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October 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 August 31, 2019.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a surplus of $84.3 million, a net decrease of $41.8 million from last month�s estimate. The change in OPM�s surplus projection is due to projected shortfalls in several agency accounts, the largest of which is a $30 million deficiency for Medicaid based on cost trends.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2020 operations with a $38.8 million surplus, no change from the enacted budget plan. The current projection would leave a positive STF balance of $358.9 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 OPM�s FY 2020 surplus projections for the General and Transportation Funds through August 31, 2019. I should note it is still very early in the fiscal year and my projections will be updated as more information becomes available in the coming months.
General Fund spending is currently exceeding the budget plan by a net $56.8 million. As a result, the initial surplus of $141.1 million that was built into the FY 2020 budget has been reduced to $84.3 million. This experience year-to-date reinforces the wisdom of building an additional safety margin into the budget plan. In addition to the Medicaid shortfall noted above, the non-appropriated Adjudicated Claims account has a projected deficiency of $20 million. The remaining portion of the deficit is due to additional requirements projected for accounts within the Department of Correction and the Office of Early Childhood.
To date, FY 2020 revenues appear to be generally in line with the budget plan. As more data becomes available for first quarter fiscal year collections, these projections will be revised as necessary. Early indications for FY 2020 show income tax withholding receipts are consistent with budget targets, growing by approximately 4.1 percent over FY 2019 levels through August. This growth rate reflects the underlying trend for receipts, factoring out the year-end statutory revenue accruals. Based on the budget plan, the Sales and Use tax is projected to grow 2.4 percent over the FY 2019 realized totals. To date, however, this category is running behind last year�s pace and, therefore, should be watched closely going forward.
A number of economists are predicting slower growth for the United States and other major economies in the coming year. The ongoing trade dispute with China continues to create uncertainty for businesses and could have a negative influence on consumer confidence. My office will continue to monitor these trends and any potential impact they have on the state budget as the fiscal year progresses.
Based on FY 2019 results, the Budget Reserve Fund balance will be just over $2.5 billion once the audit is completed. This represents 13.0 percent of FY 2020 net General Fund appropriations. The statutory revenue volatility cap requires revenues above a certain threshold to be transferred to the 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.
As noted, once the audit of FY 2019 is complete, the balance of the BRF will be $2,505,537,507. Adding the estimated $318.3 million volatility transfer and the projected FY 2020 surplus of $84.3 million would bring the year-end balance of the BRF to approximately $2.9 billion. This would represent approximately 14.6 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 gained 2,800 net jobs in August, to a level of 1,697,200, seasonally adjusted. In addition, July�s originally-released job loss of 100 was revised upward by 1,700 to a gain of 1,600 jobs over the month. The strong employment results for the last two months have pushed job growth into positive territory for calendar 2019.
Over the year, DOL reported that nonagricultural employment in the state grew by 7,600 jobs on a seasonally-adjusted basis. Information, leisure & hospitality and financial activities were the fastest growing sectors in the state�s labor market on a percentage basis. The construction, other services, and trade, transportation & utilities sectors experienced the largest job losses.
Connecticut's unemployment rate stood at 3.6 percent in August, unchanged from the revised July figure and down four-tenths of a point from a year ago when it was 4.0 percent. Nationally, the unemployment rate was 3.7 percent in August 2019, unchanged from July�s revised estimate. Connecticut has now recovered 83.5 percent (100,400 payroll job additions) of the 119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). As of August, the job recovery was into its 114th month and the state needed an additional 19,900 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 (103.4 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.
On September 24th, the Bureau of Economic Analysis reported that Connecticut�s personal income grew by a 4.8 percent annual rate between the first and second quarters of 2019. Based on this result, Connecticut ranked 31st in the nation for second quarter income growth. This growth rate was below the national average of 5.4 percent. However, it represented a stronger performance than the New England region�s average growth rate of 4.3 percent. The percent change in personal income across all states ranged from 7.5 percent in Texas to unchanged (0.0 percent) in North Dakota.
According to the BEA, U.S. Real Gross Domestic Product grew at an annual rate of 2.0 percent in the second quarter of 2019. This represented a slow-down in growth from the first quarter of 2019, when real GDP increased 3.1 percent. Consumer and government spending drove the increase in GDP, while a decrease in business investment and a weak housing market slowed down growth for the quarter. Exports also declined as trade tensions between the U.S. and China remained unresolved.
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for August 2019 compared with August 2018. Sales of single-family homes fell 6.28 percent and the median sale price increased by 3.64 percent. New listings were down 7.20 percent in Connecticut, while the median list price rose 3.54 percent to $289,900. Average days on the market decreased 15.66 percent in August 2019 compared to the same month in the previous year (70 days on average, down from 83 days).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales experienced a small increase in August, marking the second consecutive month of growth. August sales rose 1.3 percent from July to a seasonally adjusted annual rate of 5.49 million. Three of the four major regions reported sales growth, while the West recorded a decline last month. According to NAR, the median existing-home price for all housing types in August was $278,200, up 4.7 percent from August 2018 ($265,600). August�s price increase marks the 90th straight month of year-over-year gains. Historically low interest rates are bringing buyers into the market, which combined with lower levels of inventory, has led to higher real estate prices across 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. 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.
Sincerely,
Kevin Lembo
State Comptroller
To view the data in Excel format, click here:
General Fund: A-D
Transportation Fund: E-H