Gov. Ned Lamont proposed a two-year, $46 billion budget Wednesday that relies on federal funding and state reserves to close a major deficit without significant tax hikes while bolstering aid for municipalities and school districts.

But the package also leaves Connecticut with several budget challenges to be resolved in the not-so-distant future.

The package would channel more than $400 million in emergency federal relief to low-performing school districts. But it also would suspend plans to bolster regular state-funded aid for municipal schools by $90 million in the next two-year budget cycle.

Municipalities also would share receipts from a new tax on marijuana — at the same time a more lucrative sales tax revenue-sharing plan to assist towns remains in limbo.

Lamont did not propose tolls this year as he did in the last two, but he did call for a new mileage-based highway tax on large trucks and also proposes the state shift a huge portion of sales tax receipts into Connecticut's cash-starved transportation program.

And while the governor was able to steer clear of tax hikes, his plan would cancel more than $170 million per year in previously approved tax cuts, while offering the sixth amnesty program for tax delinquents in the past three decades.

Even with those changes, the administration projects state finances, unless adjusted, would run more than $1.7 billion in deficit annually through mid-2026.

"Let's face it, the Connecticut budget is still burdened with high fixed costs accumulated over the decades," the governor said in his budget address. " ... Connecticut will have to remain agile in meeting these changing circumstances, but that being said, I would not change our hand with any other state in the country."

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The governor's proposal, which would appropriate $22.6 billion in the 2021-22 fiscal year and $23.4 billion in 2022-23, boosts spending 2% in the first year and 3.5% in the second.

And while acknowledging that the coronavirus pandemic "drew into sharp focus" Connecticut's health and educational disparities, particularly along racial lines, Lamont said reversing that has to be balanced against the cost of reviving the economy as well as the state's financial limitations.

The governor did not propose expanding Medicaid eligibility to cover more poor residents, as many of his fellow Democrats in the legislature demanded, and he proposed reinstating an asset test within that program.

The governor also did not recommend a rate increase for the private, nonprofit agencies that deliver the bulk of state-sponsored social services, but did propose additional funding to cover increased caseloads.

Federal funding to the rescue

Lamont has warned for months that, despite the pandemic, Connecticut could not afford to be too aggressive with its spending.

Analysts warned in November that state finances, unless adjusted, would run $4.3 billion in the red over the next two fiscal years combined. A rosier revenue forecast in January whittled that shortfall down to about $2.6 billion, or roughly $1.3 billion per year. But that still represents more than 6% of the budget's General Fund — an imposing gap.

Still, Congress authorized major new relief for education and housing in December that includes nearly $1 billion for Connecticut.

And President Joe Biden has asked Congress to direct about $350 billion to states and municipalities that could be used not only to cover COVID-19-related expenses, but also to cover other budget costs.

At first glance, Lamont's proposal relies on less federal aid than pre-pandemic years. The budget projects $1.55 billion used in the General Fund next year, compared with more than $2 billion in 2019.

But that's mostly a function of how Connecticut accounts for relief from Washington.

Lamont's budget counts on an average of $875 million over the next two fiscal years that will come from emergency federal stimulus.

And the budget numbers also don't cite the billions of dollars in federal reimbursements for Medicaid costs Connecticut receives annually. That reimbursement has grown by hundreds of millions of dollars since the pandemic began.

Rainy day fund likely will be tapped

Office of Policy and Management Secretary Melissa McCaw, Lamont's budget director, said that while the administration is optimistic the new Congress and president will channel more aid to states, it has a back-up plan, as well.

If Washington remains dysfunctional, Lamont will tap Connecticut's $3 billion rainy day fund.

But this approach is likely to spark objections from many of the governor's fellow Democrats in the state House and Senate majorities.

Progressive Democrats argue Connecticut should leverage federal dollars and tap its emergency reserves to help those hardest hit by the pandemic, noting that more than 200,000 filers still are receiving weekly unemployment benefits.

By comparison, Connecticut lost 120,000 jobs in the last recession, which ran from December 2007 through mid-2009.

Still, Lamont said the state's fiscal position is stronger than most other states', and its rainy day fund is a reflection of his administration's efforts to control spending and keep tax rates down.

"I've always said, we don't need more taxes, we need more taxpayers, and they are already paying dividends as you can see by our balanced budget," the governor said.

No major tax hikes, but more revenue for the state

Still, Lamont's budget would generate more than $170 million in new tax revenue in each year by deferring previously approved tax cuts.

Previously approved tax breaks for retired teachers, middle-class income taxpayers, and corporations would be postponed.

The governor's budget also supports taxation and regulation of marijuana sales for recreational use — and potentually sharing about a portion of the annual receipts with cities and towns.

The administration projects this initiative would generate almost $40 million by 2023, with $6 million going to distressed communities.

But municipalities would have to decide whether to add a 3% excise tax to the 6.5% sales tax and 9.5% state excise levy that also would be applied to cannabis sales.

When the legislature's nonpartisan Office of Fiscal Analysis last projected receipts from taxing marijuana in 2017, it estimated an annual revenue of $115 million — but that also recognized it could take several years for total receipts to reach that mark.

Pro-commercialization advocates have suggested Connecticut's annual take eventually could be $170 million or more a year.

Lamont also hopes to generate almost $50 million per year by 2022-23 by setting fees on online sports betting and by launching internet lottery and keno sales.

But McCaw said that initiative will hinge on negotiations with the Mohegan and Mashantucket Pequot tribes — which run casinos in southeastern Connecticut and have a longstanding agreement with the state which gives them exclusive jurisdiction over certain forms of gambling.

Keith M. Phaneuf is a reporter for The Connecticut Mirror (www.ctmirror.org). Copyright 2021 © The Connecticut Mirror.

kphaneuf@ctmirror.org