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March 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 January 31, 2019.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $516.1 million, an increase of $54.2 million from last month's estimate. The change in OPM's surplus projection is due to lower projected net expenditures. My office is currently projecting a somewhat lower General Fund surplus of $506.8 million for reasons explained below.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2019 operations with a $73.0 million surplus, a $3.4 million increase from last month's estimate. This would leave a positive STF balance of $318.7 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 $506.8 million for FY 2019. This represents a $54.2 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 is $100 million lower than the consensus forecast and OPM's letter of February 20th. My office reached this determination based on a drop-off in December and January estimated payment receipts, which are now under-performing their budget targets. 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 current revenue estimates.
Looking 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 final budget results. My office will continue to assess new information as it becomes available and revise this projection as needed in future months.
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 $506.8 million would bring the year-end balance of the BRF to approximately $2.24 billion, or approximately 11.8 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. Recent economic indicators 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. 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. On March 8th, DOL is scheduled to release updated employment results for January 2019, along with new benchmarked job data for the 2018 calendar year.
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 4.0 percent in January 2019, up one-tenth of a point from December. 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). As of December, the job recovery was into its 106th month and the state needed an additional 7,800 jobs to reach an overall employment expansion.
In a February 26th report, the Bureau of Economic Analysis (BEA) released Real Gross Domestic Product (GDP) results by state for the third quarter of 2018. Connecticut experienced a seasonally adjusted annual growth rate of 3.3 percent, which ranked 21st in the nation overall. This growth rate was slightly below the national average of 3.4 percent and equal to the New England regional average. The percent change in real GDP in the third quarter ranged from 5.8 percent in Washington to 0.0 percent in West Virginia. BEA data indicated the sectors that contributed most to Connecticut's growth in the third quarter of 2018 were finance & insurance (+0.64%), nondurable goods manufacturing (+0.46%), information (+0.38%) and wholesale trade (+0.37).
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for January 2019 compared with January 2018. Sales of single-family homes fell 9.91 percent, while the median sale price declined 4.80 percent. New listings grew by 6.23 percent in Connecticut, but the median list price dropped by 5.10 percent to $241,900 from a year ago. Average days on the market decreased 16.67 percent in January 2019 compared to the same month in the previous year (85 days on average, down from 102 days).
For the U.S. housing market, existing-home sales experienced a small decline for the third consecutive month in January, according to the National Association of Realtors. Of the four major U.S. regions, only the Northeast saw an increase in sales activity in January 2019. Total existing-home sales decreased 1.2 percent from December to a seasonally adjusted annual rate of 4.94 million in January. Sales are now down 8.5 percent from a year ago.
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