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September 1, 2015
The Honorable Dannel P. Malloy
Governor of the State of Connecticut
State Capitol
Hartford, Connecticut
Dear Governor Malloy:
I write to provide you with financial statements for the General Fund and the Transportation Fund through July 31, 2015.
The Office of Policy and Management (OPM) is projecting that the General Fund is in balance with the adopted budget plan for Fiscal Year 2016. The budget plan anticipated a General Fund balance of $0.8 million at the close of Fiscal Year 2016. OPM is projecting a Transportation Fund balance of $253.5 million at the end of Fiscal Year 2016. A continuation of strong motor fuel tax receipts is expected to increase operating revenue by $6 million over the initial budget plan.
I am in agreement with OPM's estimates at this early point in the new fiscal year. I share OPM's concerns relating to potential General Fund revenue shortfalls in Fiscal Year 2016. The revenue accruals for Fiscal Year 2015 were not as strong as expected, and there is concern that this trend could continue into Fiscal Year 2016. There are also numerous revenue policy changes in Fiscal Year 2016, including an estimated $13.6 million in new revenue from the roll-out of Keno gaming, which will be carefully monitored in the coming months. Undoubtedly, revenues will be adjusted in future months as trends become better defined. It is also worth noting that the General Fund budget for Fiscal Year 2016 includes $200.6 million in forced savings. Given the lapses extracted from agency budgets in prior fiscal years, achieving this target will be challenging.
The current volatility in financial markets has complicated the budget outlook for Fiscal Year 2016. Over the past several fiscal years, the state has experienced significant fluctuations in capital gains related receipts. In late 2012, investors turned over a large volume of long-term capital gains to take advantage of the expiring 15 percent tax rate, which increased to a top long-term rate of 23.8 percent on January 1, 2013. As a result, the state realized a windfall on the capital gains driven portion of the income tax in Fiscal Year 2013. Because this left little in unrealized gains, this significant component of the income tax experienced a sharp drop in Fiscal Year 2014. As the market surged, investors were reluctant to take short-term gains because such gains are taxed at a higher ordinary income rate. Fiscal Year 2015 estimated and final tax receipts were below initial budget estimates. The recent downturn in the market increased sales volume. It remains to be seen if the increase in gains related to sales will help to mitigate the negative impact of the present market decline.
The fundamentals of the national economy continue to point to future economic growth. On August 27th, the Bureau of Economic Analysis reported that GDP for the 2nd quarter of 2015 posted growth of 3.7 percent (up from the preliminary estimate of 2.3 percent). Total U.S. home sales increased 10.3% in July from the same month last year.
Retail sales rebounded in July as households boosted purchases of automobiles and a wide array of other goods. This is a positive sign for economic growth in the 3rd quarter of 2015.
Connecticut's economy has also been posting gains. According to the Department of Labor, preliminary figures show that Connecticut gained 4,100 payroll positions in July. This follows the addition of 600 jobs in June. Connecticut has added 30,600 jobs over the past twelve-month period, which brings total payroll employment in the state to 1,696,000. Over the entire calendar 2014 year, the state added 25,100 payroll positions. The state's unemployment rate dropped to 5.4 percent in July, continuing a decline from a high of 9.5 percent in October 2010. According to a report from the Connecticut Realtors Association released on August 20th, Connecticut single-family home sales rose 14.6% in July from the same month last year. Most state's leading indicators continue to signal growth.
The one notable drag on both the national and state economy has been stagnant wage growth. Wages have not been able to attain their pre-recession growth rates. This has had a significant impact on household consumption, which accounts for about two-thirds of the national economy as measured by GDP. Between 1947 and 2007 annual real household consumption grew by 3.6 percent, on average. Since 2008, growth has been closer to 1.5 percent. There have been sporadic signs that wage growth may begin strengthen. This bears close watching given the impact of wages on the larger economy and more specifically on Connecticut's budget outlook.
I also issue a Comprehensive Annual Financial Report (CAFR) as an accounting supplement to the budgetary report. The CAFR includes financial statements for all state funds and component units prepared in accordance with Generally Accepted Accounting Principles (GAAP). From a balance sheet perspective, the GAAP shortfall or unreserved fund balance in the General Fund was $727.2 million as of June 30, 2014. GAAP deficit reduction bonds in the amount of $598,500,000 were issued in Fiscal Year 2014 to reduce the shortfall. Results for Fiscal Year 2015 will be published at the beginning of the new calendar year.
Sincerely,
Kevin Lembo
State Comptroller
To view the data in Excel format, click here:
General Fund: A-D
Transportation Fund: E-H