Federal relief spending will shape state’s future
“Leaders and decision makers are going to have to be strategic and have an eye toward growth,” said Melissa McCaw, Gov. Ned Lamont’s budget director. “There’s a great opportunity here to think outside the box.”
With billions of dollars of federal coronavirus relief pouring into Connecticut, leaders face an unprecedented balancing test.
Most of this money will be used to enhance safety and undo the economic chaos caused by COVID-19. But Connecticut also is expected to fund new initiatives, transforming everything from health care, education, its workforce and infrastructure to better function in a post-pandemic world.
The challenge is to ensure that when the federal dollars run out in 2024, Connecticut’s economy will have recovered enough to pay for these new ventures and make this transformation permanent
“There is no greater economic concern in our generation,” said Chris DiPentima, president and CEO of the Connecticut Business and Industry Association. “How we spend this money will determine what Connecticut does for the next two decades.”
Although stimulus payments of up to $2,800 per household, extended unemployment benefits and $350 billion in direct relief to states and municipalities grabbed most of the headlines involving the $1.9 trillion federal relief measure, there is so much more.
Funds are earmarked for education, workforce development, child care and other social services, rental assistance, and capital projects.
“Leaders and decision makers are going to have to be strategic and have an eye toward growth,” said Melissa McCaw, Gov. Ned Lamont’s budget director. “There’s a great opportunity here to think outside the box.”
The Lamont administration is committed to using the funds to reverse as much of the damage from the last 12 months as possible, McCaw said, but also to ensure Connecticut doesn’t get trapped in a downward economic spiral for years to come.
That means propelling job growth, ensuring housing stability and closing gaps in technology that limited many poor families’ access to health care and education, she said.
Step One for businesses: Keeping taxes down
The first step toward that goal involves stabilizing state finances.
Even with a robust stock market that mitigated the damage to the state’s finances, government spending is on pace to exceed revenues by $1.3 billion over each of the next two fiscal years — unless adjustments are made.
Connecticut has just over $3 billion in its rainy day fund. But Lamont and many others say a big chunk of the $2.6 billion from Washington, D.C., that goes directly into the state budget should be used to balance the books for the coming biennium.
That, in turn, would leave the rainy day fund intact and available to cover any shortfalls in 2024 and afterward — when the federal dollars run out.
The out-years could be a real problem if an October forecast from the University of Connecticut’s economic think-tank is correct. Economist Fred Carstensen warned that the state likely will struggle to recover employment, business productivity, personal income and state revenues past 2030.
Federal rules block states and municipalities from using this relief to cut taxes or to pay down their pension debt.
But that’s not a problem for DiPentima, because the No. 1 item on the business wish list, he said, is simply to keep state and municipal taxes stable for as long as possible. The threat of tax hikes, the CBIA has argued for years, is the single-largest impediment against businesses adding new jobs.
Connecticut municipalities — which generally don’t have reserves anywhere close to the state’s — say the pandemic cost them hundreds of millions of dollars in lost or deferred revenue.
Despite that hit, cities and towns recognize the latest round of federal aid “is bridge money to get to the other side” of the pandemic, said Joe DeLong, executive director of the Connecticut Conference of Municipalities.
DeLong said he’s confident communities will be cautious with spending the nearly $1.6 billion in federal relief headed their way.
But he also noted they’re coming off a decade during which the state frequently has reneged on promises to expand municipal aid as Connecticut grappled with huge pension debt.
If Lamont and the General Assembly want stable city and towns budgets when the federal aid runs out in 2024, DeLong said, that means more reforms for state employee and teacher pensions and other retirement benefits.
“I think most of our cities and towns realize they’re going to be on a fiscal rollercoaster with the state” until this is done, he added.
‘COVID has not been an equal opportunity employer’
There’s more to bolstering Connecticut’s economy, though, than simply avoiding tax hikes.
The state will receive $140 million for capital projects, and McCaw said the administration wants to use those dollars to transform Connecticut’s information technology infrastructure, to give businesses and workers more options to work remotely and function more efficiently.
These funds also can be invested in worker retraining and other workforce development initiatives. Coupled with $370 million available for community colleges and the rest of Connecticut’s higher education network, the state has a chance to return thousands of unemployed to jobs.
Connecticut still has more than 200,000 households receiving weekly unemployment benefits, and even after vaccinations largely have progressed, the state likely will have 150,000, said Don Klepper-Smith, an economist with DataCore Partners.
Like Carstensen, Klepper-Smith says that Connecticut’s economic future is sketchy at best.
