October 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 August 31, 2024. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2025 with a $109.2 million surplus and the Special Transportation Fund will end Fiscal Year 2025 with a $127.4 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.
General Fund
The FY 2025 General Fund surplus is projected to be $109.2 million, which is $4 million lower than last month’s projection and $188.6 million lower than budgeted. Revenues are projected to be $167.7 million higher than budgeted, partially offsetting projected expenditures that are $356.3 million higher.
Revenues are revised upwards by $19.1 million this month to account for FY 2024 year-end results in both the withholding portion of the Personal Income Tax (+$35 million) and the Health Provider Tax (-$15.9 million). Net expenditures are revised upwards by a net $23.1 million, due to additional projected shortfalls across various agencies.
Special Transportation Fund
The Special Transportation Fund (STF) is projected to close FY 2025 with a $127.4 million surplus, an increase of $1 million from last month’s projection due to lower projected expenditures. Public Act No. 24-151 requires the portion of the FY 2024 year-end STF fund balance above 18 percent of FY 2025 net appropriations be used to reduce the state’s transportation-related indebtedness. That amount is currently projected to equal $533.1 million.
Budget Reserve Fund
We estimate that with the closeout of FY 2024, $929 million will be transferred out of the Budget Reserve Fund (BRF) and into the State Employees’ and Teachers’ Retirement systems this year.
In the second forecast for FY 2025, transfers totaling $1.27 billion from both the volatility cap deposit and operating surplus are projected to increase the BRF balance to 23.6 percent of General Fund appropriations. Since the statutory cap for the BRF is 18 percent, the projected balance would result in additional transfers to the retirement funds during the closeout of FY 2025.
Economic Indicators
The Federal Reserve began lowering interest rates for the first time in four years with a bold move at their September meeting, cutting the federal funds rate by 0.5 percentage points to 4.75-5 percent. The Fed projects moderate economic growth of about 2 percent annually in the next few years with unemployment around 4.4 percent. Additional rate cuts in the months ahead should gradually ease borrowing costs for consumers and businesses.
Overall inflation, based on the Consumer Price Index (CPI), is decidedly down, with August figures showing U.S. consumer prices rose 2.5 percent year-over-year, the smallest 12-month increase since February 2021. Falling energy prices are helping to bring overall inflation down, while rising shelter costs continue to be a drag.
The Fed rate cut is good news for the sluggish housing market, though a serious undersupply of housing is expected to keep home prices rising. Mortgage rates have dropped to new lows for the year, hitting 6.08 percent for a 30-year fixed rate in late September. Nationally home sales declined in August as buyers waited for the Federal Reserve to act. Connecticut’s housing market remains tight, with inventory levels significantly below the national average and median sales price growth of 8.4 percent year-over-year in August.
Lower interest rates are expected to boost new home construction, which should help improve housing affordability in the long-term by increasing the supply of homes. Falling mortgage rates should also gradually increase the inventory of existing homes to buy, as the differential shrinks between current rates and the ultra-low rates many homeowners locked in during the pandemic.
The national unemployment rate stood at 4.2 percent in August, with job growth slowing but still positive (+142,000 jobs). Connecticut’s labor market is tighter, with the unemployment rate dropping again to 3.4 percent, significantly below the national average, and average weekly wages rising 6.5 percent year-over-year versus 3.5 percent for the nation. The state experienced a loss of 2,200 jobs in August, continuing the post-2020 trend of job losses in the second half of the year. Connecticut’s total employment is up by 12,800 jobs compared to August 2023.
Connecticut’s real gross domestic product (GDP) grew at an annualized rate of 2.8 percent in the second quarter according to preliminary estimates, compared to 3.0 percent in the U.S. Benchmarking revisions increased U.S. Q1 growth from 1.4 percent to 1.6 percent, while Connecticut’s 2023 Q4 growth was faster (5.8 percent) and 2024 Q1 growth was slower (-0.3 percent) than initially reported.
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