Lamont keeps CT budget within fiscal guardrails, pays down $500M in debt

Gov. Ned Lamont stayed well within Connecticut’s fiscal guardrails Wednesday, recommending a $26.1 billion budget that erases $500 million in bonded debt and invests in child care and education while largely holding the line in most other places.

The spending plan for the fiscal year starting July 1 increases base aid for public colleges and universities but reduces overall support despite warnings that it would leave higher education institutions in deficit and forced to trim staff and programs.

The package bolsters K-12 education, though not as quickly as legislators want, scaling back planned increases for magnet, charter and vocational schools and keeping universal school meals afloat through December with temporary funding.

Lamont would create several new posts to monitor health care quality and finances but declined to recommend inflationary increases for nursing homes or for the hundreds of private, nonprofit agencies that deliver the bulk of state-sponsored social services. The administration also wants to tighten Medicaid eligibility on the HUSKY program and require some poor adults to purchase subsidized insurance through the state’s exchange.

And while the plan doesn’t include any major tax cuts — following two years of hefty reductions — the administration is pitching a new plan to try to secure hundreds of millions of disputed tax dollars from Connecticut residents who work remotely for businesses in New York.

The governor’s proposal would boost spending 3.1% over the current spending level and add just $89 million to the preliminary, $26 billion budget he and lawmakers adopted last June for the 2024-25 fiscal year. And much of that spending added onto the preliminary budget involves a nearly $80 million increase in the require state contributions to public-sector pension funds.

But while Lamont repeatedly urged lawmakers recently to embrace Connecticut’s spending cap and other programs that have secured big surpluses, his own plan relies on a commonly used end run around the guardrails.

Lawmakers often carry surplus funds from one fiscal year to the next because these “carryforwards” then can be spent without counting against future cap limits. Lawmakers already planned to carry $95 million from this fiscal year’s $645 million surplus into 2024-25. The governor would boost that to $140 million.

“For the first time in a generation, the state of Connecticut is not lurching from one financial crisis to the next,” the administration wrote in its budget introduction. “The state’s financial position is stable, and, unlike other states, we are not facing deficits that would result in deep cuts in spending or substantial increases in taxes.”

Transportation program debt

The fiscal guardrails have helped state government since 2017 to amass a $3.3 billion rainy day fund and pay down an extra $7.7 billion in pension debt.

But Lamont also has been accused of accumulating too many surplus dollars when it comes to the budget’s $2.1 billion Special Transportation Fund.

This subset of the state budget fund is on pace to close $241 million or 11% in surplus when the fiscal year ends June 30, according to Lamont’s budget office.

And it finished the 2022-23 fiscal year with a 15% surplus, equal to $277 million, according to final numbers from the state comptroller’s office. And that was despite a 13-month gasoline tax holiday that returned about $330 million to motorists. Most of that cost, $240 million, occurred during the 2022-23 fiscal year.

The administration estimates the STF’s reserves — the fund that holds all its annual surpluses — will total $911 million after this fiscal year, a tally that exceeds more than 42% of the entire STF.

The transportation fund is supported by two fuel taxes, a portion of the sales tax and a recently added highway mileage levy on commercial trucks.

Republicans have accused the Democratic governor of hoarding too much revenue and urged him to repeal the highway mileage tax.

Construction industries and trades have urged Lamont and the state Department of Transportation to launch more capital projects. The STF funds DOT operations and pays the debt service on the annual state borrowing that, coupled with federal grants, finances repairs to Connecticut’s highways, bridges and rail lines.

Lamont’s budget does assume annual borrowing for capital work will grow from $875 million this fiscal year to $1 billion in 2024-25.

But he also would take $500 million from the STF reserve and use it to reduce Connecticut’s more than $7.4 billion in outstanding transportation bonding debt.

With more than $80 billion in unfunded pension and retiree health care benefits and bonded debt combined, Connecticut is one of the most indebted states, on a per capita basis, in the nation.

The administration estimates that wiping out this much bonded debt at once will reduce debt service costs by $26 million next fiscal year, and by roughly $60 million in 2025-26.

“This proposal builds on Connecticut’s recent budgetary successes by leveraging our current financial position to pay down transportation debt now and generate years of savings,” said state Treasurer Erick Russell, who crafted the debt reduction plan in cooperation with the Lamont administration. “This plan will strengthen the [transportation] fund and leave the state well-positioned to take on transportation projects essential to our economic growth and the quality of life of our residents.”

Lamont’s budget also assumes Connecticut will borrow $1 billion for transportation capital projects next fiscal year, a major jump from the $875 million in financing estimated this year.

