November 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 September 30, 2023. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2024 with a $212.1 million surplus and the Special Transportation Fund will end Fiscal Year 2024 with a $203.9 million surplus. OSC is in general agreement with OPM’s General Fund and Special Transportation Fund projections. The following analysis of the financial statements furnished by the Office of Policy and Management (OPM) is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
In the third forecast for Fiscal Year 2024, the General Fund surplus is projected to be $212.1 million, which is a $72.4 million reduction from last month’s projection and $187.6 million lower than budgeted. The primary reason for this reduction in surplus is higher than anticipated expenditure requirements in the Department of Social Services Medicaid account. Revenue estimates remain unchanged from the previous month, but the results of the November 10, 2023, consensus forecast could have a significant impact on next month’s projections.
In the third forecast for Fiscal Year 2024, the Special Transportation Fund (STF) surplus is projected to be $203.9 million, a $300,000 reduction due to additional requirements in the Other Post Employment Benefits (OPEB) account. The current forecast would leave a positive STF balance of $885.7 million at year-end.
After the revenue volatility transfers from FY 2023 operations were completed in September, the Budget Reserve Fund (BRF) balance stands full at $3.31 billion or 15 percent of FY 2024 net General Fund appropriations. Based on current estimates, $683.2 million in volatile revenues from final and estimated income taxes and pass-through entity tax payments would be made at year-end. After adding the projected General Fund surplus of $212.1 million, that would bring the BRF FY 2024 year-end balance to just over $4.2 billion or 19.1 percent.
To date, over $7 billion from volatile revenue transfers and General Fund surpluses have been used to pay down unfunded pension liabilities since the inception of the state’s fiscal guardrails.
Both the Connecticut and national economies continue to show resilience in the face of economic headwinds. Moving forward, risk factors to watch include rising interest rates, the resumption of student loan repayments and the related impact on consumer spending, a possible Federal government shutdown and uncertainty caused by the wars in Ukraine and the Middle East.
For its upcoming November 1st meeting, analysts expect the Federal Reserve to leave interest rates unchanged but anticipate more rates hikes are possible before year-end. 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. Inflation has cooled from 9.1 percent last summer to 3.7 percent in September, but that is still above the Fed’s target rate of two percent. Higher interest rates make borrowing more expensive for consumers, with an 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 336,000 jobs in September, significantly higher than economists had been expecting. The state Department of Labor (DOL) reported Connecticut added 3,200 jobs in September and has gained 21,100 over the last year. Connecticut’s unemployment rate remained steady at a post-COVID low of 3.5 percent and the state has recovered 99 percent of 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 have climbed to their highest level 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 7.79 percent in October, up from 7.08 percent a year ago.
In Connecticut year-over-year sales of single-family homes decreased 28.17 percent in September and new listings were down 11.40 percent according to Berkshire Hathaway HomeServices. At the same time the median sales price increased 8.45 percent while days on the market decreased and on average houses were selling 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. 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 4.9 percent in the third quarter of 2023, an increase over the second quarter growth of 2.1 percent. The growth in the third quarter was better than analysts expected and primarily reflected increases in consumer spending and inventory investment. However, due to decreases in disposable personal income and the personal savings rate in the quarter, economists do not expect this level of rapid GDP growth to be sustainable in the coming quarters.
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.