All of that adds up to a deferral of hard choices until the 2025 legislative session, when the last of the pandemic relief provided by the American Recovery Plan Act, or ARPA, will be gone, and the governor and lawmakers must negotiate a new biennial budget for the 2026 and 2027 fiscal years.

“If that’s the deal that they are cutting, the governor is gonna need to tell that to the public — that he is doing an end run around the caps,” said House Minority Leader Vincent J. Candelora, R-North Branford. “Because I do think backfilling our budget with ARPA is the wrong way to go and is a violation of the spirit of all the guardrails.”

In an interview Monday, Lamont acknowledged that closing a budget deal will require him to accept the use of some revenue that will disappear next year, complicating the crafting of the next two-year budget. He declined to say exactly how much.

“I think that’s something you negotiate,” Lamont said. “But I pay special attention to that, because we’ve had soon-to-be-six balanced budgets in a row. I don’t want to pass something I think could be out of whack. Growth in the economy is slowing. Sales tax revenues are not picking up. I err on the side of caution here. And I think I’m the only guy in the building that does.”

To close the deal as currently framed, the governor will have to accept something that is “out of whack.” The question is by how much.

Lamont said he is asking that non-recurring revenue be used to the greatest possible extent in ways that do not open budget gaps in later years. For example, he said, any ARPA money that nonprofits use for personnel costs should be clearly identified as one-time bonuses, not salary increases.

To free up ARPA money that is now committed to capital expenditures, such as HVAC improvements in public schools, the state would replace those ARPA dollars with state bonding. The reason for the fiscal sleight of hand: the federal aid is outside the state’s spending caps.

Lamont said he is unmovable on the issue of preserving a volatility cap passed in 2017 and unanimously renewed in 2023 for five years. It is enforced by bond covenants that require Connecticut to use spikes in volatile revenue sources for budget reserves or to pay down debt. 

New revenue estimates due Tuesday are expected to show impressive growth in tax receipts — but not the right kind. Most of the growth is coming from quarterly income and business tax receipts, which are covered by the volatility cap.

If lawmakers want to adjust the volatility cap, they should wait until the covenants expire; the state’s credibility is at stake, he has said. Lamont has been consistent in defending the caps.

On Feb. 8, the day after proposing his budget revisions for the second year of the fiscal biennium, Lamont reiterated his opposition to even a modest recalibration of volatility caps set in 2017 without much study.

“I think it’s a slippery slope. ‘Oh, these are just minor adjustments. And this is a one time thing.’ That’s not the way the world looks at it, especially given our history here in Connecticut,” Lamont said.

His administration similarly seemed to warn legislators in February against anything that could be construed as a gimmick to sidestep the state’s fiscal guardrails.

“Gov. Lamont is committed to preserving and adhering to the fiscal guardrails,” the administration wrote in its budget introduction. “Gimmicks to get around the caps to support new spending would create unsustainable growth in the budget, beyond the ability of our residents to pay for state services.”

Lamont said Monday he still believes that, but negotiations require compromise.

“I’m not an absolutist on this,” Lamont said.

Critics of the “fiscal guardrails,” particularly progressive Democrats, have been arguing for months that this system is saving too aggressively and siphoning vital funds from core programs. The budget for the coming fiscal year has a built-in operating surplus of about $300 million.

Before the latest revenue estimates, the volatility cap was projected to capture another $450 million next fiscal year.

Ritter and Rep. Maria Horn, D-Salisbury, the co-chair of the Finance, Revenue and Bonding Committee, said the governor needs to be wary of the volatility cap losing support if it continues to put so much revenue off limits, placing pension payments and budget reserves above all else. 

“I think that would be a sad outcome for us. Because we really can do both,” Ritter said. “And we could make some very minor adjustments and still do all the same things in building the rainy day fund up and paying the pension fund down.”

“I do believe that they need to have some give and flex to them if they’re going to survive,” Horn said. “I’m concerned that if we don’t have some flexibility, they will snap, and we won’t have them anymore. And that’s bad.”

Lawmakers are uncomfortable watching the University of Connecticut and the Connecticut State Colleges and Universities system order significant tuition and fee hikes for the next academic year and plan cutbacks to close deficits. Nonprofit agencies that deliver the bulk of state-sponsored social services say they lose $480 million annually because state payments haven’t kept pace with inflation, leaving them unable to meet demand.

“Gov. Lamont must recognize that he isn’t just making a political choice,” said Norma Martinez-HoSang, director of Connecticut for All, a progressive coalition of more than 60 faith, labor and other civic organizations. “His actions — rather inactions — are sending waves throughout Connecticut and hitting the kitchen tables of each and every working family.”

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