|
|
September 30, 2019
The Honorable Ned Lamont
Governor of the State of Connecticut
State
Capitol
Hartford, Connecticut
Dear Governor Lamont:
I write to provide you with the legal financial statements for Fiscal Year 2019. These statements have been prepared in accordance with statutory provisions designed to incorporate designated expenditure accruals of Generally Accepted Accounting Principles (GAAP) into the budget process. It is important to recognize that these statements have not been fully audited at this writing. The figures are subject to final audit adjustment and should be viewed as preliminary results. Final audited statements will be released on or before December 31, 2019.
The General Fund ended Fiscal Year 2019 with a surplus of $370,597,419. In accordance with Section 4-30a of the Connecticut General Statutes, once the audit is completed, the surplus will be transferred to the Budget Reserve Fund (BRF). The Transportation Fund had an operating surplus of $74,395,384 which left a positive fund balance of $320,116,310 at the close of Fiscal Year 2019.
In FY 2019, as in the prior fiscal year, significant progress was made toward building the balance of the BRF. This was primarily due to the revenue volatility cap, first implemented in FY 2018. This statutory provision requires revenues above a certain threshold to be transferred to the 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. At year-end, a volatility transfer of $949,680,660 was made to the BRF.
Prior to the close of FY 2019, the balance of the BRF was $1,185,259,428, which represented approximately 6.2 percent of net General Fund appropriations. Adding the $949.7 million volatility transfer and the unaudited FY 2019 surplus of $370.6 million would bring the year-end balance of the BRF to just over $2.5 billion or approximately 13 percent of net General Fund appropriations for FY 2020. Therefore, the BRF balance more than doubled based on FY 2019�s operating results. This represents a major step forward, but there is still more work to do. 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.
Unlike the earlier years of the economic recovery, FY 2019 was characterized by more stability and less uncertainty. For example, no deficits were projected for the General Fund at any time during the fiscal year and no mid-year deficit mitigation plans were necessary. This was largely the result of net revenues exceeding their budget targets, combined with moderate increases in spending overall. At the same time, as will be described in more detail below, Connecticut has still not fully recovered from the Great Recession and a number of fiscal challenges remain.
In FY 2019, General Fund expenditures totaled $19,248,650,540. This represented growth of 3.4 percent over actual FY 2018 spending levels, a net increase of $637.9 million. Closer analysis reveals that spending growth was concentrated in a few specific areas for FY 2019. For example, the three appropriations with the greatest dollar increases in FY 2019 all fall under the category of fixed costs. The largest was debt service, which grew by $273.9 million or 14.0 percent over FY 2018 levels. Second was the employer contribution to SERS retirement, which increased by $115.8 million or 11.0 percent. Third was the State�s share of Medicaid, which grew by $93.9 million, but by a relatively modest 3.7 percent. Together these three line items accounted for three-quarters of the spending growth in the General Fund for FY 2019. The full FY 2019 General Fund statement of appropriations and expenditures by line item is presented in Schedule B-3.
Employee General Fund salary and wage costs (from all appropriations) totaled $2.73 billion in FY 2019. This represented an increase of $132.4 million or 5.1 percent compared with FY 2018. However, once programmatic changes are factored in, the actual growth rate was significantly smaller. In FY 2019, the Correction Managed Health Care group was transferred from the University of Connecticut Health Center�s operating fund to a General Fund appropriation within the Department of Correction. This program shift accounted for $51.6 million of the total increase in salaries. After adjusting for this change, the actual FY 2019 growth rate for General Fund salary and wages was 3.1 percent.
One notable example of a year-over-year reduction in costs was in the General Fund retiree health insurance account. Despite increasing enrollment and medical trend growth, retiree health insurance expenditures were $19.1 million lower in FY 2019, which represented a reduction of 2.7 percent versus FY 2018. The primary factor was savings associated with the implementation of a Medicare Advantage plan for retirees and dependents age 65 and over.
As noted, a number of General Fund revenue categories out-performed their budget targets in FY 2019. Overall, realized revenues totaled $19,649,862,151 and came in a net $641.2 million above the budget plan. Compared with the prior year, this represented General Fund revenue growth of 8 percent over FY 2018. I should note, however, this growth rate is overstated due to some timing issues around the receipt of over $400 million in Federal Medicaid reimbursements related to hospital supplemental payments. Due to delays in the Federal review of the State�s claim, these payments were received in FY 2019 instead of FY 2018, as originally anticipated. Therefore, adjusting for this timing difference, General Fund revenues grew by closer to 3.5 percent over FY 2018 realized amounts. Of course, had the revenue been received in FY 2018 as planned, the prior year deficit would have been substantially reduced.
