April 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 February 29, 2024. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2024 with a $108.7 million surplus and the Special Transportation Fund will end Fiscal Year 2024 with a $229.5 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
The General Fund is projected to end the fiscal year with a surplus of $108.7 million, which is $59.2 million lower than last month’s projection and $291.0 million lower than budgeted. The decrease in surplus was due to downward revisions in revenues totaling $56.7 million compared to last month. The largest decrease was in sales and use tax, which was revised down by $100 million as collections to date have remained flat compared to last year. Inheritance and estate taxes, transfers-special revenue, real estate conveyance taxes, and health provider taxes were also revised downward by a total of $77 million due to weaker than expected performance and lower than anticipated collections. These reductions were somewhat offset by an upward revision to withholding tax of $100 million, which continues to exceed its target and growing at approximately 6 percent. Indian gaming payments and public service tax were also revised upward by a total of $25.3 million.
Net expenditures were revised upwards by $2.5 million compared to last month. 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.
Special Transportation Fund
The Special Transportation Fund (STF) is projected to end the fiscal year with a $229.5 million surplus, $11.1 million less than the prior month’s projection and $25.3 million higher than budgeted. The decrease was the result of a downward revision in revenues totaling $3.0 million and an increase in projected net expenditures of $7.8 million. The current forecast would leave a positive balance of $908.7 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 to the Budget Reserve Fund (BRF) at fiscal year-end. After adding the projected General Fund surplus of $108.7 million, the BRF balance is anticipated to be slightly less than $3.9 billion or 17.7% of net General Fund appropriations, before statutorily required transfers, by the end of Fiscal Year 2024.
Month-after-month, Connecticut continues to realize the benefits of the state’s fiscal guardrails. These benefits have resulted in greater fiscal stability and strength; a BRF that is funded to the statutory limit; and the additional reduction in pension debt creating significant savings in the current fiscal year as well as into the future.
Economic Indicators
The U.S. economy continues to gently cool, with mixed economic indicators creating uncertainty for consumers. Although jobs continue to grow and inflation has stayed relatively flat, the high cost of borrowing and carrying debt has overshadowed those positive economic indicators, resulting in lower consumer sentiment about the state of the economy.
The labor market continues to show strength, adding 275,000 jobs in February. However, employment gains in December and January were revised down by a cumulative 167,000 jobs, while unemployment rose to a two-year high of 3.9 percent.
Consumer confidence declined in February, while fears of entering a recession in the next 12 months increased. Furthermore, current events such as the ongoing war between Israel and Hamas, rising prices in general, and high interest rates continue to have many Americans feeling concerned.
The Federal Reserve left rates unchanged at the March Federal Open Market Committee meeting, holding rates steady at a target of 5.3 percent to 5.5 percent, with anticipated rate cuts coming later in 2024. The central bank has raised its benchmark interest rate from near zero in early 2022 to 5.5 percent in the most aggressive series of rate hikes since the early 1980s. Year-on-year headline inflation dropped from 3.4 percent in December to 3.1p percent in January, which remains above the Fed’s target rate of 2.0 percent. Higher interest rates continue to make borrowing more expensive for consumers, with the largest impact on home mortgages, car loans, and credit card debt.
The Bureau of Labor Statistics reported that the U.S. added 275,000 jobs in February, above the average monthly gain of 229,000 over the prior 12 months. However, employment gains in December and January were revised down by a cumulative 167,000 jobs.
High interest rates, creating a high cost of carrying debt, 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 6.9 percent in February, up from 6.5 percent a year ago.
In Connecticut, year-over-year sales of single-family homes decreased 14.3 percent in February and new listings were down 25.9 percent according to Berkshire Hathaway HomeServices. At the same time the median sales price increased 35.1 percent while average days on the market decreased to 61days, compared to 62 days a year ago. On average, houses were selling at 104.2 percent above list price. 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 “third” estimate of U.S. real Gross Domestic Product, which increased at an annual rate of 3.4 percent in the fourth quarter of 2023. The estimate is 0.2 percent higher than the “second” estimate from the prior month, which was the result of more complete source data being available. The update primarily reflected upward revisions to consumer spending and nonresidential fixed investment that were partly offset by a downward revision to private inventory investment.
The increase in real GDP reflected increases in consumer spending, state and local government spending, exports, nonresidential fixed investment, federal government spending, and residential fixed investment that were partly offset by a decrease in private inventory 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 $643.9 million as of June 30, 2023.
If you have any questions on this report, please do not hesitate to contact me.
Sincerely,
Sean Scanlon
State Comptroller