FY Letter to the Governor dated September 29, 2017
OSC Letterhead

September 29, 2017

The Honorable Dannel P. Malloy
Governor of the State of Connecticut
State Capitol
Hartford, Connecticut

Dear Governor Malloy:

I write to provide you with the legal financial statements for Fiscal Year 2017. These statements have been prepared in accordance with statutory provisions designed to incorporate designated expenditure accruals of Generally Accepted Accounting Principles (GAAP) into the budget process. It is important to recognize that these statements have not been fully audited at this writing. The figures are subject to final audit adjustment and should be viewed as preliminary results. Final audited statements will be released on or before December 29, 2017.

The General Fund ended Fiscal Year 2017 with a deficit of $22,696,231. A transfer from the Budget Reserve Fund will eliminate the shortfall returning the unappropriated balance of the fund to zero. The Transportation Fund had an operating deficit of $45,225,502, which left a positive fund balance of $97,615,054 at the close of Fiscal Year 2017.

After the transfer to the General Fund, the Budget Reserve Fund will have a balance of $212,886,689. The reserves at the beginning of Fiscal Year 2017 were $235,582,920.

In evaluating the Fiscal Year 2017 General Fund deficit, some context may be instructive. The revised budget for FY 2017 included appropriation levels that were $847.2 million lower than the original budget plan for FY 2017, adopted in Public Act 15-244. The net reductions in the revised budget for FY 2017 were largely driven by underperforming revenue collections as reflected in the April 30, 2016 consensus revenue forecast, the last of FY 2016.

The revised budget for FY 2017 had a growth rate of -0.32 percent, comparing the revised appropriations for FY 2017 to actual FY 2016 expenditures. In the end, General Fund FY 2017 expenditures of $17,763,039,724 came in $100.9 million below the revised budget plan.

Overall, General Fund expenditures that are classified as fixed costs continued to grow in FY 2017. Fixed costs, as defined by Connecticut General Statutes (CGS) section 2-36b, include categories such as entitlements, debt service, pension payments and retirement health insurance costs.

Debt service costs, including UCONN 2000 debt, grew by $103.6 million in FY 2017 compared with the prior year, an increase of 5.7 percent. Retirement health costs rose by $60.5 million in FY 2017, representing growth of 9.4 percent. Pension contributions, including the State Employee Retirement and Teachers? Retirement Systems, increased by $64.5 million or 3.1 percent. Medicaid expenditures, the largest line item in the General Fund, grew by only $16 million in FY 2017, less than one percent over FY 2016.

Despite rising fixed costs, year-over-year expenditures declined in FY 2017 by $158.2 million compared with FY 2016 actuals, a decline of nearly one percent. This was accomplished by more stringent cost controls applied to other types of General Fund spending. Personal services expenditures, the primary appropriation for General Fund employee salaries, decreased by $155.3 million in FY 2017, a reduction of 6.8 percent. Position reductions in the General Fund also translated into $32.9 million in lower costs for active employee health insurance and Social Security taxes. Other expenses, which state agencies use for a wide variety of non-salary items, decreased by $52.4 million, a decline of 10.4 percent. Another notable reduction included General Fund block grants for higher education units, which fell by $67.5 million or 9.5 percent.

Adjusting for one large programmatic shift, virtually all General Fund function of government categories experienced spending decreases in FY 2017 compared with the prior year: legislative (-10.2%); general government (-6.8%); regulation and protection (-4.9%); conservation and development (-7.1%); health and hospitals (-3.0%); human services (0.0%, no change); education, museums and libraries (-2.3%); corrections (-4.5%); and judicial (-7.6%). The non-functional category, which includes debt service, pension contributions and retirement health insurance, was the only one that grew in FY 2017. Non-functional expenditures increased by $202.1 million, representing growth of 4.3 percent.

Disappointing revenue performance led to deficit mitigation efforts in the fourth quarter of FY 2017, including allotment reductions and revenue transfers contained in Public Act 17-51. In particular, April tax collections were significantly lower than expected. For the year, Personal Income Tax receipts, the largest single General Fund revenue source, came in $530.3 million below FY 2017 budget targets and $193 million below FY 2016 final results. A closer look at the components of the income tax revealed that there was modest growth of 1.3 percent in the withholding portion of receipts compared with the prior year totals. However, despite a rising stock market, the estimated and final payments portion of the income tax came in well below projected levels. Collections for these more volatile components, which are related to capital gains and bonus payments, dropped by 7.8 percent compared with FY 2016. One possible explanation for this trend is that wealthy state residents may be holding off selling assets in anticipation of tax reductions at the Federal level. In addition, investors are relying more heavily on tax efficient vehicles such as Exchange Traded Fund (ETFs), which are designed to minimize taxes on capital gains.

Sales and Use Tax receipts, the second largest General Fund tax category, ended the year $136.5 million below the budget plan. On a positive note, the Corporations Tax offset some of these revenue shortfalls by coming in $193.8 million above target in FY 2017. The Inheritance and Estate Tax also over-performed budget projections by $44.1 million.

According to state Department of Labor (DOL) statistics, Connecticut gained 12,200 nonfarm seasonally-adjusted payroll jobs over the course of FY 2017 and had a total of 1,692,800 employed residents as of June 2017. As the fiscal year closed, unemployment stood at 5.0 percent, down one-tenth of a percent from the beginning of the fiscal year. In July, DOL reported that Connecticut had recovered 82.3 percent (98,000 jobs) of the 119,100 seasonally adjusted jobs lost in the Great Recession (March 2008 to February 2010).

After mixed results in calendar 2016, the housing market in Connecticut improved during the first six months of 2017. According to Berkshire Hathaway Home Services, sales and prices were up for both single family homes and condominiums in the first quarter of 2017 compared with the same period in 2016. In the second quarter of 2017, Connecticut experienced a 5.7 percent increase in sales volume year-over-year and 9.1 percent decrease in days on the market. Compared with the same period in the prior year, the median price for single family homes increased 3.1 percent and condominiums increased 3.0 percent.

During FY 2017, Connecticut?s economy experienced lower levels of growth compared with past recoveries. After advancing at a 2 percent rate in the fourth quarter of 2016, Connecticut?s GDP growth slowed to 0.6 percent in the first quarter of 2017, which ranked 37th among all states. Personal income was expanding in Connecticut at an annual rate of just one percent during Fiscal Year 2017. Personal income growth in the second quarter of 2017 was 0.8 percent, which ranked 22nd among U.S. states.

The Transportation Fund had revenue of $1,394.4 million in FY 2017, which fell $70.0 million below target, as all tax categories underperformed budget expectations. In part, this was due to continued low oil prices. Transportation Fund spending of $1,431.9 million grew by $31.1 million or 2.2 percent from the prior fiscal year. The largest single increase was for Debt Service, which rose $49.2 million or 10 percent over the prior year.

My office also issues a Comprehensive Annual Financial Report (CAFR) that converts the GAAP budgetary basis to the GAAP financial reporting basis. The CAFR accounts for various non-budgetary financial transactions as well as the budgetary basis transactions. From a CAFR balance sheet perspective, the GAAP shortfall or unassigned fund balance in the General Fund was a negative $998.9 million as of June 30, 2016. I will report the new unassigned fund balance figure for Fiscal Year 2017 no later than February of 2018 in accordance with SEC requirements.

If you have any questions on this report, please do not hesitate to contact me.


Kevin Lembo
State Comptroller

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