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After compromise, legislators extend CT’s ‘fiscal guardrails’

Gov. Ned Lamont was warmly greeted Wednesday by Senate President Pro Tem Martin M. Looney and House Speaker Matt Ritter. But they later pushed him to amend his fiscal guardrails plan.
Gov. Ned Lamont was warmly greeted Wednesday by Senate President Pro Tem Martin M. Looney and House Speaker Matt Ritter. But they later pushed him to amend his fiscal guardrails plan.

Gov. Ned Lamont and legislative leaders negotiated 11th-hour compromises that produced unanimous passage Thursday of a bill extending budget reforms that have contributed to Connecticut’s fiscal turnaround.

“Today’s legislation is a compelling and effective sign to residents, employers and credit rating agencies that Connecticut is serious about living within our means and saving for the future,” Lamont said.

Lamont insisted in his budget address Wednesday that bond covenants behind a volatility cap should be extended by a decade, but he settled for a 10-year provision the legislature can abandon after five years.

Legislative leaders downplayed the late compromises, instead noting what House Speaker Matt Ritter, D-Hartford, called the “magic moment” of the legislature uniting behind reforms that have helped generate surpluses, full budget reserves and accelerated payments on pension debt.

“Ten years from now is a long time,” Ritter said in a press conference prior to the House session. “And we had people who made the argument that five years worked really well the first time — why would you change that?”

Leaders of the House and Senate Republican minorities said the compromise version still represents a commitment to the fiscal discipline that the 2017 passage of the so-called “fiscal guardrails” has imposed on Connecticut.

Lamont was reelected with 56% of the vote last year, running on a campaign that emphasized his adherence to the guardrails and his general handling of the state’s finances. Ritter said Thursday that the guardrails was a mandate of the governor’s victory.

“Quite frankly, it is one of the reasons why we are operating in a surplus and are in a position to provide tax relief and expand services for the residents of Connecticut, as I proposed in the budget that I presented to the legislature yesterday,” Lamont said. “Fiscal stability is the foundation to inclusive growth.”

While short of the governor’s version, the extension underscores a deep change that has occurred in the General Assembly. It has shifted from grudging acceptance of the budget controls to a widespread acknowledgment of their role in generating a string of surpluses, a full budget reserve and the paying down of pension debt.

The reason for the acceptance is simple, legislators said.

“It worked,” Rep. Maria Horn, D-Salisbury, co-chair of the Finance, Revenue and Bonding Committee, said during the press conference.

Original passage came under duress six years ago, a compromise devised to break a budget deadlock forced on a Democratic majority by moderate Democrats and a Republican minority that was far stronger than it is today, holding half the seats in the Senate and just short of a House majority.

Today, with overwhelming majorities, Democrats could easily shed the 2017 reforms. But Ritter said that is unthinkable.

Ritter acknowledged dissatisfaction with elements of Lamont’s proposed budget, which does not provide as much money for nonprofit service providers and education aid. But legislative leaders of both parties are unwilling to make the guardrails a bargaining chip.

“This moment sets a guardrail,” Ritter said. “It worked five years ago, and that magic in a bottle is important to maintain on this one issue. And if you let this drag on too long, you will not have that magic moment.”

The bill is being offered as emergency legislation that can go to a floor vote without review by legislative committees or public hearings. It also provides funding for free school lunches and a cutting-edge aerospace research center at the University of Connecticut.

Horn and Rep. Toni E. Walker, D-New Haven, co-chair of the Appropriations Committee, said the quick passage was necessary to set the parameters for taxes and spending in the budget to be resolved in coming months.

“Some of the bills that are coming out that have enormous price tags — we bring them into reality,” Walker said. “What are our basic constraints? What are the guardrails, so that everybody understands that this is a Connecticut for all? And we have to make sure that we balance it.”

Lamont thought he had a deal for a 10-year extension, but Ritter, Senate President Pro Tem Martin M. Looney, D-New Haven, and other Democratic leaders met with Lamont and his senior staff late Wednesday afternoon to inform him changes were necessary for easy passage Thursday.

Since 2017, the state’s rainy day fund has grown from a meager $213 million — about 1% of the General Fund — to a record-setting $3.3 billion. That reserve is at its legal limit, equal to 15% of the General Fund.

State officials also have poured another $5.8 billion in surpluses in Connecticut’s cash-starved pension funds. And analysts are projecting this fiscal year will close on June 30 with $3.2 billion left over, which would be the second-largest surplus in state history.

The guardrails established as part of that 2017 bipartisan budget include:

  • A spending cap that keeps growth across most sections of the budget in line with changes in personal income or inflation, whichever is larger.
  • An annual cap on the total value of bonds state government can issue to finance municipal school construction, renovations to state buildings, open space and farmland preservation, and various community projects supported with state borrowing. The cap does not apply to borrowing for transportation projects or for the capital programs at public colleges and universities.
  • A “volatility adjustment” that restricts legislators’ ability to spend quarterly income and business tax receipts in excess of a $3.2 billion threshold. These funds, which are tied heavily to capital gains and other investment earnings, historically have fluctuated greatly from year to year.
  • And a revenue cap designed to stop legislators from creating budgets with little fiscal room for error, a periodic problem in the past. For example, the 2009 legislature approved a $17.4 billion General Fund for the 2009-10 fiscal year with a built-in cushion of just $2.1 million, a margin of less than 1/80th of 1%.

To shield these fiscal controls from tampering, legislators five years ago also launched a process that’s become known as “bond lock.”