Unlike the last recession, when a plunging stock market took a chunk out of many rich households, “COVID has not been an equal opportunity employer,” said KlepperSmith, who was the state’s chief economic advisor in the late 2000s under Gov. M. Jodi Rell.
The coronavirus has clobbered Connecticut restaurants, hotels and many retail stores. The highest infection rates also were centered on poor urban centers.
Meanwhile, the Dow Jones Industrial Average closed Friday at nearly 32,628 points, 26% higher than it was last year on March 4 — just before it began a pandemic-induced plunge that briefly eliminated one-third of its value.
So while keeping taxes down is important, others argue that it is more important to help those who have suffered the most.
Besides providing stimulus payments up to $2,800 per household and extending federal unemployment benefits, the relief bill also enhances federal income tax cuts for the working poor, for lowand middle-income families with children. It also increases and expands eligibility for premium subsidies for households that buy subsidized health insurance through the state exchange.
This was a crucial part of the measure, said U.S. Rep. Joe Courtney, D-2nd District, who said recipients of this tax relief will pump most of those dollars right back into the economy.
“This is pure stimulus in terms of consumer spending,” he said. “These are families that have bills to pay.”
Connecticut has scaled back its state income tax credits in recent years for the working poor and middle-class households, but it can’t afford to continue on this path if it wants a stable economy coming out of the pandemic, according to Yale Law School Professor Anika Singh Lemar, who teaches at the school’s community and economic development clinic.
Though many recipients of these credits can afford to save very little of their income tax refunds, the tax breaks still move them one step closer toward economic security. “They’re using it for a cushion against the next crisis, or investing in education or home ownership,” Lemar said. “We need all of that in Connecticut, too.”
Investing more in social services and schools
A huge chunk of the $2.6 billion Connecticut will receive involves enhanced federal Medicaid payments, and the progressive Democrats in the General Assembly have insisted the state expand eligibility to help thousands of households that have lost their insurance.
The state contracts with hundreds of communitybased nonprofit agencies to deliver the bulk of its social services, and many of those they serve are Medicaid clients.
This puts the state in a unique position to help long underfunded nonprofits “that have struggled with long-term inadequate funding and the financial pressures of the pandemic,” said Gian-Carl Casa, president and CEO of the CT Community Nonprofit Alliance.
Nonprofits receive little more than they did from the state one decade ago, and they estimate that, after taking inflation into account, the industry is down about $460 million per year.
Sen. Cathy Osten, DSprague, and Rep. Toni E. Walker, D-New Haven, co-chairs of the Appropriations Committee, have said Connecticut must expand Medicaid eligibility and do more for its nonprofits, which lost millions of dollars during the first year of the pandemic due to shuttered programs and enhanced health safety costs.
“The state has an obligation to fund nonprofits at a level that keeps them sustainable,” Osten said.
Connecticut’s schools also need a major infusion of dollars in part to help students catch up on the curriculum and socialization they missed during the past year, as many spent large chunks of time learning from home.
But Fran Rabinowitz, executive director of the Connecticut Association of School Superintendents, said the challenge facing districts is much greater than that.
Schools not only need to help students become more skilled in digital learning, but they need to revise their curricula to help students understand the pandemic, viral risks and how they are changing society, Rabinowitz said.
That means not only investing in summer school but in new programs that may continue to be necessary even after the federal dollars expire in 2024.
House Speaker Matt Ritter, D-Hartford, said legislators recognize this challenge. And while Lamont’s budget proposal for the next two fiscal years recommends suspending about $90 million in previously approved increases in state education grants, Ritter said lawmakers are committed to preserving those increases.
“If it were not in COVID time, I would want to give Matt Ritter a hug for that,” Rabinowitz said.
During the last recession, the state propped up its education grant system in 2010 and 2011 with $270 million per year in temporary, emergency federal aid — and no plan what to do afterward.
And even though former Gov. Dannel P. Malloy and the 2011 legislature ultimately replaced the lost federal dollars with state money, districts were bracing for the worst. “People lost their jobs left and right,” Rabinowitz said, adding she still fears the “funding cliff” effect.
In other words, Connecticut’s plan for this federal money must assume that when it goes away, some of the new and expanded programs it funded will remain — and state dollars will be needed in 2024 to pay for them.
“The federal dollars should not negate the state’s responsibility,” she said, adding that she hopes the next two years should be a time of academic, technological and social development for schools.
“Isn’t that exciting that we have an opportunity to do that?”