COMPTROLLER LEMBO PROJECTS
$219.1-MILLION DEFICIT FOLLOWING EXPECTED REVENUE EROSION
Tuesday, March 1, 2016 |
Contact: Tara Downes (860.702.3308 |
FOR IMMEDIATE RELEASE
Comptroller Kevin Lembo announced today that, as he reported last month,
revenue has further eroded -- bringing the latest projected deficit for the
current fiscal year to $219.9 million.
In a letter to Gov. Dannel P. Malloy, Lembo said that he agrees with the
Office of Fiscal Analysis’ (OFA) recent revenue briefing that reduced the
January consensus income tax estimate for Fiscal Year 2016 by $200 million.
"I cautioned last month that I was concerned with the potential for further
erosion in the consensus revenue forecast,” Lembo said. "Economic data now
supports a downward adjustment in that forecast. This projected deficit – now
exceeding 1 percent of the state budget (1 percent is $181.6 million) – should
prompt renewed collaborative mitigation efforts.”
Lembo said the payroll withholding portion of the income tax, which
contributes over 60 percent of total collections, continues to show moderate
growth. However, the estimated payment portion of the income tax – which is more
volatile and largely influenced by stock market conditions – was 4 percent below
last fiscal year as of January.
"In nine of the past 11 fiscal years, final payments have moved in the same
direction as estimated payments,” Lembo said (see chart immediately below).
"This historical pattern raises serious concerns regarding April final payment
"Recent market developments that impact estimated and final income tax
payments have increased the probability of negative year-over-year collections
in these income tax components,” Lembo said. "The Federal Reserve reported that
the stock market decline in the third quarter of 2015 contributed to a
$1.2-trillion drop in American household wealth, which was one of the largest
losses since the recession. Corporate equities lost $2.3 trillion during the
quarter. At this writing, the stock market continues to post negative growth for
"The market-driven decline in wealth has had a dampening effect on all states
that rely on capital-gains driven tax receipts.”
Lembo said it is still possible and imperative that the Office of Policy and
Management (OPM) achieve their spending reduction targets of $87.8 million below
the budget plan for the current fiscal year. OPM is attempting to achieve $350.5
million in General Fund savings, which is $149.9 million above the original
budget plan. This savings target includes the spending reductions adopted late
last year and other forced savings, which are partially offset by $62.1 million
in agency deficiencies.
"Despite the revenue reductions this month, Connecticut’s economy continues
to experience moderate growth,” Lembo said.
Lembo pointed to some of the latest economic indicators from federal and
state Departments of Labor and other sources that show:
• Through Feb. 25, year-to-date income tax withholding receipts were running
2 percent above the same period last fiscal year. New tax rate tables
incorporating the higher rate structure as adopted in PA 15-244 were required to
be implemented by the end of August. Therefore, beginning September 2015
receipts have incorporated the higher tax rates.
• Withholding receipts are the largest single source of state tax revenue,
accounting for 61 percent of the total income tax receipts in Fiscal Year 2015
and almost 40 percent of total General Fund tax receipts in that year. With the
exception of tax increase spikes in Fiscal Years 2011 and 2012, the current
cycle of economic recovery has posted below normal withholding gains.
• Labor market information for January and February will not be available
until later in March. According to the Department of Labor, December nonfarm
employment estimates from the U.S. Bureau of Labor Statistics (BLS) payroll
survey (seasonally adjusted) indicated that Connecticut gained 300 jobs in
December bringing payroll employment to a level of 1,700,700. November’s
original estimate of 5,100 job gains improved to a gain of 5,800 jobs.
Connecticut has now increased nonfarm employment by 22,600 (1.35 percent) in
calendar year 2015 averaging 1,883 jobs per month during the year.
• Connecticut has now recovered 106,700 positions, or 89.7 percent of the
119,000 seasonally adjusted total nonfarm jobs that were lost in the state
during the March 2008 - February 2010 employment recession (pre-benchmark). The
state needs to reach the 1,713,000 job level to enter a clear nonfarm employment
expansionary phase. This will require an additional 12,300 nonfarm jobs.
