State officials are poised to legally exceed Connecticut's spending cap for the first time in nearly two decades to avert a crisis in paying Medicaid bills -- and to pave the way for a new two-year budget.
Both Gov. Ned Lamont's administration and House Speaker Matt Ritter, D-Hartford, confirmed a tentative understanding to resolve the Medicaid shortfall expected to approach or exceed $300 million this fiscal year.
And while neither discussed exceeding the cap, which keeps overall budget appropriations in line with household income and inflation, officials have largely exhausted other options to circumvent that limit without formally going beyond it.
"The administration continues to make positive progress with legislative leaders on an agreement regarding the deficiency bill for fiscal year 2025 and a framework for the budget for fiscal years 2026 and 2027," Lamont's budget spokesman, Chris Collibee, said Friday. "We are optimistic that an agreement can be reached soon."
"I expect we will vote on Monday" to cover the Medicaid shortfall, Ritter said late Thursday, then quickly added a huge qualifier that hinted toward a compromise.
The speaker said legislators will cover that Medicaid gap in the traditional manner, which involves formally appropriating the necessary funds.
With the administration forecasting an almost $2.4 billion surplus this fiscal year, and another $4.1 billion stashed in the rainy day fund, Connecticut can easily cover a $300 million Medicaid shortfall.
A lack of budget resources was never the problem.
But covering the Medicaid gap and other cost overruns in the current budget would push spending $25.4 million over the cap, based on the last month's projections.
That can be accomplished, provided the governor declares a budget emergency in writing and that the House and Senate each agree with a 60% vote of approval. The $300 million would be drawn from this year's projected surplus.
And while Lamont and lawmakers agree to spend about $300 million more than normally permitted this fiscal year, the tentative deal also would let legislators spend additional funds, close to that amount, in the next biennial budget. Democrats are expected to spend that money on municipal aid, human services, education and state employee wages.
Officials have done so seven times since the spending cap was created in 1991 but not since 2007, when Republican Gov. M. Jodi Rell and a Democratic-controlled legislature appropriated $690 million above the limit to significantly boost municipal aid and payments to doctors and other providers that treat the poor.
But after a severe recession pushed state finances deep into the red and triggered a historic $1.8 billion-plus tax hike in 2011, legally exceeding the cap became politically taboo.
Lamont, who called the spending cap "sacrosanct" in a January meeting with business leaders, has been loath to tamper with this or other budget controls that he often calls "fiscal guardrails."
Over the last seven years, Connecticut has used budget surpluses to add $3.9 billion to its rainy day fund and shrink pension debt by $8.6 billion.
But many of the governor's fellow Democrats in the legislature's majority say these controls, which were last calibrated in 2017, are saving excessively at the expense of local schools, health care and other core services.
These budget caps have captured an average of $1.8 billion from the General Fund each year since 2017, equal to about 8%, and will collect a projected $2.4 billion or 10% this year.
With three-quarters of the General Fund tied to wages, Medicaid, debt service, retirement benefits and other fixed costs, removing 10% from the remaining quarter budget has a big impact.
Critics also say political fears of exceeding the cap have triggered an overreliance on less-than-transparent accounting gimmicks that circumvent spending limits without officially breaking them.
Since the coronavirus first struck in 2020, Connecticut has used billions of dollars in emergency federal aid -- which can be spent outside normal cap limits -- to defer cap reform and to bolster programs that otherwise would have been cut. But those resources have nearly all been exhausted, and the impact can be seen in budget proposals for the next two fiscal years.
To keep spending under the cap, budget plans proposed by both Lamont and the Democratic-controlled Appropriations Committee would underfund contractually guaranteed health care for retired state workers by an average of $114 million per year.
Both also dramatically scaled back a major planned increase in payments to health care providers who treat the poor.
Budget plans proposed by the governor, the Appropriations Committee and House Republicans each would shift $300 million or more outside of the budget and spending cap system to bolster early childhood development over the coming biennium. The proposal initially came from Lamont, and both parties supported it.
Lamont's plan would also reduce basic Education Cost Sharing grants to nearly half of Connecticut's 169 cities and towns next fiscal year, in accordance with an existing legislative formula.
And the governor would need to borrow $60 million per year to maintain the Town Aid Roads Program, which covers basic road maintenance and winter snow removal, because otherwise his budget would exceed the cap.
Faced with this year's Medicaid cost overruns and more cap constraints, House Democrats earlier this week hoped to find one more legal loophole.
They originally planned to shift about $300 million in projected surplus outside of the formal budget -- an accounting move possible with a simple majority vote -- to meet Connecticut's obligations to health clinics, social service agencies and other care providers this fiscal year.
Then, assuming Medicaid demand would not shrink, the Democrats' plan would restore that extra $300 million to the formal budget in each of the next two fiscal years, effectively claiming a cap exemption on grounds that it was the start of a new program.
But the Lamont administration balked at what it saw as a transparent and poorly designed gimmick and threatened to delay payments to care providers until after the next fiscal year begins on July 1 on grounds that it didn't have available funds.
Ritter then countered Thursday by announcing the House would run a bill Monday that would cover the Medicaid shortfall with the off-budget accounting maneuver, effectively forcing Lamont to choose between strict adherence to the spending cap and supporting Connecticut's care providers.
Both sides quickly thereafter resumed negotiations and struck a compromise, prompted in part by the potential damage to care givers.
Providers responded that -- unlike the state of Connecticut -- they aren't flush with cash, can't wait six to seven weeks for dollars due in late May, and don't like being used as a political football.
"We will be in serious arrears and not able to make payroll," Alice Forrester, CEO of Clifford Beers Community Health Partners in New Haven, said shortly before Lamont and legislators struck a tentative deal.
Forrester, whose group employs about 400 people, adding that "things are very tight, and the Medicaid rates are already paying at 62 cents on the dollar. We're already in the hole."
Connecticut's federally qualified health centers, which provider medical, dental and behavioral health care services to about 30% of the Medicaid population, "are already vastly underpaid by Medicaid, which the state's own study confirmed, and are operating on the slimmest of margins," said Shawn K. Frick, CEO of the Community Health Center Association of Connecticut.
The prospect of a six-week delay in payments "because of an internal disagreement between policymakers is outrageous and dangerous," he said, and it could have triggered layoffs, canceled medical appointments and possibly even site closures.