State Treasurer Erick Russell and other advocates for a landmark program to invest in Connecticut’s poorest children have reached a deal with Gov. Ned Lamont to lift the Baby Bonds Trust out of political limbo in time to launch on July 1.

The deal, reached last Friday, still would invest $600 million over the next 12 years in the economic futures of children in poverty, but it no longer would rely on borrowed money to finance those investments — avoiding an estimated $165 million in interest charges.

The agreement also greatly enhances the odds that Lamont and his fellow Democrats in the legislature’s majority will reach an amicable deal on a new state budget and bond package. Members of the General Assembly’s Black and Puerto Rican Caucus and others had warned last month that if Lamont refused to compromise on Baby Bonds, it likely would lead to political gridlock on other fiscal issues.

“We know the huge impact this can have on people,” said Russell, who engineered the compromise that will allow Connecticut to begin depositing $3,200 in trust for each baby born after July 1 and covered by HUSKY, the state’s Medicaid program. “This is giving hope to families for a brighter future … providing an opportunity for them to see their future in a different way.”

“This is a win for Connecticut,” Lamont said, who praised Russell and Sen. Patricia Miller, D-Stamford, who also helped negotiate the compromise. “Connecticut’s Baby Bonds program will lift up young people as they reach adulthood and help address intergenerational poverty.”

Connecticut Voices for Children, a New Haven-based policy group, predicted the program would make the state a national leader in combating poverty.

“At a time of unprecedented income and wealth inequality, our state has shown residents through policy and dollars that government can be a force for good and that elected officials can move beyond politics,” said Emily Byrne, the group’s executive director.

Those $3,200 deposits — expected to be made on behalf of 15,000 or more children annually — would grow over the course of their youth and early adulthood. Recipients still living in Connecticut could tap these resources between the ages of 18 and 30, to buy a home, pay for college or invest in a business.

According to the treasurer’s office, each child’s deposit likely would grow via investments to between $11,000 and $24,000, depending on when the funds are accessed.

Russell’s solution hinged on CT’s recent robust surpluses

Russell, who was elected to his first term in November, was determined to find a solution. A New Haven Democrat raised in blue-collar surroundings and the first of his family to graduate from college or law school, Russell has been an avid supporter of Baby Bonds as an effective anti-poverty tool.

But the treasurer also wanted to find a compromise that addressed at least one of the governor’s concerns.

The solution ultimately stemmed from the billions of dollars Connecticut has saved over the past five years that have left its finances — in the short-term — in robust health.

Despite borrowing $2 billion in 2008 to shore up its cash-starved pension fund for municipal teachers, the state refinanced that debt in 2019 — shifting billions of dollars in required contributions owed throughout the 2020s into the 2030s and later.

To ensure Wall Street credit rating agencies would bless this restructuring, Connecticut also placed hundreds of millions of dollars into reserve, which would be tapped if the state failed to make its full annual contribution to the teachers’ fund.

But just two years before that, the legislature enacted bipartisan budget controls — new caps on spending and borrowing and two savings programs that restrict lawmakers’ ability to spend certain quarterly tax receipts.

These so-called fiscal guardrails, coupled with a robust stock market between 2018 and 2021, have helped the state amass a record-setting $3.3 billion rainy day fund and deposit another $5.8 billion in surpluses into its pension funds. Nearly $2.7 billion of those deposits have gone into the teachers’ pension alone.

Because of this reversal, Russell said, the special reserve fund Connecticut set up in 2019 when restructuring the pension no longer is necessary.

That fund, which holds about $393 million, could be repurposed — though the state still would have to open a special insurance policy in its place, at a cost of about $12 million — to protect the pension system and to appease ratings agencies, Russell said.

That leaves about $381 million the state then could invest. The projected earnings over the next 12 years, coupled with the principal, would be more than enough to cover $600 million in investments for poor children, Russell said.

More importantly, had Connecticut borrowed $50 million annually for 12 years, the projected interest cost was $165 million, according to the treasurer’s office. That expense now is avoided entirely.

The treasurer added that while the program will bring hope to many poor families, it also represents a pragmatic investment for the state as a whole, increasing the potential of thousands of future adults to contribute to a robust economy.

Lamont didn’t always like Baby Bonds program

Hailed by progressives as a revolutionary new tool to reverse poverty in Connecticut, which is home to some of the most extreme income and wealth inequality in the nation, the program appeared set to launch two years ago when lawmakers passed — and Lamont signed — a measure creating the Baby Bond Trust.

It empowered the state to borrow $50 million annually — by issuing bonds — to finance the program for 12 years, from 2023 through 2034.

Things changed last spring, though, when Democratic legislative leaders accommodated Lamont and removed the treasurer’s direct authority to borrow the funds. Instead, they stipulated the borrowing couldn’t happen unless first approved by the State Bond Commission.

The 10-member commission is the chief gate-keeper of the government’s credit card and is chaired by the governor, who has sole authority to set its agenda.

If the bond commission doesn’t give the green light to finance baby bonds, the program has no money to distribute. And Lamont subsequently made it clear he had two problems.

For one thing, he didn’t like the bonding aspect of Baby Bonds. “This is probably not appropriate for bonding,” he told reporters in early April.

With more than $88 billion in bonded debt and unfunded retirement benefit obligations — stemming from bad savings habits stretching back to the late 1930s — Connecticut is one of the most indebted states in the nation. And Lamont spent most of his first four years in office, through 2022, urging lawmakers to embrace a “debt diet.”

Secondly, the governor also said he was wary of any public assistance program that would commit big state funding now but not deliver a benefit to residents for at least another 18 years.

But supporters countered that Lamont, a wealthy Greenwich businessman, didn’t appreciate the depth of entrenched poverty some communities have struggled with for decades. By reserving funds now — and by taking advantage of years of investment earnings — the state could give poor children the capital to launch an education or a career that for many would otherwise be financially impossible.

“The idea that we can continue to do business as usual and expect the outcome to be different doesn’t work,” Russell said.

Former state Treasurer Shawn T. Wooden, who spearheaded the Baby Bonds initiative in 2021, was among those frustrated by Lamont’s seeming reversal. But he wasn’t the only one.

Sen. Marilyn Moore, D-Bridgeport, who co-chairs the legislative subcommittee overseeing non-transportation bonding, warned Lamont and others last month not to underestimate the strong support for Baby Bonds.

A member of the Black and Puerto Rican Caucus, which includes 40 representatives and senators, Moore had hinted that many lawmakers wouldn’t allow the next state budget to be adopted while Baby Bonds was in limbo.

“I don’t want to play poker,” she said in mid-April. “But I want that money to be allocated.”

Moore praised Lamont on Monday for backing the compromise.

She predicted Connecticut would be recognized nationally for this innovative step to reverse child poverty, urging state officials to complement this investment by dedicating more funds into local school systems and health care.

“It’s one tool in the toolbox to help us, but we still have work to do,” she said.

And public support for Baby Bonds wasn’t strong only in urban centers, said Sen. Mae Flexer, D-Windham, another vocal advocate for the program. Eastern Connecticut is home to some of Connecticut highest regional unemployment rates.

“I have personally talked to families who hope their children are born after July 1” to benefit from Baby Bonds, Flexer said.

“It’s incredible that Connecticut is finally going to be leading the way in how to make an investment in poor kids and give them the kinds of opportunities that middle class and wealthy kids have always had.”