• Connecticut’s nonfarm jobs recovery is now 70 months old and is averaging
about 1,524 jobs per month since February 2010. The table below looks at peak
employment by job sector before the recession and the December 2015 job totals
for each sector. The sectors with the strongest job additions, Education and
Health Services and Leisure and Hospitality pay wages that are below the
statewide average; whereas, sectors with losses such as Manufacturing and
Financial Services have pay rates well above the statewide average.
• As the state’s employment recovery has progressed, an increasing number of
job sectors have posted sustained employment gains. As this trend continues,
improved wage growth and withholding receipts should occur.
• U.S. employment has been advancing at a rate of 1.9 percent over the
12-month period ending in December; Connecticut’s employment growth was 1.3
percent for the same period.
• Connecticut’s unemployment rate was 5.2 percent in December; the national
unemployment rate was 5 percent. Connecticut’s unemployment rate has continued
to decline from a high of 9.5 percent in October 2010.
• There were 99,000 unemployed job seekers in Connecticut in December. A low of
36,500 unemployed workers was recorded in October of 2000. The number of
unemployed workers hit a recessionary high of 177,200 in December of 2010.
• The Department of Labor reports that average hourly earnings at $29.64, not
seasonally adjusted, were up $1.17, or 4.1 percent, from the December 2014
hourly earnings estimate. The resultant average private-sector weekly pay was
calculated at $995.90, up $36.46, or 3.8 percent higher than a year ago.
• The 12-month percent change in the Consumer Price Index for All Urban
Consumers (CPI-U, U.S. City Average, not seasonally adjusted) in December 2015
was 0.7 percent.
• The graph below shows the monthly percent change from the prior year in
Connecticut private-sector weekly earnings. Since the start of Fiscal Year 2015,
Connecticut has experienced positive growth in wages, although still below the
pre-recession growth levels.
• Based on third-quarter data from the Bureau of Economic Analysis released
on Dec. 21, 2015 Connecticut ranks 27th nationally in income growth for the
quarter. The chart below shows the 12-month trend in Connecticut personal
income, which has yet to attain its past expansionary strength. Data for the
fourth quarter will be released on March 24.
• Per capita income does not provide information on income distribution or
relative income inequality. A report issued by the Economic Policy Institute in
2015 stated that New York and Connecticut had the largest gaps between the
average incomes of the top 1 percent and the average incomes of the bottom 99
percent. In both states, the top 1 percent earned average incomes more than 48
times those of the bottom 99 percent.
• In 2015, Connecticut ranked number two in the nation in the number of
households per capita with investable assets of over $1 million. According to
Phoenix Global Wealth Monitor, 100,996 or 7.3 percent of households in the state
were millionaires. The state also held this ranking in 2014.
• Based on Connecticut’s progressive income tax structure, the top 2 percent of
wage earners in the state pay almost 40 percent of the total income tax.
• According to a Feb. 11 release by the Warren Group, Connecticut recorded
2,588 single-family home sales in December 2015, the largest sales total for the
month since 2006. The December sales volume was 17.9 percent higher than the
same month last year.
• The December 2015 median price for a home in the state was $235,000, a
decrease of 2.1 percent from the median price of $240,000 in December 2014.
• Sales volume in the state’s housing market had been solid throughout 2015. The
year-over-year sales gain through 2015 was 16.9 percent. The Warren Group notes
that due to price deflation, Connecticut remains a buyer’s market.
• The table below shows sales activity in 2015 by County. All counties
experienced strong sales gains in 2015.
• In 2015, housing permits increased from last year in eight out of 12
months. Permits have been trending upward, but are below the levels experienced
• Sales at retail stores and restaurants rose 0.2 percent in January from the
prior month, according to a Feb. 12 release by the Commerce Department. A core
measure of retail sales that excludes the more volatile components of autos and
gasoline posted a January increase of 0.4 percent. Americans stepped up spending
across most major retail categories. Compared with a year earlier, sales grew
3.4 percent. Gasoline stations posted a 9.5-percent drop from January of last
• January marked the fourth consecutive month of gains and showed how American
households remain relatively strong. However, despite the recent upward trend in
spending, the University of Michigan's preliminary February consumer sentiment
index dropped to 90.7 from 92.0 in January. The surveyors attributed the drop to
a less favorable outlook for the economy this year reflected in early market
• Companies have also warned about the impact of market volatility on shoppers
recently. A number of companies that reported quarterly earnings this past week
referred to the turbulent macroeconomic backdrop, but they said it has yet to
have a pronounced impact on their bottom line.