The state specifically pledged in bond covenants — essentially the state’s contracts with its Wall Street investors — not to adjust these rules, except under very limited conditions, before June 30, 2023.

Legislators are proposing some changes to this system.

The revenue cap, which currently limits annual appropriations to 98.75% of revenue — roughly a $280 million built-in cushion — is supposed to reach 98% by 2026, saving roughly $460 million.

The new deal will freeze the revenue cap at its current level. Democratic legislators have talked informally about redirecting the extra funds either to bolster education aid to school districts or to support early childhood care.

A second change involves the rainy day fund limit, which would grow to 18%. In the context of the current budget, that would allow the reserve to grow from $3.3 billion to $4 billion.

And the bonding cap, which had stood at $2 billion, would rise to $2.4 billion and then be adjusted annually based upon inflation.

House Minority Leader Vincent J. Candelora, R-North Branford, asked lawmakers during the floor debate to recall not only the grueling nine-month-long budget battle in 2017 that produced the reforms but the eight years that preceded it, a period marked by frequent budget deficits, rising debt costs and some very hefty state tax hikes.

But after 2017, “it was almost as if the stars aligned perfectly,” Candelora said, adding that the savings habits developed since 2017 have made it possible for legislators to consider the roughly $500 million annual tax cut Lamont proposed Wednesday. “Finally we are looking at a systemic change to our tax structure that will help our lower [income] and middle-class taxpayers.”

“We do a pretty good job of working collaboratively on really important policy,” added House Majority Leader Jason Rojas, D-East Hartford. “It speaks volumes about the direction the state of Connecticut is going in.”

Sen. John Fonfara, D-Hartford, co-chair of the Finance, Revenue and Bonding Committee, also recalled the harsh budget years of the early 2010s.

“I hope we never see those days again,” he said during the Senate debate, adding that with its robust reserves now, the next economic downturn’s impact on state finances should be different. “We should be able to deal with [it] without having to cut services or raise taxes” in extreme amounts.

But some argue that Connecticut has been too focused on saving over the past five years and should have devoted more resources to respond to the coronavirus pandemic, the 40-year-high in inflation in 2022, and longstanding inequalities in education, health care, housing and economic opportunity.

Recovery for All CT, a coalition of more than 60 labor, faith-based and community groups, pushed hard against an immediate 10-year extension of these budget restrictions.

“Connecticut is faced with a historic crisis of unmet needs, and we need budget mechanisms that will improve the lives of working families, not hurt the critical programs we all rely on,” said Puya Gerami, campaign manager for the coalition.

Emily Byrne, executive director of the New Haven-based policy group Connecticut Voices for Children, said Wednesday the guardrails are worth celebrating.

“However,” she added, “these current fiscal controls were created at a different time, and it would be a tremendous mistake for the people of Connecticut if we renewed all of these fiscal guardrails without updating them in order to ensure that we as a state can build a more equitable future.”

Many of Lamont’s fellow Democrats in the legislature said the $50.5 billion budget he proposed Wednesday for the next two fiscal years doesn’t make adequate investments in education, child care and social services.

Both Ritter and Horn had predicted overwhelming bipartisan support for the extension, even if done via an emergency bill.

“It does shorten the process, but there certainly have been robust conversations” among legislators, Horn added.

Sen. Rob Sampson, R-Wolcott, voted for the guardrails measure but also questioned why an emergency bill was necessary in early February.

“Little if any of the language that is before us has been through the committee process,” Sampson said, noting that meant it also hadn’t been through a public hearing this year.

And while keeping state finances in good shape is an important task, Sampson added, “we’re also charged with making sure we follow a process and a procedure that is transparent and worthy of the people we represent.”

Candelora said before the House debate that while a 10-year extension would have been better, the GOP can work with at least five more years.

“I’m less concerned with the number of years,” he said. “We are more focused on maintaining the integrity of the caps.” Candelora noted there are a number of accounting maneuvers past legislatures and governors have used to effectively spend much more than the spending cap technically allows.

Senate Minority Leader Kevin Kelly of Stratford also said a 10-year extension would be better, “but five years of this continued fiscal discipline — and an automatic renewal of that fiscal discipline after five years — will continue to improve our state’s financial health and enable us to provide much needed tax relief for struggling Connecticut families.”

Lamont and state Comptroller Sean Scanlon also had endorsed a 10-year extension of the guardrails.

Adam Joseph, the governor’s communications director, didn’t address the latest extension proposal directly. But he said Lamont “strongly believes that extending the bond covenants and associated guardrails for 10 years is the responsible path to pursue and protects our financial future. Honoring our commitment to teachers and our state employees by helping to pay down our pension liabilities is the right thing to do.”

Scanlon said Thursday that “any extension is a good thing, any continuation of what is working is a good thing.”

UConn gets funding for aviation research

The emergency bill also requires the Department of Community and Economic Development to provide up to $20 million to the University of Connecticut for state matching funds necessary for the school to pursue as much as $60 million in federal grants for a cutting-edge aerospace research project.

UConn and Pratt & Whitney are partners in seeking federal grants for a Center for Sustainable Aviation on the Storrs campus that will focus on developing a new generation of hydrogen-powered jet engines.

The university will be giving up $12 million in capital funds in fiscal 2025 to offset a portion of the $20 million, which would come from the Department of Community and Economic Development.

Universal free school lunches

The bill provides $60 million in federal American Rescue Plan Act funds to provide free school breakfasts and lunches for the remainder of the school year.

Some school systems have exhausted federal funding that allows the free school meals at the start of the school year.

Unclear is whether the state will continue funding next year, when it would have to use state resources.

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