July 1, 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 May 31, 2019.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $700.9 million, an increase of $129.1 million from last monthís estimate. The change in OPMís surplus projection is mostly due to an improved revenue forecast, combined with a modest reduction in net expenditures.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2019 operations with a $63.1 million surplus, a $5.8 million increase from its May estimate. The change is the result of higher revenue estimates, primarily in the Motor Fuels and Sales and Use Tax categories. The current projection would leave a positive STF balance of $308.8 million at year-end.
The following analysis of the financial statements furnished by OPM is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
The Office of the State Comptroller (OSC) is in general agreement with OPMís surplus projections for the General and Transportation Funds through May 31, 2019. However, certain provisions contained within the recently enacted FY 2020 state budget (Public Act 19-117) will reduce the current year General Fund surplus as outlined below.
Based on recent trends, the General Fund revenue picture has improved since the April consensus forecast. Overall, revenues have increased by a net $120.6 million in this monthís projection. Estimates in several tax categories have been revised upward as they continue to outperform their budget targets. These include the Sales and Use Tax (+$39.9 million), the Corporate Tax (+$25 million), the Inheritance & Estate Tax (+$16.5 million) and the Public Service Corporations Tax (+$17.5 million). In addition, a $110 million improvement in the Pass-Through Entity Tax was offset by a $100 reduction in the estimated and final payments portion of the income tax. Net increases in other revenue categories combined with a projected increase in refunds of taxes account for the remaining changes in the revenue schedule, which are shown in Exhibit C.
As noted, two provisions within Public Act 19-117 will reduce the projected surplus for FY 2019 by $540.9 million, leaving a remaining General Fund surplus of $160.0 million. Section 90 of PA 19-117 appropriates $380.9 million to establish a new special capital reserve fund for the Teachersí Retirement System and Section 50 reserves $160 million to be used for a comprehensive hospital settlement.
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 Pass-through Entity tax. If current projections are realized, an $895.5 million volatility transfer would be made to the BRF.
The current balance of the BRF is $1,185,259,428. Adding the estimated $895.5 million volatility transfer and the remaining projected FY 2019 surplus of $160 million would bring the year-end balance of the BRF to $2.24 billion. This would represent approximately 11.6 percent of net General Fund appropriations for FY 2020. 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.
Connecticutís 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 May, to a level of 1,694,000, seasonally adjusted. At the same time, Aprilís originally-released job gain of 300 was revised upward by 200 to a gain of 500 jobs over the month. With the May job losses, calendar 2019 employment growth has slipped back into negative territory. Over the year, DOL reported that nonagricultural employment in the state grew by 6,600 jobs on a seasonally-adjusted basis. Information, leisure & hospitality, financial activities and construction were the fastest growing sectors in the stateís labor market on a percentage basis. The other services, trade, transportation & utilities, and professional & business services sectors experienced job losses.
Connecticut's unemployment rate stood at 3.8 percent in May, unchanged from the revised April figure and down four-tenths of a point from a year ago when it was 4.2 percent. Nationally, the unemployment rate was 3.6 percent in May 2019, also unchanged from Aprilís revised estimate. Connecticut has now recovered 80.8 percent (97,200 payroll job additions) of the 119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). As of May, the job recovery was into its 111th month and the state needed an additional 23,100 new net jobs to reach an overall employment expansion.
On June 25th, the Bureau of Economic Analysis (BEA) reported that Connecticutís personal income grew by a 1.5 percent annual rate for the first quarter of 2019. Based on this result, Connecticut ranked 48th in the nation. This growth rate was below both the national average of 3.4 percent and the New England regionís average rate of 2.6 percent. The percent change in personal income across all states ranged from 5.6 percent in West Virginia to -0.6 percent in South Dakota.
Berkshire Hathaway HomeServices reported largely positive results for the Connecticut housing market for May 2019 compared with May 2018. Sales of single-family homes grew 2.27 percent and the median sale price increased by a robust 7.69 percent. New listings were essentially flat, down only 0.12 percent in Connecticut. However, the median list price was up 9.06 percent to $289,000 compared with $265,000 a year ago. Average days on the market decreased 13.33 percent in May 2019 compared to the same month in the previous year (78 days on average, down from 90 days).
For the U.S. housing market, existing-home sales rebounded in May, the first increase in two months, according to the National Association of Realtors (NAR). May sales were up 2.5 percent from April to a seasonally adjusted annual rate of 5.34 million. All four major U.S. regions saw growth in sales, with the Northeast experiencing the biggest increase. NAR reported that buyers are responding to favorable market conditions, including lower mortgage rates. However, compared with a year ago, total U.S. sales were down 1.1 percent (versus 5.40 million in May 2018).
Recent news reports have highlighted the shortage of affordable houses at the lower end of the market. In addition to being saddled with student loan debt, first-time homebuyers also face increasing competition from investors for starter homes in many parts of the country.
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.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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