December 2, 2019
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 October 31, 2019.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a deficit of $19.6 million, a decrease of $98.7 million from last month’s estimate. The change in OPM’s projection is largely due to a net $84.5 million reduction in revenue based on the November 12th consensus forecast reached by OPM and the Office of Fiscal Analysis (OFA). In addition, OPM is projecting an increase in spending of $14.2 million over last month’s estimate.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2020 operations with a $26.8 million surplus, a $12 million reduction from last month. The change was due to a combination of lower revenues from the consensus forecast, which were offset by a $4.2 million decrease in anticipated spending. The current projection would leave a positive STF balance of $347 million at year-end. The Office of the State Comptroller (OSC) is in general agreement with OPM’s Transportation Fund forecast.
The following analysis of the financial statements furnished by OPM is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
OSC is projecting a General Fund deficit of $31.6 million for FY 2020, $12 million higher than OPM’s current estimate. The difference with OPM is on the expenditure side of the budget and is due to a $24 million net shortfall in the fringe benefit accounts. The State Employees’ Health Services account has the largest deficiency, primarily due to fewer than anticipated retirements. This shortfall is partly offset by a projected surplus in other fringe benefit appropriations, particularly the Alternative Retirement Program (ARP) account. In FY 2019, approximately 1,600 employees transferred out of ARP into the State Employee Retirement System (SERS) as part of a grievance award. The decreased enrollment in ARP has resulted in lower spending.
On the revenue side of the budget, my office agrees with the consensus revenue forecast, which reduced revenues by net $84.5 million compared with the initial budget plan. The largest change was a $100 million increase in refunds of taxes, mostly due to larger than expected refunds for the income tax and Pass-Through Entity Tax. The estimate for collections related to the new 10 cent plastic bag surcharge was reduced by $20.7 million in the consensus forecast. Several large retailers have eliminated plastic bags in response to the new requirement and collections to date have been well below target. In contrast, the Sales and Use Tax has performed above expectations and projections were increased by $39.8 million. Receipts for the Personal Income Tax, Corporations Tax and Pass-Through Entity Tax all remained in line with budget targets and, therefore, no changes were made in the consensus forecast. The complete schedule of General Fund revenues is attached in Exhibit C.
The statutory revenue volatility cap requires revenues above a certain threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2020, the cap is $3,294.2 million for estimated and final income tax payments and revenue from the Pass-through Entity tax. If current projections are realized, a $318.3 million volatility transfer would be made to the BRF.
The balance of the BRF presently stands at $2,505,537,507. Adding the estimated $318.3 million volatility transfer, less the projected FY 2020 deficit of $31.6 million would bring the year-end balance of the BRF to approximately $2.79 billion. This would represent approximately 14.0 percent of net General Fund appropriations for FY 2021. In order to help protect against future economic downturns, Connecticut must maintain financial discipline and continue building the BRF balance to the statutory target of 15 percent.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends:
The state Department of Labor (DOL) reported preliminary data showing Connecticut lost 1,500 net jobs in October, to a level of 1,698,000, seasonally adjusted. DOL noted a significant portion of the decline came from the trade sector. October’s job losses were the first seen since June 2019. At the same time, September’s originally-released job gain of 3,600 was revised upward by 1,100 to a gain of 4,700 jobs over the previous month.
Over the year, DOL reported that nonagricultural employment in the state grew by 4,800 jobs on a seasonally-adjusted basis. Information, education & health services and financial activities were the fastest growing sectors in the state’s labor market on a percentage basis. The construction, other services, and professional & business services sectors experienced the largest job losses.
Connecticut's unemployment rate stood at 3.6 percent in October, unchanged from the revised September figure and down two-tenths of a point from a year ago when it was 3.8 percent. Nationally, the unemployment rate was 3.6 percent in October 2019, up one-tenth of a point from September’s revised estimate of 3.5 percent.
Connecticut has now recovered 84.8 percent (102,000 payroll job additions) of the 120,300 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). As of October, the job recovery was into its 116th month and the state needed an additional 18,300 new net jobs to reach an overall employment expansion. Within the job recovery numbers, DOL points out a significant distinction. The private sector has recovered more than the total jobs lost in the recession (105.5 percent), which means the remaining employment losses are from the government sector. This sector includes all federal, state and local government employment, including public education, and Native American tribal government.
In a November 7th report, the Bureau of Economic Analysis (BEA) released Real Gross Domestic Product (GDP) results by state for the second quarter of 2019. Connecticut experienced a seasonally adjusted annual growth rate of 1.0 percent, which ranked 47th in the nation overall. This growth rate was below both the national average of 2.0 percent and the New England regional average of 1.3 percent. The percent change in real GDP in the second quarter ranged from 4.7 percent in Texas to 0.5 percent in Hawaii. The sectors that contributed most to Connecticut’s GDP growth in the second quarter of 2019 were finance & insurance (+0.38%), professional, scientific & technical services (+0.37%), and information (+0.32%). The sectors that contracted the most included wholesale trade (-0.29%), construction (-0.27) and nondurable goods manufacturing (-0.18).
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for October 2019 compared with October 2018. Sales of single-family homes declined 2.99 percent, but the median sale price increased by 3.79 percent. New listings were down 2.85 percent in Connecticut, while the median list price rose 4.21 percent to $269,900. Average days on the market increased slightly in October 2019 compared to the same month in the previous year (75 days on average, up from 74 days).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales rose in October, recovering slightly from the declines seen in September. October sales increased 1.9 percent from September to a seasonally adjusted annual rate of 5.46 million. On the regional level there were mixed results with sales growth in the Midwest and South and declines in the Northeast and West. According to NAR, the median existing-home price for all housing types was $270,900, up 6.2 percent from October 2018 ($255,100). October’s price increase marks 92 straight months of year-over-year gains.
My office also issues a Comprehensive Annual Financial Report (CAFR) as an accounting supplement to the budgetary report. The CAFR 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 $241.1 million as of June 30, 2018. I will report the new unassigned fund balance figure for Fiscal Year 2019 no later than February of 2020 in accordance with U.S. Securities and Exchange Commission (SEC) requirements.
If you have any questions on this report, please do not hesitate to contact me.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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