February 1, 2024
The Honorable Ned Lamont
Governor of the State of Connecticut
State Capitol
Hartford, Connecticut
Dear Governor Lamont,
I write to provide you with financial statements for the General Fund and the Transportation Fund through December 31, 2023. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2024 with a $166.7 million surplus and the Special Transportation Fund will end Fiscal Year 2024 with a $241.0 million surplus. OSC is in general agreement with the Office of Policy and Management’s (OPM’s) General Fund and Special Transportation Fund projections. The following analysis of the financial statements furnished by OPM is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
General Fund
In the sixth forecast for Fiscal Year 2024, the General Fund is projected to end the year with a surplus of $166.7 million, which is $11.3 million less than last month’s projection and $233.0 million lower than budgeted. The decrease in surplus was due to downward revisions in revenues from the latest consensus forecast, which were somewhat offset by downward revisions in expenditures as outlined below.
As a result of the January 2024 consensus forecast, revenues have been revised downward by an aggregate of $29.8 million compared to the prior month. The largest downward revisions were in sales and use tax (-75.0 million) as collections have remained below target; Federal grant revenue (-$40.3 million) due to an updated estimate of anticipated federal reimbursement; and miscellaneous revenues (-$40.0 million) due to expected lower collections from recoveries. These reductions were largely offset by an upward revision to the withholding component of the personal income tax ($158.0 million) as growth in this revenue source remains above expectations.
Net expenditures are currently projected to exceed budgeted levels in several agencies. The largest anticipated overages relate to the Department of Social Services Medicaid account, and the State Comptroller fringe benefits in the higher education Alternative Retirement System account. However, overall expenditures were revised downward by $18.5 million compared to last month based on current projections.
Special Transportation Fund
The Special Transportation Fund (STF) is projected to end the year with a $241.0 million surplus, $30.7 million higher than the prior month’s projection and $36.8 million higher than budgeted. The increase is primarily driven by the upward revision in revenue from the January consensus revenue forecast, which revised revenues upward by $26.0 million. The remainder of the surplus is the result of forecasted expenditures being below the level in the adopted budget. The current forecast would leave a positive balance of $911.0 million at fiscal year-end.
Budget Reserve Fund
Based on current estimates, $478.5 million in volatile revenues from final and estimated income taxes as well as pass-through entity tax payments would be made at fiscal year-end. After adding the projected General Fund surplus of $166.7 million, the Budget Reserve Fund (BRF) balance is anticipated to be slightly less than $4.0 billion or 18.0% of Net General Fund appropriations, before statutorily required transfers, by the end of Fiscal Year 2024.
Our state continues to reap the benefits of the fiscal guardrails through increased savings and paying down our state’s pension debt. This has led to annual savings of hundreds of millions of dollars, a full rainy day fund, and the ability to better weather future economic downturns.
Economic Indicators
The U.S. economy is showing signs of slowing, with eroding spending power, elevated interest rates, a cooling labor market, and consumers being more cautious with their spending. At the same time, we see three economic tailwinds that will simultaneously support activity, including the avoidance of a labor market retrenchment, easing inflation and labor costs compression, and likely interest rate cuts from the Fed for the first time since 2020.
Although the odds of entering a recession in the next 12 months are higher than usual, it’s by no means guaranteed. Moreover, the prospects of a soft landing have risen, indicating that slipping into a recession is less likely, helping to bolster consumer confidence. However, current events such as the war between Israel and Hamas, rising prices in general, and high interest rates continue to have many Americans feeling concerned.
The Federal Reserve is expected to hold rates steady at a target of 5.3% to 5.5%, with anticipated rate cuts coming in the second half of 2024. The central bank has raised its benchmark interest rate from near zero in early 2022 to 5.5% in the most aggressive series of rate hikes since the early 1980s. Year-on-year headline inflation rose from 3.1% in November to 3.4% in December, which is above the Fed’s target rate of 2.0%. Higher interest rates continue to make borrowing more expensive for consumers, with the largest impact on home mortgages, car loans, and credit card debt.
Despite a cooling labor market, the Bureau of Labor Statistics reported that the U.S. added 216,000 jobs in December, exceeding what economists had been expecting. The state Department of Labor (DOL) reported Connecticut lost 2,500 jobs in December but gained 23,200 over last year. Connecticut’s unemployment rate rose slightly to 3.8%, just above the national level of 3.7%.
High interest rates and elevated home prices continue to create a drag on the housing market. Mortgage rates linger at the highest levels in more than two decades, and sales of existing homes have dropped while prices remain elevated. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.7% in December, up from 6.3% a year ago.
In Connecticut, year-over-year sales of single-family homes decreased 13.5% in December and new listings were up 2.5% according to Berkshire Hathaway HomeServices. At the same time the median sales price increased 12.3% while days on the market decreased 17.1%. On average, houses were selling above list price, 101.8%. Higher housing costs continue to be a major concern for low- and moderate-income families who are much more likely to rent than own.
The Bureau of Economic Analysis released the advance estimate of U.S. real Gross Domestic Product (GDP), which increased at an annual rate of 3.3% in the fourth quarter of 2023. The estimate is based on source data that is incomplete and will be updated with revisions once the source data is complete. The increase in real GDP reflected increases in consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, also increased.
My office also issues an Annual Comprehensive Financial Report as an accounting supplement to the budgetary report. This annual report 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 $771.5 million as of June 30, 2022.
If you have any questions on this report, please do not hesitate to contact me.
Sincerely,
Sean Scanlon
State Comptroller