Among the most notable results was the performance of the withholding portion of the income tax, which brought in $518 million or 8.4 percent more than budgeted. In addition, the Pass-through Entity (PET) tax on partnerships and S-corporations came in $572 million over its target, nearly twice as much as budgeted. The Sales and Use Tax out-performed its target by $184.5 million or 4.4 percent, while the Corporations Tax was $140.7 million or 15.3 percent above the budget plan. These positive developments were partially offset by smaller reductions in other tax categories. These included the Insurance Companies Tax ($40.5 million below budget or -17.3 percent) and the Cigarettes and Tobacco Tax ($23.5 million below budget or -6.2 percent).
For non-tax revenues, lottery receipts (shown as Transfers � Special Revenue) totaled $364.1 million or $11.4 million above the budget plan. In addition, casino gaming payments totaled $255.2 million or $51.6 million over budget as competition from out of state casinos had a smaller impact than anticipated. License, Permit and Fees revenue underperformed, falling $31.4 million below target, while Sales of Commodities and Services was $10.6 million under budget. The complete statement of estimated and realized revenue is presented in Schedule B-2.
Transportation Fund spending of $1,609,093,578 in FY 2019 grew by $125.4 million or 8.5 percent from the prior fiscal year. Over half of that spending growth was for debt service, which rose by $67.2 million or 11.7 percent over FY 2018 levels. The largest programmatic spending increase was for Department of Transportation bus operations, which grew $29.8 million or 18.0 percent. Transportation Fund state employee retirement contributions increased by $9.8 million or 8.4 percent in FY 2019. However, employee salary and wages experienced modest growth in FY 2019 of $4.5 million or 2.2 percent over FY 2018.
The Transportation Fund had revenue of $1,688,144,080 in FY 2019, which exceeded the budget plan by $67.6 million. As with the prior fiscal year, the strongest performing tax category was the Oil Companies tax, which benefitted from higher oil prices and finished the year $33.2 million above target.
During FY 2019 Connecticut�s economy experienced low unemployment and moderate growth as the recovery from the Great Recession entered its tenth year. However, based on two significant indicators � job growth and housing prices � Connecticut continues to lag behind the nation�s economic recovery.
According to U.S. Bureau of Labor Statistics data reported by the state Department of Labor (DOL), Connecticut gained 4,600 nonfarm seasonally-adjusted payroll jobs over the course of FY 2019 and had a total of 1,692,800 employed residents as of June 2019. However, the vast majority of the employment growth (+8,600 jobs) occurred in the first six months of the fiscal year, from July through December 2018. In the second half of the fiscal year, Connecticut lost a net total of 4,000 jobs. Looking at year-over-year job growth, information, leisure & hospitality, 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.
As the fiscal year closed, Connecticut's unemployment rate stood at 3.7 percent in June, down one-tenth of a point from May 2019 and down four-tenths of point from a year earlier when it was 4.1 percent. Nationally, the unemployment rate was also 3.7 percent in June 2019, up one-tenth of a point from May 2019 and down three-tenths of point from the prior year when it stood at 4.0 percent.
As of July 2019, Connecticut had 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). At that point in time 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. Within the job recovery numbers, Connecticut�s Department of Labor 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.
The Connecticut housing market�s results were mixed for FY 2019. An August 27, 2019 release by the Federal Housing Finance Agency (FHFA) reported housing price appreciation statistics by state for the period ending June 30, 2019. FHFA�s Housing Price Index (HPI) tracks changes in home values for individual properties owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Over the past year, based on the HPI, Connecticut home prices continued to grow more slowly than most of the nation. Connecticut homes appreciated only 2.98 percent for the year, which ranked 45th in the nation overall. The U.S. average appreciation for the period was 4.99 percent. A comparison of five-year housing prices showed similar results: Single family houses in Connecticut appreciated 10.06 percent for the period versus a 32.92 percent increase for the nation as a whole.
A separate measure by data and analytics firm CoreLogic showed U.S. home prices increased by 3.6 percent year-over-year in July. At the same time, Connecticut was one of only two states that experienced a decrease in home prices (-0.3 percent) for the period. The other state was South Dakota, which saw a price decline of 3.4 percent. CoreLogic also reported Connecticut�s housing market still has a long way to go to recover its pre-recession peak. As of July 2019, Connecticut�s home prices were the farthest in the nation below their all-time high, still 16.4 percent below the peak reached in July 2006.
According 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. 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 disputes between the U.S. and China remained unresolved.
In a July 25th report, BEA released Real Gross Domestic Product (GDP) results by state for the first quarter of 2019. Connecticut experienced a seasonally adjusted annual growth rate of 2.2 percent, which ranked 45th in the nation overall. This growth rate was below both the national average of 3.1 percent for the period and the New England regional average of 2.5 percent. The sectors that contributed most to Connecticut�s GDP growth in the first quarter of 2019 were finance & insurance, health care & social assistance and retail trade.
On September 24th, BEA 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.
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