December 1, 2023
The Honorable Ned Lamont
Governor of the State of Connecticut
Dear Governor Lamont,
I write to provide you with financial statements for the General Fund and the Transportation Fund through October 31, 2023. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2024 with a $153.9 million surplus and the Special Transportation Fund will end Fiscal Year 2024 with a $208.4 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.
In the fourth forecast for Fiscal Year 2024, the General Fund is projected to end the year with a surplus of $153.9 million, which is $58.2 million lower than last month’s projection and $245.8 million lower than budgeted. The reduction in surplus is the result of a downward revision in net revenues, coupled with higher than anticipated expenditure requirements.
The November consensus forecast between OPM and the Office of Fiscal Analysis (OFA) reduced General Fund revenues by a net $57.1 million from the previous month’s estimate. The largest reductions in projected revenues were in the estimates and finals component of personal income tax and the sales and use tax. Estimates and finals revenues were lowered to reflect weaker than anticipated fourth quarter estimated payments. Sales and use tax were revised downward to reflect slowed collections toward the end of 2023. Additionally, refunds of taxes were revised upward, a negative impact on revenues, due to higher than anticipated refunds for taxpayers who recently finalized their income year 2022 returns. These reductions were somewhat offset by upward revisions to several categories. The most significant being federal grants primarily resulting from the final reconciliation of federal funds received to those earned for medical services during the second half of Fiscal Year 2023.
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 State Comptroller fringe benefits in the higher education Alternative Retirement System account.
The Special Transportation Fund (STF) is projected to end the year with a $208.4 million surplus, $4.5 million higher than the prior month’s projection and $4.2 million higher than budgeted. This is primarily due to forecasted expenditures being below the level in the adopted budget. The current forecast would leave a positive balance of $878.4 million at fiscal year-end.
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 $153.9 million, the Budget Reserve Fund (BRF) balance is anticipated to be $3.9 billion or 17.9% of Net General Fund appropriations by the end of Fiscal Year 2024.
To date, over $7 billion from volatile revenue transfers and General Fund surpluses have been used to pay down unfunded pension liability since the inception of the state’s fiscal guardrails. The results of which have saved the state hundreds of millions of dollars in future annual debt
payments, while guiding the state its continued path of fiscal stability.
Both the Connecticut and national economies continue to show resilience with continued job growth, increased wages, a steady unemployment rate, and increased consumer spending. Although consumer confidence increased slightly in November, following three consecutive months of decline, risk factors causing future concern include the war between Israel and Hamas, the restart of student loan payments, rising prices in general, and high interest rates.
For its upcoming December 12th meeting, analysts expect the Federal Reserve to hold rates steady at a target of 5.3% to 5.5%. 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 fell from 3.7% in September to 3.2% in October, but this is still 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 challenges facing the economy, one area that continues to show strength is the labor market. The Bureau of Labor Statistics recently reported that the U.S. added 150,000 jobs in October. Although an increase, this is somewhat lower than economists had been expecting, which may be a sign of a cooling economy. The state Department of Labor (DOL) reported Connecticut added 3,700 jobs in October and has gained 29,300 over the last year. Connecticut’s unemployment rate remained steady at a post-COVID low of 3.5% and the state has fully recovered, 102.3%, the jobs lost during the COVID lockdown of March and April 2020.
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 7.3% in October, up from 6.6% a year ago.
In Connecticut, year-over-year sales of single-family homes decreased 16.0% in October and new listings were down 3.2% according to Berkshire Hathaway HomeServices. At the same time the median sales price increased 10.8% while days on the market decreased 11.1%. On average, houses were selling above list price, 103.2%. Higher housing costs continue to be a major concern for low- and moderate-income families who are much more likely to rent than own. A recent report from the National Low-Income Housing Coalition analyzing the affordability of each state found that a minimum wage worker in Connecticut would have to work 69 hours a week, at $15 per hour just to afford a modest one-bedroom apartment.
The Bureau of Economic Analysis reported U.S. real gross domestic product (GDP) grew at an annual rate of 5.2% in the third quarter of 2023, an increase over the second quarter growth of 2.1%. The growth in the third quarter was better than analysts expected and primarily reflected increases in consumer spending and inventory investment. However, economists expect this momentum to shift downward in quarter four as increasing market gains and the restart of student loan repayments will likely lead to reduced discretionary income and more scrutiny over spending.
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.