Despite the bipartisan praise lavished on Connecticut’s budget constraints, officials never have fully embraced them, spending hundreds of millions of dollars in recent years outside the “fiscal guardrails” — drawing from short-term sources.

But these temporary wells are running dry faster than many anticipated, setting the stage for a budget showdown this May, with funds for education, human services and health care hanging in the balance.

On one side, Gov. Ned Lamont, other moderate Democrats and most of the legislature’s Republican minority are pushing for stricter adherence to these fiscal controls.

On the other are most of Lamont’s fellow Democrats, who want to spend up to $400 million beyond official limits. But they note that besides shoring up core programs, this still would leave finances projected in the black — and poised to further reduce pension debt.

Options for working around the spending cap are shrinking

“I am not going to ask my caucus to vote for a budget that does not have $300 million to $400 million of extra spending,” House Speaker Matt Ritter, D-Hartford, told The Connecticut Mirror on Thursday.

But that’s not an easy task, given that the preliminary $26 billion budget for 2024-25 — the one that legislators want to enhance — already exceeds the state spending cap by $30 million. In other words, there’s no room to add even $1. And that plan only boosts General Fund spending by 2% above current levels.

Further complicating matters, Ritter’s comment came one day after Lamont’s administration reduced projections for this fiscal year’s operating surplus to just $109 million or one-half of 1% of the General Fund. Eroding sales tax receipts and cost overruns in human service agencies have steadily whittled down the $400 million cushion lawmakers built into the budget when they adopted it last June.

Why does this year’s surplus matter for next year’s budget?

Legislators were counting on that $400 million since carrying operating surplus from one fiscal year into the next is one of the chief tools used to circumvent the spending cap. Because those carry-forward dollars technically were appropriated in a prior year, they don’t count against future cap calculations when they are spent.

The legislature carried about $280 million from last fiscal year’s operating surplus into the current budget. That plan also was backed by $544.3 million of the nearly $2.8 billion in flexible pandemic relief Connecticut’s state government received from Congress in 2021 through the American Rescue Plan Act.

But those ARPA funds, which aren’t subject to the spending cap and are the second tool legislators use to maneuver around the guardrails, have nearly been exhausted.

Lamont’s budget office estimated in early February that only $55.7 million in previously allocated ARPA could be re-directed into the next budget, although that number might be slightly larger. The administration is preparing an updated tally and has asked all agencies to report on unspent funds by March 25.

Still, a $109 million surplus and about $56 million in guaranteed ARPA represents about $165 million that could be added to the next state budget without violating cap rules, far below the $300 million to $400 million legislative leaders insist is needed to address a plethora of issues.

Legislative leaders say available funds under cap aren’t enough

Public colleges and universities, which have been big beneficiaries of funds from these temporary sources in recent years, are projecting significant deficits after July 1, despite tuition and fee increases already ordered at community colleges, regional state universities and at the University of Connecticut.

The private, nonprofit agencies that deliver the bulk of state-sponsored social services estimate they lose $480 million annually because government payments haven’t matched inflation since 2007.

Legislators also want to boost funding for a child care industry that hasn’t fully recovered financially from the worst of the coronavirus pandemic as well as for various health care programs that are facing increasing demand.

And despite the shrinking operating surplus, that doesn’t mean the state finances are heading for a deficit. They may not have gotten worse at all.

Though the operating surplus has dropped from $400 million to $109 million, that’s not the only fiscal safety net Connecticut has.

A second program, which forces the state to save a portion of volatile income and business tax receipts, is expected to collect $480 million this fiscal year. Some legislators expect that number to grow in late April when analysts adjust projections based on income tax filings.

Most of that savings program involves capital gains and other investment-related earnings, and the markets have risen considerably since the fiscal year began.

The Dow Jones Industrial Average closed Thursday at 39,781 points, up 15.7% since last July, while the S&P [Standard & Poor’s] 500 is up 17.8% over the same period, according to marketwatch.com.

