April 1, 2020
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 February 29, 2020. At the outset of this letter, I wanted to thank you for your leadership and dedication to the people of Connecticut during the COVID-19 crisis. The Office of the State Comptroller stands with you and will continue to provide any support needed to strengthen the State’s efforts in these challenging times.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a deficit of $58.6 million, an increase of $3.8 million from last month’s estimate. OPM noted this forecast incorporated $37.4 million in anticipated expenditures announced to date for the state’s response to the public health emergency to combat the COVID-19 pandemic. However, the deficit projection did not include the broader recessionary influences on the state’s economic activity and revenue streams.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2020 operations with a $39.3 million deficit, representing a $40.5 million reduction in the fund’s operating balance from last month. Overall net revenues were reduced by $46.4 million, largely due to lower oil prices and reduced commuter travel. The largest change was a $31 million reduction in Oil Companies Tax revenue. At the same time, spending forecasts improved by a net $5.9 million. The current projection would leave a positive STF balance of $280.9 million at year-end. My office is in general agreement with OPM’s Transportation Fund projection.
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 currently projecting a General Fund deficit of $170.0 million for FY 2020, $111.4 million higher than OPM’s current estimate. OSC’s forecast incorporates most of the revenue changes adopted by OPM in its March 20th letter, with two exceptions. First, OSC is reducing its estimate for the withholding portion of the income tax by $130 million, which is $100 million lower than OPM’s most recent forecast. My office is already seeing a drop-off in withholding receipts from the large number of layoffs and furloughs resulting from non-essential business closures related to the state’s response to the COVID-19 pandemic. In addition, OSC is reducing its sales tax estimate by $30 million, $11.4 million below OPM’s projection, again due to coronavirus-related business closures and shelter at home directives.
Aggressive public health interventions and social distancing measures are necessary to fight the further spread of COVID-19. Yet the speed and scale of the pandemic’s economic disruptions are unprecedented for Connecticut. As a result, the full extent of the impact is not yet clear and may take weeks, if not months, to determine. The current year deficit could, and likely will, grow larger. The delays and extensions of tax filing deadlines that became necessary during the crisis will further complicate any analysis in the near term. Nevertheless, OSC will continue to monitor the situation closely and update these projections in future reports.
On the expenditure side of the budget, my office is largely in agreement with OPM. However, the state’s response to the public health aspects of the coronavirus is an evolving situation. Therefore, expenditure projections will be revised as more information becomes available.
The statutory revenue volatility cap requires receipts above a certain threshold to be transferred to the Budget Reserve Fund (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 (PET) tax. If current projections are realized, a $318.3 million volatility transfer would be made to the BRF. Due to recent economic disruptions, stock market losses and extensions of various tax filing deadlines, this projection will need to be revisited as the fiscal year progresses.
The balance of the BRF presently stands at $2,505,537,507. Adding the estimated $318.3 million volatility transfer, less the projected FY 2020 deficit of $170.0 million would bring the year-end balance of the BRF to approximately $2.65 billion. This would represent 13.3 percent of net General Fund appropriations for FY 2021. The state has made enormous progress in building the BRF balance over the past two years. That effort required sacrifice and discipline. Now, as the state faces an unexpected public health and economic crisis, Connecticut is better positioned to meet the challenge.
To date three Federal emergency spending bills have been enacted by Congress that will provide financial resources to Connecticut to combat the coronavirus and the associated economic damage. This includes the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARE) Act, signed by the President on March 27th. According to a Federal Funds Information for States (FFIS) analysis, Connecticut is projected to receive $2.36 billion in funds from the CARE Act and the two earlier Federal bills. As millions of Americans and thousands of Connecticut residents lose their jobs in the economic fallout of the COVID-19 pandemic, sustained support will be needed, including:
· Expanded unemployment insurance;
· Support for businesses, especially small and medium sized businesses, to maintain jobs and keep employees on the payroll;
· Strengthening the safety net with expanded Medicaid eligibility, health insurance coverage, paid leave and food assistance; and
· Increased aid for state and local governments, as well as for hospitals, other health care providers and first responders to deal with the ongoing public health crisis.
