March 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 January 31, 2024. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2024 with a $167.9 million surplus and the Special Transportation Fund will end Fiscal Year 2024 with a $240.7 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 $167.9 million, which is $1.2 million higher than last month’s projection and $231.8 million lower than budgeted. The increase in surplus was due to downward revisions in net expenditures of $1.2 million compared to last month. Although overall net expenditures dropped compared to the prior month, they are still expected 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.
Revenues remained flat compared to the prior month, expected to end the fiscal year at roughly $22.5 billion, $5.4 million below the original budget.
Special Transportation Fund
The Special Transportation Fund (STF) is projected to end the fiscal year with a $240.7 million surplus, $0.3 million less than the prior month’s projection and $36.5 million higher than budgeted. The decrease is primarily driven by an increase in projected net expenditures compared to the prior month of $0.3 million. Estimated revenues remained unchanged from the levels reported last month, and are expected to end the fiscal year at about $2.4 billion. The current forecast would leave a positive balance of $919.8 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 $167.9 million, the 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.
As a result of the fiscal guardrails, the state has been able fund the BRF to its statutory limit while continuing to make additional payments towards its pension plans. This has resulted in hundreds of millions of dollars in annual savings that would have been used for debt service payments and has put the state in a much stronger position to weather economic headwinds as they arise.
Economic Indicators
The U.S. economy entered 2024 with continued resilience, albeit with some moderation in growth and inflationary pressures. The labor market started the year strong, with the economy adding 353,000 jobs, unemployment remaining steady at 3.7%, and wage growth reaccelerating. However, economic growth is expected to slow in 2024 as consumer spending starts to fade and interest rates remain elevated.
Consumer confidence rose in January along with the prospects of a soft landing. Additionally, fears of entering a recession in the next 12 months continued to dissipate. Nevertheless, 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 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 dropped from 3.4% in December to 3.1% in January, which remains 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.
The Bureau of Labor Statistics reported that the U.S. added 353,000 jobs in January, exceeding what economists had been expecting.
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 6.6% in January, up from 6.3% a year ago.
In Connecticut, year-over-year sales of single-family homes decreased 7.7% in January and new listings were down 6.3% according to Berkshire Hathaway HomeServices. At the same time the median sales price increased 13.2% while average days on the market remained flat at 43 days. On average, houses were selling at 101.2% 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 “second” estimate of U.S. real Gross Domestic Product (GDP), which increased at an annual rate of 3.2% in the fourth quarter of 2023. The estimate is 0.1% lower than the “advance” estimate from the prior month, which was the result of more complete source data being available. The update primarily reflected a downward revision to private inventory investment that was partly offset by upward revisions to state and local government spending and consumer spending.
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