“If you look at the overall picture, it’s nowhere near as dire as if you look at isolated pieces,” said Senate President Pro Tem Martin M. Looney, D-New Haven.

But there’s still a problem: While the operating surplus can be carried forward to help next year’s budget, the volatility savings program cannot, except under special conditions.

Even if its potential growth in April outstrips the reduction in the operating surplus, the volatility savings program can’t help education, health care or social services. Under the guardrails system, the funds must be used to reduce pension debt or to increase the rainy day fund.

Connecticut already has a record-setting $3.3 billion budget reserve and has paid down an extra $7.7 billion in pension debt since 2020. Over the past four years, 21% of all revenues — excluding those assigned to special budget funds — have gone into the pensions.

Many of Lamont’s fellow Democrats say this system over-prioritizes debt reduction, and that they don’t want to stop saving — but just seek a more balanced approach.

Lamont and GOP say Conn. can’t lose sight of long-term challenges

Lamont and Republican legislators counter, though, that Connecticut is not out of the fiscal woods from a long-term perspective.

The state failed to save properly for pensions for more than seven decades prior to 2011, forfeiting billions of dollars in potential investment earnings — a gap current and future taxpayers must plug. The state’s unfunded pension obligations remain huge, topping $37 billion entering this year, according to the administration.

What happens if the global economy slides into recession next year, or if Washington begins to pull more funding for states back to pre-pandemic levels, as it did this past year with winter heating assistance, Republican state legislative leaders have asked.

If Connecticut Democrats increase spending as pandemic grants are exhausted, it will be even harder to sustain those investments if future challenges arise, said House Minority Leader Vincent J. Candelora, R-North Branford.

“The fundamental question that Democrats always seem to ignore around spending is sustainability, and that’s why the caps are there,” Candelora said. “If you can’t keep up with those spending levels year to year, you’re putting yourself in a long-term deficit. … This is the behavior we saw 20 years ago and we’re seeing today.”

“One thing that we can’t do is play fiscal gimmicks with these guardrails,” added Senate Minority Leader Stephen Harding. “We’ll be in far worse shape in the long run.”

The Lamont administration also hasn’t shown interest in carving out new ways to work around the cap.

“Any additional state funds that the General Assembly provides in any FY 25 budget adjustment will need to be consistent with a balanced budget that complies with all statutory and constitutional caps,” Chris Collibee, Lamont’s budget spokesman.

Democrats insist that whatever they do will absolutely be legal. The question, for some, is whether it will comply with the intent of the guardrails system.

The preliminary budget for 2024-25 has a built-in operating surplus of $300 million and expects to save another $450 million through the volatility program. Democrats say they don’t want to tap anywhere close to all of that $750 million projected cushion.

They’re exploring an “intercept” of revenue, an accounting maneuver that technically assigns a portion of some revenue source — tax receipts, interest earnings, fees — outside of the budget, as well as an expense that these intercepted revenues would cover. When the spending occurs outside the budget, it no longer counts against the spending cap.

Legislators and governors have used this technique before. A revenue intercept of roughly $150 million to $200 million, coupled with remaining ARPA funds and this year’s $109 million operating surplus, might be enough to resolve the next state budget before the regular legislative session ends on May 8.

To those who say this is a gimmick, Ritter’s response is: Check your history.

Democratic and Republican legislators both gave ground at the end of a nine-month-long budget debate seven years ago to establish unprecedented budget constraints.

“What has made Connecticut move since 2017 has been the compromises, the give and takes,” he said.

Some Democratic legislators insist closer to $1 billion needs to be added to the next budget, Ritter said, adding that caucus leaders, trying to compromise, already have shaved that down to $300 million to $400 million. But that’s as far as they will go.

“If people don’t like what we have, and don’t have better ideas,” the speaker said, “we will pass it [anyway] and see what they do with it.”

www.ctmirror.org