The scope and suddenness of this crisis is without precedent in living memory. Therefore, relief needs to be provided quickly and be sustained over time to prevent even more harm, especially for those most in need. The recovery will be difficult and uneven. The biggest risk for policy makers is not doing too much, but rather doing too little in the face of these enormous challenges.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Virtually all economic measures look back at past periods. In the present situation, therefore, some economic indicators presented below may appear inconsistent with more recent developments in the rapidly changing response to the COVID-19 pandemic.
In recent weeks, Connecticut and the nation saw a historic spike in initial unemployment insurance (UI) claims as coronavirus concerns forced numerous businesses to close in support of public health-related social distancing efforts. According to the U.S. Bureau of Labor Statistics (BLS) initial UI claims for Connecticut went from 3,440 to 25,098 for the week ending March 21st, an increase of 630 percent. Since that date, jobless claims continued to surge as more claims poured into the Connecticut Department of Labor (DOL) on a daily basis.
Prior to the COVID layoffs, the state was experiencing modest, but steady job growth. On March 23rd, Connecticut DOL reported the preliminary Connecticut nonfarm job estimates for February 2020 from the business payroll survey administered by the U.S. Bureau of Labor Statistics (BLS). DOL’s Labor Situation report showed the state gained 4,000 net jobs in February, to a level of 1,700,800 seasonally adjusted. The January 2020 originally released job gain of 2,600 was revised up to a gain of 3,300 over the month. According to DOL, Connecticut experienced six months of job growth through February. Having said that, payroll jobs are expected to decline sharply in March as a result of increased layoffs and furloughs.
Over the year, DOL reported that nonagricultural employment in the state grew by 13,300 (0.8 percent) seasonally adjusted. Connecticut's unemployment rate stood at 3.8 percent in February, up one-tenth of a percent from the revised January level and unchanged from a year ago. The U.S. jobless rate in February 2020 was 3.5 percent, down three-tenths from February 2019. As indicated earlier, due to the dramatic increase in initial unemployment claims in March, the state and national unemployment rates will be significantly higher when the official estimates are released next month.
On March 24th, the Bureau of Economic Analysis reported that Connecticut’s personal income grew by a 1.8 percent annual rate between the third and fourth quarters of 2019. Based on this result, Connecticut ranked 46th in the nation for fourth quarter income growth. This growth rate was below the national average of 3.0 percent and the New England region’s average growth rate of 2.8 percent.
For the full year in 2019, BEA reported, income rose 3.2 percent in Connecticut, lower than the national growth rate of 4.4. percent and ranked 48th in the nation overall. Despite the slower level of growth, Connecticut still ranked first in the nation for per capita personal income at $79,087. This represented 140 percent of the national average of $56,663.
Prior to any COVID-related closures, Berkshire Hathaway HomeServices reported results for the Connecticut housing market for February 2020 compared with February 2019. Sales of single-family homes grew by a modest 1.18 percent, with the median sale price increasing by 8.70 percent. New listings were up 7.94 percent in Connecticut, while the median list price rose 6.25 percent to $254,900. Average days on the market were unchanged in February 2020 compared to the same month in the previous year (93 days on average).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales climbed substantially in February following a slight decline in January. February sales increased 6.5 percent over January to a seasonally adjusted annual rate of 5.77 million. Of the four major regions, only the Northeast reported a decrease in sales, while other areas saw increases, including sizable sales gains in the West. According to NAR, the median existing-home price for all housing types in February was $270,100, up 8.0 percent from February 2029 ($250,100), as prices increased in every region. February’s price increase marks 96 straight months of year-over-year gains. NAR reported that the positive results in February are not reflective of the impact of the coronavirus. The associated disruptions to the economy and the stock market will make it difficult to predict what short-term effects the pandemic will have on future sales.
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 $771.4 million as of June 30, 2019.
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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