But the administration has dangled higher investments before and not delivered.

This fiscal year, for example, it also projected $1 billion in borrowing, but that projection has since gone down by $125 million.

The administration projected $1.2 billion in 2022-23 and borrowed $830 million; and projected $875 million the year before that — and borrowed $500 million.

Connecticut issued an annual average of $725 million in transportation bonds between 2015 and 2018 under Gov. Dannel P. Malloy, according to debt reports from the state treasurer’s office. During Lamont’s first term, the annual average ticked upward just 2.6%, reaching an average of $744 million — even though STF revenues grew 22% over those four years.

But the third year has just begun on a five-year federal program to invest $1.2 trillion in the state’s transportation projects, and construction industries and trades both said Wednesday that Lamont can’t afford to wait any longer to get significantly more projects underway.

“Everyone knows infrastructure investments are the highest return on investments,” said Don Shubert, president of the Connecticut Construction Industry Association, who added the state should be borrowing and investing closer to $1.5 billion annually in transportation projects. “And failing to maximize all available federal funding and failing to invest at this point is a tremendous, missed opportunity for the state.”

Nate Brown, president of International Union of Operating Engineers, Local 478, said hitting the $1 billion borrowing target isn’t sufficient. “We have to exceed the target,” he said. “We have the opportunity of a lifetime. There’s people and contractors who are more than ready to go.”

Battling NY for tax dollars

Lamont’s new budget doesn’t include any major tax cuts — which was expected given the huge reductions he and the legislature approved in each of the past two sessions.

Low- and middle-income households are expected to save about $460 million next fiscal year from the largest income tax cut in state history. The changes, approved last year, include both rate reductions and several enhanced credits.

The governor did recommend about $3.5 million in fee reductions, removing initial application fees in understaffed fields including nurses, teachers, and child care workers.

But the administration hopes to bolster the state’s coffers, by as much as $200 million annually in future years, by challenging controversial “Convenience of the Employer” rules in New York state.

Connecticut officials argue that New York rules unfairly require many Connecticut residents who work remotely from home for New York-based employers to pay taxes to the Empire State.

Lamont is urging residents to challenge the New York rules in court. Those that are successful and receive a refund from New York would then owe taxes to Connecticut.

Lamont proposes to add a 50% income tax credit to those challengers, and to waive any penalties Connecticut could claim against them.

A spokeswoman for N.Y. Gov. Kathy Hochul could not be reached for comment Wednesday morning.

Federal COVID relief

Lamont’s proposal also hinges on repurposing $55.7 million in unspent federal COVID-relief grants, which provide great fiscal flexibility because they can be spent outside of the cap system. But the shifting of these American Rescue Plan Act funds is expected to spark many questions from legislators, specifically: How much money have state agencies that received federal grants left unspent?

All states must designate how these funds will be used by Dec. 31. They still can be spent as late as Dec. 31, 2026, but purposes cannot be reassigned after this calendar year.

Legislators also are expected to press Lamont over how much of this fiscal year’s surplus can be used to support the next state budget. Even though the governor recommended boosting the planned “carryforward” from $95 million to $140 million, his fellow Democrats in the House and Senate majorities have suggested using between $200 million and $300 million to support numerous initiatives in health care, social services, and education.

Lamont also may face criticism for sweeping more than $16 million from a program that shares a portion of state sales tax receipts with cities and towns. The administration says this transfer would not impact municipal grants in the upcoming fiscal year, but it was not clear Wednesday whether that could trigger challenges a few years down the road.

Other changes

Lamont also proposed folding the Connecticut Port Authority into the Connecticut Airport Authority, consolidating the management of the state’s harbors and aviation facilities under one umbrella. 

David Kooris, the current chairman of the Connecticut Port Authority, mentioned the potential merger between the two quasi-public agencies during a meeting last fall, but little has been mentioned publicly about the plan since then.

The Port Authority has been an issue for the Lamont administration for years, largely because of the escalating cost of the redevelopment of the State Pier in New London. That project, which is now reaching completion, is meant to transform the port facility into a launching pad for offshore wind projects in the Atlantic. But the cost of the project ballooned from an estimated $93 million to more than $300 million. 

The Lamont administration also proposed restructuring payments into the pension plan for state judges to save $14.3 million next fiscal year. Connecticut restructured payments into the state employees’ pension in 2017 and 2019, and contributions to the teachers’ pension in 2019.

Staff Writers Andrew Brown and Jaden Edison contributed to this article.