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May 2, 2017
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 March 31, 2017.
In its revised May 1 letter, the Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2017 operations with a deficit of $389.8 million, which is a decline in the financial position of the fund of $409.5 million from the original April 20th letter. OPM has incorporated the new May 1st consensus revenue forecast into their revised estimates. The new estimated Transportation Fund balance at the end of Fiscal Year 2017 is $112.2 million. This represents an erosion of $30.6 million in the Fund’s position due to this fiscal year’s operations.
The Budget Reserve Fund has a current balance of $235,582,921, which is insufficient to cover the current General Fund deficit projection.
The most significant deterioration in the General Fund’s fiscal outlook occurred in the projection for income tax receipts, which are now $450.7 million below last month’s estimate and $532.2 million off from the original budget plan. This decline is slightly offset by gains in other revenue areas. Complete revenue details for the General Fund are contained in Exhibit C.
I am projecting a General Fund deficit of $393.4 million for Fiscal Year 2017. I am in general agreement with OPM’s Transportation Fund numbers. My variance of $3.6 million from OPM for the General Fund relates to adjudicated claims where I expect slightly higher payouts during this fiscal year.
Over the past two months, I have expressed concern regarding final income tax collections. The final collections have historically moved in the same direction as the quarterly estimated income tax payments. After the first two quarterly deposits of this fiscal year, estimated payments were running more than 8 percent below last fiscal year. This raised significant concerns regarding final payment collections. It now appears that final payments will be approximately 10 percent below last fiscal year’s level.
Because there was a significant run-up in the stock market as 2016 came to a close, there was some optimism regarding the potential for gains in estimated and final income tax payments. Those gains have not materialized. One reason may be the increasing popularity of tax efficient investments such as Exchange Traded Funds (ETFs). These funds tend to track indexes like the DOW and are traded on exchanges. They are designed, in part, to minimize capital gains taxes. In the United States, ETF assets increased from $157 billion in 2003 to $2.8 trillion by March of 2017. In addition to greater use of tax advantaged investments, the state’s population loss may also have played a role in the disappointing final payment results.
In addition to the drop in estimated and final income tax payments, there has been significantly slower growth in the withholding portion of the income tax, especially in the second half of the fiscal year. The withholding component of the income tax is responsible for over 60 percent of total income tax revenue. A general shift in the composition of employment by sector to lower paying jobs may be a contributing factor.
Turning to the expenditure side of the General Fund in Fiscal Year 2017, aggressive budgeted saving targets are being largely achieved. OPM estimates that net spending will exceed the budget plan by $10 million. Anticipated lapses now total $239.4 million.
Connecticut’s overall budget performance is ultimately dependent upon the performance of the national and state economies.
According to benchmark revisions by the U.S. Bureau of Labor Statistics, Connecticut lost 200 jobs in calendar year 2016. After strong first quarter employment growth, the employment situation in the state became more erratic. The final quarter of 2016 posted a net loss of jobs. The state has posted job growth in each month of the first quarter of 2017 putting Connecticut ahead of last year's strong pace of employment growth. The 2017 first quarter job gains total 7,900; in the first quarter of 2016 employment grew by 6,100. Connecticut's unemployment rate for March increased by one tenth of a point to 4.8 percent - six tenths of a point lower than it was a year ago. While the unemployment rate moved up in March, the labor force also expanded as discouraged job seekers re-entered the labor market.
According to a March 28th release from the Bureau of Economic Analysis, Connecticut’s personal income grew by 3 percent between 2015 and 2016. This ranked Connecticut 33rd nationally in 2016 income growth. Connecticut had the slowest rate of growth in New England. However, Connecticut ranked number one nationally in per capita personal income in 2016 with income of $71,033. Connecticut’s fourth quarter results for 2016 were better than the full year results. The fourth quarter growth annualizes to a rate closer to 4 percent, which ranked the state at 21 nationally for growth that quarter.
CT Realtors reported that the sale of single-family residential homes in Connecticut increased by 5.1 percent in March 2017 from the same month a year earlier. The median sales price of a home increased by 2.2 percent to $237,000. Connecticut has been in a sustained period of sales volume gains since 2012; prices have also been rebounding in recent months.
Looking at the broader national economy, real GDP in the first quarter of 2017 grew at an anemic 0.7% annual rate. In the fourth quarter of 2016 GDP grew at a 2.1% rate.
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 unassigned fund balance in the General Fund was a negative $998.9 million as of June 30, 2016.
Sincerely,
Kevin Lembo
State Comptroller
To view the data in Excel format, click here:
General Fund: A-D
Transportation Fund: E-H