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January 2, 2019
The Honorable Dannel P. Malloy
Governor of the State of Connecticut
State Capitol
Hartford, Connecticut
Dear Governor Malloy:
I write to provide you with financial statements for the General Fund and the Transportation Fund through November 30, 2018.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $242.4 million, a decrease of $12.5 million from last month's estimate. The change in OPM's surplus projection is due to higher anticipated spending of $19.0 million combined with a net increase in revenues of $6.5 million. The growth in expenditures is largely due to a higher forecast in the in the non-appropriated Adjudicated Claims account, which is used to pay SEBAC v. Rowland claims and other negotiated settlements. The net growth in revenue is due to a $30.8 million improvement in Corporations Tax collections, which is offset by a $4.3 million reduction Insurance Companies Tax receipts and a $20 million projected increase in refunds of taxes.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2019 operations with a $66.3 million surplus, a $1.0 million decrease from last month's estimate. This would leave a positive STF balance of $312.0 million at year-end.
The Office of the State Comptroller (OSC) is in general agreement with OPM' s General Fund and Transportation Fund forecasts. The following analysis of the financial statements furnished by OPM is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
The most notable revenue trend in FY 2019 thus far is the performance of the withholding portion of the Personal Income tax. The November consensus revenue forecast between OPM and Office of Fiscal Analysis had withholding receipts $255.4 million or 4.2 percent above budget target. Based on collections to date that projection will likely go higher in the next consensus forecast, which is scheduled for January 15th. Since the withholding portion of the income tax is the largest single revenue source in the General Fund, its continued growth will be a key component to achieving budget balance, along with maintaining discipline on the expenditure side of the budget.
Another trend that will bear close scrutiny is the performance of the estimated and final payments portion of the income tax. Preliminary indications for the first five months of FY 2019 show that these receipts are running ahead of budget targets. Through November 2018, combined collections of estimated and final payments were 13.9 percent higher than the same period a year ago. However, due to recent steep drops in the stock market, these revenue categories will need to be monitored carefully in the coming months. It should be noted that the rapid growth in estimated payments during FY 2018 began in December and January a year ago, largely due to one-time events related to Federal tax changes. The stock market's volatile performance this December, including ending the year in negative territory for the first time in a decade, may have a significant impact on estimated and final payment collections for the balance of FY 2019.
The statutory revenue volatility cap enacted in FY 2018 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 current projections are realized, a $648.0 million volatility transfer would be made to the BRF.
The present balance of the BRF is $1,185,259,428. Adding the estimated $648.0 million volatility transfer and OSC's projected FY 2019 surplus of $242.4 million would bring the year-end balance of the Budget Reserve Fund to just under $2.1 billion, or about 10.9 percent of General Fund expenditures. This would certainly represent a significant improvement over the recent past.
A number of forecasts for the coming year are predicting slower growth for the U.S. and other major economies. In addition, as 2019 begins, growing stock market turbulence and political uncertainty on the Federal level may have an impact on consumer confidence as the government shut down enters its second week with no end in sight. Therefore, it is imperative that Connecticut continue to build a strong balance in the Budget Reserve Fund to protect against any future downturn.
Connecticut's overall 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 500 net jobs in November, to a level of 1,702,900, seasonally adjusted. However, October's originally-released job growth of 1,500 was revised up by 1,500 to a gain of 3,000 jobs over the month. The sectors that lost the most jobs in the month of November 2018 were education & health services (-600) and professional & business services (-500), while manufacturing and trade, transportation & utilities each lost 400 jobs. Sectors that gained employment in November included construction (+700 jobs), other services (+400) and financial activities (+300).
Over the year, DOL reported that nonagricultural employment in the state grew by 23,000 jobs on a seasonally-adjusted basis. Construction, leisure & hospitality and professional & business services were the fastest growing sectors in the state's labor market on a percentage basis. The government and transportation & public utilities sectors experienced the largest losses.
Connecticut's unemployment rate stood at 4.1 percent in November, down one-tenth of a point from October 2018 and down four-tenths of point from a year ago when it was 4.5 percent. Nationally, the unemployment rate was 3.7 percent in November 2018, unchanged from October. Connecticut has now recovered 91.3 percent (108,700 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 105th month and the state needs an additional 10,400 jobs to reach an overall employment expansion.
On December 20th, the Bureau of Economic Analysis (BEA) reported that Connecticut' s personal income grew by a 4.1 percent annual rate between the second and third quarters of 2018. Based on this result, Connecticut ranked 20th in the nation for third quarter income growth. This growth rate was just above the national average, but slightly slower than the New England region's average rate of 4.2 percent. Personal income growth across all states ranged from 6.2 percent in Nevada and Washington State to 2.1 percent in Missouri.
According to a December 21st report from BEA, U.S. Real Gross Domestic Product grew at an annual rate of 3.4 percent in the third quarter of 2018, which represented a deceleration from the strong 4.2 percent growth in the second quarter. This was the third estimate for the quarter and it was revised down from 3.5 percent based on more complete source data.
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for November 2018 compared with November 2017. Sales of single family homes fell 7.30 percent, while the median sale price rose 7.82 percent. New listings fell by 4.72 percent in Connecticut and the median list price increased by 8.00 percent to $264,150 from a year ago. Average days on the market decreased 15.22 percent in November 2018 compared to the same month in the previous year (78 days on average, down from 92 days).
For the U.S. overall, the National Association of Realtors (NAR) reported mixed market conditions for November 2018. Existing-home sales increased in November for the second consecutive month and three of four major U.S. regions saw gains in sales activity. Total existing-home sales increased 1.9 percent from October to a seasonally adjusted rate of 5.32 million in November. However, sales are down 7.0 percent from a year ago (5.72 million in November 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 $821.1 million as of June 30, 2017. I will report the new unassigned fund balance figure for Fiscal Year 2018 no later than February of 2019 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.
Sincerely,
Kevin Lembo
State Comptroller
To view the data in Excel format, click here:
General Fund: A-D
Transportation Fund: E-H