January 4, 2024
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 November 30, 2023. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2024 with a $178.0 million surplus and the Special Transportation Fund will end Fiscal Year 2024 with a $210.3 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 fifth forecast for Fiscal Year 2024, the General Fund is projected to end the year with a surplus of $178.0 million, which is $24.1 million higher than last month’s projection but $221.7 million lower than budgeted. The increase in surplus is the result of improved expenditure projections and additional anticipated lapses.
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 projections declined $9.3 million compared to last month. In addition, anticipated lapses increased $14.8 million compared to last month, further reducing overall expenditures.
Revenue projections were unchanged from the prior month, remaining at an estimated $22.5 billion.
The Special Transportation Fund (STF) is projected to end the year with a $210.3 million surplus, $1.9 million higher than the prior month’s projection and $6.1 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 $880.3 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 $178.0 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 by the end of Fiscal Year 2024.
As a result of fiscal discipline, imposed by the state’s fiscal guardrails, and hard work, our state is in a much stronger position to provide critical services to those in need and to weather the lingering health and fiscal impacts brought on by the COVID-19 pandemic. Furthermore, by making additional transfers to the state’s pension plans, we have saved hundreds of millions of dollars in future annual debt payments, which could be used to meet more needs and give more relief to people who need it most.
The U.S. economy is on track to end 2023 with vigorous growth for the year driven by stronger than expected consumer spending, robust and steady job growth, as well as growing wages. Even with the Bureau of Economic Analysis’ downward revision of real Gross Domestic Product (GDP) to 4.9%, this is still the largest advance since the fourth quarter of 2021.
Consumer confidence increased again in December, for the second consecutive month, which was the result of improved confidence about future business conditions, job availability, and income. Additionally, there is optimism that the Federal Reserve may begin to cut rates in the second quarter of 2024. However, current events such as the war between Israel and Hamas, the restart of student loan payments, rising prices in general, and high interest rates continue to have many Americans feeling concerned.
For its upcoming January 31st meeting, analysts expect the Federal Reserve to hold rates steady at a target of 5.3% to 5.5%, with anticipated rate cuts coming around May 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 fell from 3.2% in October to 3.1% in November, 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 a cooling labor market, the Bureau of Labor Statistics reported that the U.S. added 199,000 jobs in November, exceeding what economists had been expecting. The state Department of Labor (DOL) reported Connecticut added 500 jobs in November and has gained 24,300 over last year. Connecticut’s unemployment rate rose slightly to 3.6%.
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 7.4% in November, up from 6.8% a year ago.
In Connecticut, year-over-year sales of single-family homes decreased 15.5% in November and new listings were down 1.4% according to Berkshire Hathaway HomeServices. At the same time the median sales price increased 9.6% while days on the market decreased 16.2%. On average, houses were selling above list price, 102.6%. 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 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 released the third estimate of U.S. real Gross Domestic Product, which increased at an annual rate of 4.9% in the third quarter of 2023. The update, which is based on more complete data than the second estimate, primarily reflected a downward revision to consumer spending. Imports, which are a subtraction in the calculation of GDP, were also revised down.
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.