September 3, 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 July 31, 2024. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2025 with a $113.2 million surplus and the Special Transportation Fund will end Fiscal Year 2025 with a $126.4 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
In the first forecast for Fiscal Year 2025, the General Fund surplus is projected to be $113.2 million, which is $184.6 million lower than budgeted. Revenues are projected to be $148.6 million higher than budgeted, partially offsetting projected expenditures that are $333.2 million higher.
Revenues are revised upwards due to $25.8 million in net changes to consensus revenue forecasts since the biennial budget was adopted in 2023 and $122.8 million in revenue policy changes enacted in the 2024 legislative session. The largest policy change was an increase of $110 million to the revenue transfer from FY 2024 to FY 2025. The $25.8 million revision to underlying revenues includes large, offsetting changes to various forecasts, including Personal Income Tax Withholding (+$228.7 million), Investment Income (+$54.9 million), and Sales and Use Tax (-$324.7 million), among others.
On the expenditure side, shortfalls of $368.1 million in agency accounts are partially offset by $31.1 million in additional anticipated lapses and $3.8 million in miscellaneous adjustments. The largest projected deficiency is for Medicaid (-$210 million).
Special Transportation Fund
In the first forecast for Fiscal Year 2025, the Special Transportation Fund is projected to close with a $126.4 million surplus, $58.3 million higher than budgeted. The increase is the result of net upward revisions in consensus revenues totaling $56 million as well as a reduction of $2.3 million in projected expenditures.
Budget Reserve Fund
We estimate that with the closeout of FY 2024, $940.5 million will be transferred out of the Budget Reserve Fund (BRF) and into the State Employees’ and Teachers’ Retirement systems this year.
In the first forecast for FY 2025, transfers totaling $1.28 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
While August brought financial market turmoil and increased recession concerns, economists generally expect the U.S. economy to continue growing moderately through fiscal year-end. Consumer spending continues to support growth, though consumers have become more price sensitive.
A weakening labor market and decreased inflation have set up the Federal Reserve to reduce their key interest rate in September. The Consumer Price Index, a key measure of inflation, has moderated to 2.9 percent from its 9.1 percent peak in summer 2022. Fed Chair Jerome Powell has indicated that “the time has come for policy to adjust,” shifting the bank’s focus from cooling inflation to preventing a spike in unemployment.
Mortgage rates dropped in August, but housing remains unaffordable for many first-time buyers amid a national shortage. National and Connecticut home sales increased in July compared to June, though Connecticut existing home sales are down 5.1 percent year-to-date. Connecticut’s housing market faces particularly low inventory, with only 1.7 months’ supply at the current pace of sales, compared to the national average of 4.0 months’ supply. The median sales price rose 8.5 percent year-over-year in July to $467,000 according to Redfin.
The U.S. unemployment rate hit 4.3 percent in July, showing a weakening labor market. However, Connecticut’s rate fell for the fourth straight month to 3.6 percent, with private sector employment reaching a new high. The Other Services sector led job growth. The Philadelphia Federal Reserve’s Coincident Index for Connecticut shows the state has seen a notable improvement in economic conditions over recent months.
While the U.S. economy is still adding new jobs, the risk of further labor market deterioration snowballing into a recession is a downside risk to the economy. Consumers were more optimistic in August, though also more concerned about jobs and future income. For now, average hourly wage growth (at 3.6 percent) continues to exceed inflation, which should help support continued economic growth.
U.S. real gross domestic product (GDP) grew at an annualized rate of 3 percent in the second quarter according to revised estimates. That is higher than the initial estimate of 2.8 percent growth, while first quarter growth was at a slower 1.4 percent annual rate.
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