August 3, 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 June 30, 2020.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a deficit of $153.1 million, an improvement of $291.6 million from its June 19th estimate. OPM’s projection incorporates a net revenue increase of $186.5 million combined with lower net expenditures of $105.1 million. OPM reports that its revenue projections encompass anticipated statutory tax accruals for collections received through August 7, 2020 that will be recorded as revenue in FY 2020. The projected deficit represents 0.8 percent of General Fund expenditures for FY 2020. According to existing state law, the deficit will be addressed through a transfer from the Budget Reserve Fund after the close of the fiscal year.
The Office of the State Comptroller (OSC) is projecting a General Fund deficit of $128.1 million for FY 2020, $25 million lower than OPM’s current estimate due to differences on the revenue side of the budget as detailed below.
OPM’s revenue improvements from last month include an upward revision of $100 million due to Federal Medicaid reimbursements; $43.4 million in additional fringe benefit recoveries for the General Fund; a downward revision of $34.2 million in tax refunds issued prior to June 30th; and a $17 million increase in casino gaming payments to account for higher than anticipated slot machine activity. Other revenue changes resulted in a net decrease of $8.1 million. Improvements on the expenditure side were attributed to reduced requirements for the state share of Medicaid due to the enhanced Federal reimbursement that was part of the Families First Coronavirus Response Act (FFCRA) and higher projected agency lapses.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2020 operations with a $149.3 million deficit, an improvement of $13.5 million from last month’s estimate. This was due to a net $6.5 million increase in revenue and $7.0 million in lower anticipated spending. The current projections would leave a positive STF balance of $170.9 million at year-end. My office is in general agreement with OPM’s STF projections.
The following analysis of the financial statements furnished by OPM is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
As noted, my office is projecting a General Fund deficit of $128.1 million for FY 2020. OSC is in general agreement with OPM’s General Fund expenditure projections for FY 2020 and the revenue changes outlined above. However, based on additional collection information and trend data available during the statutory accrual period, my office is raising its estimate for the withholding portion of the income tax by $50 million and the Sales and Use Tax by $60 million. These gains are partially offset by reductions of $40 million in the Corporation Tax and $45 million in the Health Provider Tax, both of which have been underperforming their budget targets. In addition, OSC is increasing its forecast for estimated and final income tax payments by $100 million and the Pass-Through Entity Tax by $50 million due to strong collections in July. Since both tax categories are covered by the revenue volatility cap, these improvements would not reduce the FY 2020 deficit. Instead they would increase the volatility cap revenue transfer to the Budget Reserve Fund (BRF) from $318.3 million to $468.3 million. These projected improvements in revenue assume current collection trends continue through August 7th, the end of the statutory tax accrual period.
Please note that FY 2020 year-end adjustments are still being processed and could have a significant impact on the final operating results. In addition to the statutory revenue accruals, GAAP budget-related expenditure accruals will transfer expenses incurred in FY 2020 but paid in FY 2021 back into the previous fiscal year. Preliminary reporting of unaudited operating results for FY 2020 will be presented in the September 30th monthly letter.
The balance of the BRF presently stands at $2,505,537,507. Adding the estimated $468.3 million volatility transfer, less the projected FY 2020 deficit of $128.1 million would bring the year-end balance of the BRF to approximately $2.84 billion. This would represent 14.2 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. Now, as the state faces this unprecedented public health and economic crisis, Connecticut is better positioned to meet the challenge.
A recent report by Moody’s Analytics conducted stress-testing of state governments to evaluate how well equipped they are to confront the fiscal challenges presented by the economic fallout of the COVID-19 pandemic. The Moody’s analysis focused on two recessionary scenarios, a baseline and a more severe scenario covering a longer and deeper recession. The budgetary impacts included both projected revenue losses and increased Medicaid spending. Due to Connecticut’s healthy Budget Reserve Fund balance, the state ranked near the top in terms of preparedness for even the most severe recession scenario. However, the report found the fiscal shocks of the pandemic will be enough to overwhelm even the most prepared states. In its conclusions, Moody’s finds that an additional $500 billion in federal aid to state and local governments will be needed over the next two years to avoid major damage to the economy. In addition, federal action is needed quickly to avoid the types of spending cuts and tax increases that would cost jobs and further delay the recovery.
