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February 1, 2019
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 December 31, 2018.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $461.9 million, an increase of $219.5 million from last month's estimate. The change in OPM's surplus projection is primarily due to a net revenue increase of $197.1 million associated with the consensus forecast reached with the Office of Fiscal Analysis (OFA) on January 15th. The remaining $22.4 million improvement is related to lower projected net expenditures. My office is currently projecting a somewhat lower General Fund surplus of $452.6 million for reasons explained below.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2019 operations with a $69.3 million surplus, a $3.3 million increase from last month's estimate. This would leave a positive STF balance of $315.3 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.
As noted above, OSC is projecting a General Fund surplus of $452.6 million for FY 2019. This represents a $210.2 million improvement from last month's estimate. The difference in OSC's lower surplus forecast is on the expenditure side of the budget. My office is currently projecting a $49.3 million deficiency in the non-appropriated Adjudicated Claims account, $9.3 million higher than OPM. This account is responsible for paying SEBAC v. Rowland claims and related attorney's fees, along with other negotiated settlements. Due to the often-irregular spending patterns associated with this account, my office will continue to monitor Adjudicated Claims activity closely and revise these estimates as needed.
In addition, my revenue projection for the estimated payments portion of the income tax differs from the consensus forecast. This difference has no impact on the current surplus projection for the General Fund. However, the lower forecast for estimated payments would reduce the anticipated volatility transfer to the Budget Reserve Fund (BRF). Otherwise, I am in agreement with the consensus revenue schedule.
The January 15th consensus forecast revised revenues upward by a net $197.1 million over OPM's estimate from the previous month. The largest change is a $79.3 million improvement in the sales and use tax, which has been running ahead of budget target in part due to collections related to on-line sales. OPM attributes a portion of this increase to the U.S. Supreme Court decision in Wayfair, Inc. v. South Dakota. In that case the court held that states may charge sales tax on purchases made from out-of-state retailers, even if the seller does not have a physical presence in the taxing state.
The consensus forecast also increased the projection for the withholding portion of the income tax by $75 million. Collections in this category have been running ahead of budget target consistent with job gains, lower unemployment and signs of acceleration in wage growth. Gaming payment revenue was revised upward by $25 million. This change reflects an assessment that competition from the new casino in Springfield, Massachusetts is having less of an impact than anticipated in the budget. In addition, the estimate for the inheritance and estate tax was revised upward by $20 million. Other changes in the consensus revenue forecast netted to a positive $17.8 million. One major negative change in the forecast involved refunds of taxes. Refunds, which lower revenue, have been running ahead of the budget plan and were increased by $20 million.
The consensus revenue forecast left the projection for the estimated and final payment portion of the income tax unchanged. Due to timing, OSC has been able to analyze two additional weeks of receipts in this category. Based on this information, I am reducing my projection for estimated payments by $100 million due to lower than expected collections in the December and January timeframe. My office will continue to assess new information as it becomes available and revise this projection as needed in future months.
OSC anticipated a drop-off in December receipts due to the new $10,000 Federal limitation for the State and Local Tax (SALT) deductions. This change reduced the incentive for taxpayers to make payments before calendar year-end. However, my office would have expected somewhat higher collections throughout January if the December results just reflected a change in timing of payments. Instead, January collections were more in line with typical results from earlier years. Going forward, the impact of federal tax changes and the stock market's negative performance in 2018 may have a substantial impact on estimated and final payment collections for the balance of FY 2019. As a result, the April tax collection period will take on added significance for this year's budget results.
The statutory revenue volatility cap requires revenues above a certain threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2019, the cap is $3,196.8 million for estimated and final income tax payments and revenue from the newly enacted Pass-through Entity tax. If OSC's current projections are realized, a $548.0 million volatility transfer would be made to the BRF.
The current balance of the BRF is $1,185,259,428. Adding OSC's estimated $548.0 million volatility transfer and the projected FY 2019 surplus of $452.6 million would bring the year-end balance of the BRF to just under $2.2 billion, or approximately 11.5 percent of General Fund expenditures. This result, if achieved, would represent a significant improvement over the recent past and move the BRF closer to the statutory target of 15 percent. A number of forecasts for the coming year are predicting slower growth for the United States and other major economies. Therefore, it is essential that Connecticut continue to build a strong balance in the BRF to protect against any future downturn.
Connecticut's overall budget results are ultimately dependent upon the performance of the national and state economies. I should note that the recently-ended Federal government shut-down has delayed certain economic updates for this month's report. However, the available economic indicators, especially around the job and housing markets, include the following trends.
The state Department of Labor (DOL) reported preliminary data showing Connecticut gained 1,100 net jobs in December 2018, to a level of 1,705,500, seasonally adjusted. In addition, November's originally-released job loss of 500 was revised up by 1,500 to a gain of 1,000 jobs over the month. The sectors that gained the most jobs in the month of December were construction (+2,100), education & health services (+1,100) and leisure & hospitality (+500). Sectors that lost employment in December included professional & business services (-1,800 jobs) and other services (-700 jobs).
Over the year, DOL reported that nonagricultural employment in the state grew by 19,900 jobs on a seasonally-adjusted basis. Construction, leisure & hospitality and education & health services were the fastest growing sectors in the state's labor market on a percentage basis. The government and transportation & public utilities were the only two sectors to experience job losses.
Connecticut's unemployment rate stood at 4.0 percent in December, down one-tenth of a point from November 2018 and down five-tenths of a point from a year ago when it was 4.5 percent. Nationally, the unemployment rate was 3.9 percent in December, up two-tenths of a point from November. Connecticut has now recovered 93.5 percent (111,300 payroll job additions) of the 119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). The job recovery is into its 106th month and the state needs an additional 7,800 jobs to reach an overall employment expansion.
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for December 2018 compared with December 2017. Sales of single-family homes fell 7.33 percent, while the median sale price rose 3.87 percent. New listings fell by 7.77 percent in Connecticut and the median list price increased by 4.89 percent to $264,900 from a year ago. Average days on the market decreased 15.46 percent in December 2018 compared to the same month in the previous year (82 days on average, down from 97 days).
For the U.S. housing market, after two consecutive months of increases, the National Association of Realtors (NAR) reported existing-home sales declined in December 2018. None of the four major U.S. regions saw a gain in sales activity for the month. Total existing-home sales decreased 6.4 percent from November to a seasonally adjusted rate of 4.99 million in December 2018. NAR also reported sales are down 10.3 percent from a year ago when they were 5.56 million in December 2017.
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.
If you have any questions on this report, please do not hesitate to contact me.
Sincerely,
Kevin Lembo
State Comptroller
To view the data in Excel format, click here:
General Fund: A-D
Transportation Fund: E-H