July 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 May 31, 2024. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2024 with a $224.6 million surplus and the Special Transportation Fund will end Fiscal Year 2024 with a $277.0 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
The General Fund is projected to end the fiscal year with a surplus of $224.6 million, which is $43.1 million more than last month’s projection and $175.1 million lower than budgeted.
The increase in the projected surplus was due to upward revisions in revenues coupled with reductions to projected expenditures. On the revenue side, refunds of taxes were reduced by $25 million, increasing net revenue, due to lower than expected income tax refunds. In addition, Investment Income and License, Permit, and Fee revenues were both revised upward by $15.0 million, while Escheat revenue was increased by $12.0 million. These increases were partly offset by a reduction in Federal Grants revenue of $38.7 million due to additional requirements to cover the federal share of medical services, and a portion of this federal reimbursement now expected to be received in the next fiscal year. Inheritance and Estate tax revenues were also revised downward by $15.0 million. All other revisions to revenue categories resulted in a net positive change of $18.0 million.
On the expenditure side, total net expenditure projections were revised downward by $11.8 million.
Special Transportation Fund
The Special Transportation Fund (STF) is projected to end the fiscal year with a $277.0 million surplus, $5.8 million less than the prior month’s projection and $72.8 million higher than budgeted. The decrease was the result of downward revisions in revenues of $10.0, which were partially offset by a decrease of $4.2 million in net expenditure projections. The current forecast would result in a positive balance of $956.1 million at fiscal year-end.
Budget Reserve Fund
Based on current estimates, $1.1 billion 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 $224.6 million, the BRF balance is anticipated to be nearly $4.7 billion or 21.1 percent of net General Fund appropriations, before statutorily required transfers, by the end of Fiscal Year 2024.
Economic Indicators
The U.S. economy continues to show signs of both resiliency and gradual cooling. Inflation continues to decline, though not fast enough for the Federal Reserve to cut interest rates just yet. Consumers are increasingly optimistic/pessimistic. Housing affordability remains a pain point, and consumers are beginning to pull back on spending and take on more debt.
The U.S. added 272,000 jobs in May, higher than expected and above the average monthly gain of 232,250 jobs over the prior 12 months. Growth was highest in health care, government, and the leisure and hospitality industries. Immigration has provided many of the workers driving strong job gains in the past year, though it is not clear to what extent that will continue.
The U.S. labor market remains strong, but market dynamics are returning to pre-pandemic rates. The unemployment rate rose to 4.0 percent in May from 3.9 percent in April, which is still low by historical standards, as new entrants to the labor force took longer to find jobs. While the size of the U.S. labor force dipped slightly, the share of people aged 25 to 54 working or looking for work rose to 83.6 percent in May, the highest level since 2002. Meanwhile, job openings fell for the third straight month, and the rate of people quitting their jobs is nearly at pre-pandemic levels.
In Connecticut, nonfarm payroll was up a healthy 4,700 jobs in May to a level of 1,711,000. Connecticut’s unemployment rate of 4.3 percent, while above the national average, has been trending downward for several months while the national rate has been trending up. The size of Connecticut’s labor force has been growing for five straight months as well.
The Federal Reserve continues to hold rates steady at a target of 5.3 percent to 5.5 percent. Year-on-year headline inflation dropped to 3.3 percent in May, down from 3.4 percent in April, but still above the Fed’s target rate of 2.0 percent. With inflation remaining higher than the Fed’s target rate, it’s anticipated that only one rate cut will occur and is likely to happen towards the end of the year.
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 7.1 percent in May, up from 6.4 percent a year ago.
In Connecticut, year-over-year sales of single-family homes decreased 3.8 percent in May and new listings dropped 13.9 percent according to Redfin. At the same time the median sales price increased 8.0 percent and average days on the market increased to 31 days, compared to 30 days a year ago. On average, houses were selling at 103.8 percent of the 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 1.4 percent in the first quarter of 2024. This is 0.1 percent higher than the “second” estimate previously released, primarily due to a downward revision to imports and upward revisions to nonresidential fixed investment and government spending. Consumer spending was revised down. In the fourth quarter of 2023, real GDP increased 3.4 percent.
The quarterly increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and state and local government spending 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