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.
Throughout June and into July, the nation continued seeing historically high levels of initial unemployment insurance (UI) claims. For the week ending July 25th, the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled 1.434 million, the 19th week in a row these claims have totaled over one million. Before the pandemic, initial UI claims averaged closer to 210,000 per week. The economic pain and fallout of the COVID-19 pandemic remains widespread as federal policymakers debate whether to extend unemployment benefits, including an additional $600 per week that expired on July 31, as part of the CARES Act.
Connecticut has also experienced historic levels of job losses this spring, although has recently reversed that trend and began adding jobs back. On July 16th, Connecticut’s Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for June 2020 from the business payroll survey administered by BLS. DOL’s Labor Situation report showed the state gained 73,300 net jobs (5.1 percent) to a level of 1,509,900 seasonally adjusted. At the same time, the May 2020 job gain of 25,800 was revised upward by an additional 2,600 jobs.
Over the year, nonagricultural employment in the state fell by 172,700 (-10.3%) seasonally adjusted. The leisure & hospitality sector was particularly hard hit, losing more than a third of its jobs for the period, followed by the other services and the information sectors. Connecticut's official unemployment rate stood at 9.8 percent in June, but DOL cautioned that figure continues to be significantly understated due to ongoing data collection and classification issues with this month’s Current Population Survey. DOL’s Office of Research estimates Connecticut’s unemployment rate to be much higher, in the range of 16-17 percent for the mid-May to Mid-June period. By comparison, the official U.S. jobless rate in June 2020 was 11.1 percent, although analysts noted that rate was also understated due to the data collection issues noted above. One estimate by the Peterson Institute of International Economics put the U.S.’s “realistic unemployment rate” at 13.0 percent for June.
According to a July 30th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) decreased at an annual rate of 32.9 percent in the second quarter of 2020, according to BEA’s advance estimate. This represents the steepest quarterly decline on record, reflecting the substantial economic fallout of the coronavirus pandemic. By comparison, the worst quarter during the Great Recession was an 8.4 percent drop in GDP in the fourth quarter of 2008. In the first quarter of 2020, real GDP decreased 5.0 percent.
The historical levels of unemployment and GDP results illustrate the depth of the hole from which the nation is attempting to emerge. Numerous economists, including Federal Reserve Chairman Jerome Powell, are urging Congress to provide more relief to prevent further damage to the economy and avoid prolonging the recovery, which is stalling amid rising coronavirus cases. Despite the unevenness of earlier pandemic relief efforts, they have provided a lifeline to help families and businesses avoid financial disaster, at least temporarily. As those benefits begin to expire, sustained help is needed. As I noted when the pandemic first hit, the biggest risk for policy makers is not doing too much, but rather doing too little in the face of these enormous challenges.
The Conference Board reported that the Consumer Confidence Index decreased in July after a significant increase in June. The Index now stands at 92.6, down from 98.3. The drop was attributed to a resurgence of COVID-19 infections, which threatens to slow economic activity as states in the South and Western U.S. close businesses or reassess plans for reopening.
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for June 2020 compared with June 2019. Sales of single-family homes dropped by 14.83 percent, with the median sale price increasing by 5.08 percent. Reversing a trend from recent months, new listings were up 10.18 percent in Connecticut. The median list price rose 6.37 percent to $299,900. Average days on the market increased 14.93 percent in June 2020 compared to the same month in the previous year (77 days on average compared with 67 in June 2019).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing home sales rebounded at a record pace in June 2020, ending a three-month drop in sales brought on by the coronavirus pandemic. Each of the four major regions witnessed increases in month-over-month sales, with the West experiencing the greatest growth. Total existing-home sales grew 20.7 percent from May to a seasonally adjusted annual rate of 4.72 million in June. However, overall sales decreased year-over-year, dropping 11.3 percent from a year ago. Nationally, home prices have remained strong during the pandemic. NAR noted the median existing home price for all housing types in June was $295,300, up 3.5 percent from June 2019 ($285,400), as prices rose in every region. June’s national price increase marks 100 straight months of year-over-year gains.
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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