September 3, 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 July 31, 2019.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a surplus of $126.1 million, a net decrease of $15 million from the initial budget enacted in Public Act 19-117. The $15 million difference from the budget plan is associated with a projected deficiency in the non-appropriated Adjudicated Claims account.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2020 operations with a $38.8 million surplus, with both expenditures and revenues in line with the enacted budget. The current projection would leave a positive STF balance of $353.9 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 July 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.
FY 2019 year-end adjustments are still being processed and could have a significant impact on the final operating results. The fiscal year-end process includes statutory revenue accruals that continued through the first week of August. In addition, GAAP budget-related expenditure accruals will transfer expenses incurred in FY 2019 but paid in FY 2020 back into the previous fiscal year. Preliminary reporting of unaudited operating results for FY 2019 will be presented in the September 30th monthly letter.
Initial results for FY 2019 show that a number of tax categories outperformed the original budget plan. Among the most notable was the performance of the withholding portion of the income tax, which came in $518 million or 8.4 percent above its budget target. In addition, the Pass-through Entity (PET) tax on partnerships and S-corporations brought in $572 million over its target, nearly twice as much as budgeted. These are certainly positive developments as state government transitions to the new fiscal year. At the same time, however, Connecticut lost jobs in the second half of FY 2019 and the national economy appears to be slowing. Therefore, my office will continue to monitor economy data very closely, along with its impact on state revenues and adjust these budget projections as needed in future letters.
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 was $3,196.8 million for estimated and final income tax payments and revenue from the Pass-through Entity tax. If current projections are realized, a $949.7 million volatility transfer would be made to the BRF.
The current balance of the BRF is $1,185,259,428. Adding the estimated $949.7 million volatility transfer and the projected FY 2019 surplus of $195.9 million would bring the year-end balance of the BRF to approximately $2.45 billion. This would represent approximately 12.1 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.
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 lost 100 net jobs in July, to a level of 1,692,700, seasonally adjusted. In addition, June’s originally-released job loss of 1,400 was revised upward by 600 to a loss of 800 jobs over the month. While the employment changes between June and July were not statistically significant, calendar 2019 job growth continues to be negative.
Over the year, DOL reported that nonagricultural employment in the state grew by 3,200 jobs on a seasonally-adjusted basis. Information, financial activities, and education & health services were the fastest growing sectors in the state’s labor market on a percentage basis. The other services, construction, and trade, transportation & utilities sectors experienced the largest job losses.
Connecticut's unemployment rate stood at 3.6 percent in July, down one-tenth of a point from the revised June 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 July 2019, unchanged from June’s revised estimate. Connecticut has now recovered 79.7 percent (95,900 payroll job additions) of the 119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). As of July, the job recovery was into its 113th month and the state needed an additional 24,400 new net jobs to reach an overall employment expansion.
According to an August 29th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product grew at an annual rate of 2.0 percent in the second quarter of 2019, based on BEA’s second estimate. This represents 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 second quarter GDP, while a decrease in business investment and a weak housing market contributed to slower growth for the quarter. Exports also declined as trade disputes between the U.S. and China remain unresolved.
Berkshire Hathaway HomeServices reported mixed results for the Connecticut housing market for July 2019 compared with July 2018. Sales of single-family homes fell 2.19 percent and the median sale price increased by 1.95 percent. New listings were down 1.91 percent in Connecticut, while the median list price remained essentially flat at $289,949. Average days on the market decreased 17.72 percent in July 2019 compared to the same month in the previous year (65 days on average, down from 79 days).
For the U.S. housing market, existing-home sales strengthened in July, a positive reversal after total sales declined in the previous month, according to the National Association of Realtors (NAR). July sales increased 2.5 percent from June to a seasonally adjusted annual rate of 5.42 million. Although transactions declined in the Northeast, the other three major U.S. regions experienced sales increases, including significant growth in the West. Nationwide, home price appreciation has been much stronger in the lower-price tier, compared with higher priced homes. NAR noted that lower mortgage rates are bringing buyers into the market. However, a shortage of lower-priced homes has pushed prices up in many areas.
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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