• The personal savings rate ended in 2015 about where it began. The rate in
December was 5.5 percent, and it began the year at 5.3 percent. The personal
savings rate has been on a general downward trajectory over the past 50 years.
The savings rate tends to increase during recessionary periods as consumers
become more cautious. The shaded areas on the graph below represent recessions.
Business and Economic Growth
• Nationally, orders for long-lasting manufactured goods posted their largest
monthly gain in January since last spring. This comes after a year in which the
manufacturing industry recorded its worst performance since the recession ended.
• New orders for durable goods—products designed to last at least three years,
like dishwashers and aircraft— rose a seasonally adjusted 4.9 percent in January
from a month earlier. New orders are up 0.6 percent from January a year ago. New
orders for nondefense capital goods excluding aircraft, considered a proxy for
business spending on equipment, rose 3.9 percent, which was the largest monthly
increase since June 2014. That increase follows two consecutive monthly drops.
However it was still 4.4 percent lower than January a year ago. Economists have
noted that one month of improved data doesn't necessarily signal the resurgence
of the manufacturing sector.
• As the manufacturing sector strengthened coming into 2016, the service sector,
the biggest part of the U.S. economy, shrank in February for the first time in
more than two years.
• The Market Economics preliminary purchasing managers’ services index for
February fell to 49.8 (the lowest reading since the partial government shutdown
in October 2013) from 53.2 the prior month. It was the second-weakest reading in
data going back to October 2009. Readings lower than 50 signal contraction.
• Four states – Alaska, North Dakota, West Virginia and Wyoming – are in a
recession and three others are at risk of prolonged declines according to
Moody’s Analytics. These states are especially hard hit by the drop in oil
prices and the strong dollar. Louisiana, New Mexico and Oklahoma are all at risk
of recession, according to Moody’s. This industry-specific decline is similar to
1985-86 which did produce a recession in Texas and other energy states, but it
did not spread to the rest of the nation.
• According to the Feb. 26 second estimate by the Bureau of Economic Analysis
(BEA), GDP increased at an annual rate of 1 percent in the fourth quarter of
2015. This follows growth of 2 percent in the third quarter.
• The 1-percent increase in real GDP in the fourth quarter reflected positive
contributions from personal consumption expenditures (PCE), residential fixed
investment, and federal government spending that were partly offset by negative
contributions from exports, nonresidential fixed investment, state and local
government spending, and private inventory investment. Imports, which are a
subtraction in the calculation of GDP, decreased.
• Corporate profits for the fourth quarter of 2015 will be released by BEA on
• Fourth-quarter earnings reports from S&P 500 companies are expected to decline
by 5 percent, potentially marking the first back-to-back decline since 2009,
according to S&P Capital IQ. The drop in oil prices and the rise of the U.S.
dollar are expected to continue to negatively impact corporate profits. It comes
at a time when global growth is also in decline.
• In Connecticut, the business trends tracked by the Department of Labor – which
include housing permits, exports, gaming slots, visits to major attractions, air
passenger count, CT manufacturing production index, and weekly hours – had been
on an upward trend as 2015 ended.
• Estimated and final income tax payments account for approximately 40
percent of total state income tax receipts. These payments show a correlation to
activity in equity markets relating to capital gains.
• At the end of January, year-to-date estimated and final income tax payments
for Fiscal Year 2016 were negative as compared to last fiscal year. Over the
past 11 fiscal years, estimated and final payments moved in opposite directions
twice. The current negative trend in estimated payments through the Jan. 15
filing date raises concerns about final April receipts.
• According to a recent report released by the Federal Reserve, Americans lost
nearly $1.2 trillion in wealth in the third quarter of 2015 as the stock market
dropped. This equity decline contributed to one of the largest losses in
household net worth since the economic recovery began. To put the loss in
perspective, in the third quarter total real GDP was $16.4 trillion.
• Corporate equities lost $2.3 trillion over the quarter. Major stock indexes in
the U.S. plunged sharply in late August of 2015. Market volatility has continued
to erode gains that occurred after the August correction.
• The graphs below show the year-to-date movement in the DOW and the S&P
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