Gov. Ned Lamont and legislative leaders agree that state dollars should be used to blunt the big cuts in federal aid Connecticut is facing.
But with a recession also looming that could punch more holes in state finances, how much can Connecticut spare?
Set aside too little, and officials might have to watch hundreds of thousands of residents lose Medicaid coverage while poor cities boost taxes to offset vanishing federal aid.
Set aside too much and Connecticut could tumble unprepared into the next economic downturn. The last time that happened it triggered three major state tax increases between 2009 and 2015.
“You know me, I’m not a tax-raising guy,” Lamont said Wednesday afternoon.
The governor, a fiscal moderate, is taking a wait-and-see approach. Connecticut has a record-setting $4.1 billion rainy day fund, enough to cover 18% of annual operating expenses. And while President Trump and Congress are eyeing Medicaid reductions that could cost this state more than $500 million annually, the federal aid Connecticut has lost to date has been smaller.
“There’s some storm clouds out there, absolutely,” Lamont added. “I see what’s going on out there. We’re able to manage … This is no time to panic.”
But the governor’s fellow Democrats in the legislature’s majority want to line up two lines of defense:
- The rainy day fund should be earmarked for its its traditional purpose, to offset losses in tax revenues in the event of a recession. This would enable lawmakers to postpone tax increases and cuts to vital programs potentially for years until the economy recovers.
- And one of Connecticut’s most controversial budget caps, which has drained an average of $1.4 billion or 6% from state services annually since 2017, would be scaled back, so legislators could replace some vanishing federal dollars with state funds.
Currently, that $1.4 billion, which represents a portion of annual income and business tax receipts, must be used to reduce the state’s considerable pension debt, which stands at about $35 billion. That’s in addition to the $3.2 billion in required payments to the pension funds Connecticut already makes each year.
Though the $4.1 billion rainy day fund represents a record high for Connecticut, House Speaker Matt Ritter, D-Hartford, warned Wednesday it could evaporate fast if it’s drained to counter both a recession and federal aid cuts ordered by President Trump.
“Four billion dollars,” said House Speaker Matt Ritter, D-Hartford, “could go so quickly that people’s heads will explode.”
Connecticut’s experience with its last recession supports Ritter’s argument that the rainy day fund may not be enough to cushion the pain of an economic downturn and unprecedented cuts in aid from Washington.
Between 2007 and 2009, what economists called the “Great Recession” slashed Connecticut’s income, sales and other General Fund tax receipts by 10%, according to annual financial records from the comptroller’s office.
With Lamont’s budget office projecting tax revenues this fiscal year at nearly $21.1 billion, a 10% hit would represent more than $2.1 billion. In other words, an economic downturn alone could exhaust the rainy day fund in two fiscal years.
And the same revenues that plunged the most in the last recession, tax receipts tied to capital gains and other investment earnings, are at risk again. Wall Street has slumped dramatically in recent months as investors fear new tariffs imposed by Trump will push inflation upward. The Dow Jones Industrial Average, which measures the performance of 30 large companies listed on stock exchanges in the U.S, rebounded Wednesday after several recent hits but is still down 4.2% so far this calendar year.
Rep. Maria Horn, D-Salisbury, co-chairwoman of the Finance, Revenue and Bonding Committee, noted that state government’s recovery from the last recession took far longer than two years. Connecticut struggled with sluggish recovery growth and frequent deficit projections until 2017, eight years after the Great Recession ended.
“Everything resets at a lower level,” she said.
Ritter and House Majority Leader Jason Rojas, D-East Hartford, said Democrats aren’t looking to abolish budget controls, which supporters called “fiscal guardrails,” or end savings efforts entirely.
“It’s not about doing away with the ‘guardrails’ completely,” Rojas said. “It’s doing what the law allows us to do, which is respond to an emergency.”
Senate President Pro Tem Martin M. Looney, D-New Haven, echoed the concerns of House Democrats, saying Connecticut almost certainly hasn’t taken its hardest fiscal hit from Washington.
“Things are changing day by day,” Looney said. “We’ve never seen anything like this before.”
And although the Republican-led Congress hasn’t finished work on a new federal budget, Trump already has used executive orders to unilaterally cut or freeze significant aid previously awarded to Connecticut.
About $155 million in public health grants, most of which Connecticut planned to spend in the next fiscal year, was canceled in late March. At the same time, Trump froze another $14 million earmarked for K-12 school districts here.
Those moves, though significant, pale in comparison to the hit Connecticut could face if Congress meets its goal of slashing $880 billion from programs serving states, most of which is expected to come from Medicaid.
Washington currently sends more than $6 billion annually to Connecticut through Medicaid, an entitlement program that serves roughly 1 million people here, funding health coverage for poor children and adults, nursing home and other elder care, and behavioral health and substance abuse treatment services.
State officials have modeled various Medicaid cut projections, based on proposals circulating on Capitol Hill, that could cost Connecticut anywhere from $186 million per year to $880 million.
The Center on Budget and Policy Priorities, a fiscal policy think-tank based in Washington, projected that cuts tied to new work requirements alone could put 549,000 Connecticut residents at risk of losing Medicaid coverage.
Lamont has noted on several occasions that Connecticut cannot afford to offset all losses state finances may feel in the coming years and that it is better prepared than most other states for the fiscal chaos to come.
A recent analysis by the Pew Charitable Trusts ranked Connecticut 14th-highest out of 50 states in terms of the number of days it could run government using its budget reserves alone.
And Lamont isn’t the only one reluctant to temper savings efforts and prepared to rely on the rainy day fund alone, for now, to protect Connecticut’s finances.
Republicans in the General Assembly say Connecticut should focus now on ways to cut state spending, not on tampering with budget caps.
Senate Minority Leader Stephen Harding, R-Brookfield, said Lamont needs to resist appeals to supplant vanishing federal aid with state dollars.
“The focus is on you now. Stand strong against your fellow Democrats who want to break the ‘guardrails,’” Harding said.
“We should not be dismantling the ‘guardrails’ that have protected Connecticut from overspending, protected us from tax increases,” said House Minority Leader Vincent J. Candelora, R-North Branford, who said he fears Democrats are pushing the state toward more tax hikes.
But some say Connecticut ultimately will need more revenue to deal with both an economic downturn and shrinking federal aid. And if revenue is needed, it must be accompanied by reforms to a state and municipal tax system that disproportionately falls on the poor and middle class.
“Connecticut has given our ultra-wealthy residents and major corporations a free ride for far too long, all while working families foot the bill,” Norma Martinez HoSang, director of CT For All, a progressive grassroots organization of dozens of faith, labor and other civic organizations, said Wednesday. “There’s no more critical of a time than now … to create new revenue that is both sustainable and equitable.”
Connecticut’s last tax fairness study, issued late year, found the lowest-earning 10% of households effectively spent almost 40% of their income in 2020 to cover state or municipal tax burdens, more than five times the rate faced by Connecticut’s highest earners and two-and-a-half times the statewide average.
Lamont has consistently opposed raising taxes on the state’s highest earners, arguing it would prompt them to flee the state.
The head of Connecticut’s largest health care workers union, SEIU District 1199 New England President Rob Baril, last week also urged state officials to ask more from the state’s wealthiest households and major corporations to preserve core services.
“I don’t see a way that Connecticut can provide even the status quo, which is insufficient,” Baril said, “unless we’re able to do some stuff around revenue.”