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June 1, 2020
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 April 30, 2020.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a deficit of $619.9 million, an improvement of $314.2 million from its April 30th estimate. OPM�s projection incorporates a net revenue increase of $249.6 million combined with lower net expenditures of $64.6 million.
The projected deficit represents 3.2 percent of General Fund expenditures for FY 2020. Due to the public health emergency declared on March 10, 2020 and the critical pandemic measures needed in response, no policy changes are being offered to mitigate the FY 2020 deficit at this time. OPM notes that, according to existing state law, the deficit for FY 2020 will be addressed through a transfer from the Budget Reserve Fund after the close of the fiscal year.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2020 operations with a $118.3 million deficit, a $33.4 million improvement in the fund�s operating balance from its April 30th estimate. This was mostly due to larger anticipated expenditure lapses, including debt service savings from delays in bond sales. STF revenue estimates are unchanged and continue to reflect the April 30th consensus forecast reached by OPM and the Office of Fiscal Analysis. The current projections would leave a positive STF balance of $201.8 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 General and Transportation Fund deficit projections for FY 2020. For the General Fund, the primary update in projected revenue is a change in timing for receipt of Medicaid reimbursement for hospital supplemental payments. Last month�s forecast anticipated the reimbursements would be received in FY 2021 due to a delay in the federal review and approval process. Since then federal approval has been obtained and $285.5 million in hospital supplemental payment reimbursements will be received in FY 2020. The other significant change to revenue this month is a $35.9 million reduction in casino gaming payment receipts due to a shifting of payments into FY 2021 combined with a delay in reopening the state�s casinos.
As noted last month, a clearer picture is emerging of the economic toll of the COVID-19 pandemic, although uncertainty remains about its duration. Ongoing public health interventions and social distancing measures are still necessary to fight the further spread of the virus and plans to reopen the economy must proceed with caution. First, testing needs to become much more widespread to better track the path of the virus. Similarly, contact tracing needs to improve so quarantines and social distancing can become more focused to replace society wide closures. Ultimately, things may not get back to anything approaching normal until an effective vaccine is developed and widely available to protect the population. In the months ahead, my office will continue to monitor the economic and budget situation closely and update these projections as needed.
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 $619.9 million would bring the year-end balance of the BRF to approximately $2.2 billion. This would represent 11.0 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 debate continues in Washington DC regarding whether another federal relief bill is needed, as state and local governments struggle to address the COVID-19 pandemic at a time when revenues are dropping precipitously. The drastic combination of tax increases and spending cuts needed to close future budget gaps would do an immense amount of harm. Federal reserve chairman Jerome Powell has warned the recovery may take time to gather momentum and additional relief efforts will be necessary to prevent long term damage to the economy. Therefore, my office strongly supports providing continued assistance to vulnerable families and businesses as well as new efforts to provide revenue support for state and local governments to help maintain vital public services during this crisis.
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 April and May, the nation continued seeing historically high levels of initial unemployment insurance claims. For the week ending May 23rd, the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled 2.12 million, bringing the ten-week total to 40.8 million. These employment losses were over four times the level experienced during the Great Recession and more than enough to wipe out all the job gains since the recovery began 11 years ago.
Connecticut has also experienced a sharp increase in job losses, although the extent is not fully reflected in the state�s most recent unemployment rate. On May 21st, Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for April 2020 from the business payroll survey administered by BLS. DOL�s Labor Situation report showed the state lost a historically high 266,300 net jobs to a level of 1,411,100 seasonally adjusted. In addition, the March 2020 originally released job loss of 7,600 was revised down sharply to a loss of 22,100 jobs.
Over the year, nonagricultural employment in the state fell by 276,800 (-16.4 percent) seasonally adjusted. The leisure & hospitality sector was particularly hard hit, losing over half its jobs for the period, followed by the other services and construction categories. Connecticut's official unemployment rate stood at 7.9 percent in April, but DOL cautioned that figure is significantly understated due to 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 17.5 percent for the mid-March to Mid-April period. DOL notes this higher estimate was made using Connecticut residential unemployment insurance claims and adding a similar factor for the unemployed self-employed population. By comparison, the official US jobless rate in April 2020 was 14.7 percent, up 10.3 points from March.
A recent study by the Federal Reserve Bank of Boston illustrates the financial devastation job losses can have on families without policy intervention. The report reviewed the COVID-19 pandemic�s impact on the New England region�s homeowners and renters. Due to the large number of job losses and the high cost of housing in the region, more than a million New England households are at risk for missing a mortgage or rent payment, including approximately 98,600 homeowners and 170,600 renters in Connecticut. Without CARES Act support, a total of about $1.43 billion in rents and mortgages would be at risk of nonpayment every month in New England due to coronavirus-related job losses. Federal policy intervention in the form of the CARES Act and state moratoriums on evictions and foreclosures have likely averted an immediate financial disaster for many households. However, if the economic slow-down related to COVID-19 is prolonged, more policy interventions and relief efforts will be needed to avoid more widespread economic harm to families.
On May 19th, the Congressional Budget Office (CBO) released interim projections of key economic variables based on information currently available and recent federal legislation addressing the COVID-19 pandemic. CBO concluded the U.S. economy will experience a sharp contraction in the second quarter of 2020, including a dramatic decrease in GDP and an increase in unemployment, with impacts lasting into 2021. Inflation adjusted gross domestic product (GDP) is expected to decline 11.2 percent between the first and second quarters, the equivalent of an annual rate decrease of 37.7 percent for the quarter. The nation�s unemployment rate is expected to rise to 15.8 percent in the third quarter before dropping down to 11.5 percent in the fourth quarter. While warning these projections are subject to enormous uncertainty, CBO is expecting economic activity to increase in the third quarter of 2020 as state and local governments ease stay at home orders and businesses begin to reopen. However, the projections also included the possibility of a reemergence of the pandemic. To account for this possibility, CBO projects social distancing will continue, although to a lesser degree, through the first half of next year.
The Conference Board reported that the Consumer Confidence Index held steady in May following two months of significant declines. The Index now stands at 86.6, up from 85.7 in April. This result was better than anticipated. Economists polled by Dow Jones had expected consumer confidence of 82.3 in May. The release noted the free-fall in confidence stopped in May and that short-term expectations moderately increased as the economy began to gradually re-open. At the same time the Conference Board warned an uneven path to recovery and potential second wave of the pandemic would add to uncertainty for consumers who will remain cautious about their future financial prospects.
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for April 2020 compared with April 2019. Sales of single-family homes dropped by 8.24 percent, with the median sale price increasing by 11.28 percent. Reflecting the impact of COVID-19 and social distancing efforts, new listings were down 56.52 percent in Connecticut. However, the median list price rose 11.54 percent to $289,900. Average days on the market decreased 15.05 percent in April 2020 compared to the same month in the previous year (79 days on average compared with 93 in April 2019).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales fell in April 2020, continuing a two-month drop in sales brought on by the coronavirus pandemic. Each of the four major regions experienced a decline in month-over-month and year-over-year sales, with the West seeing the greatest decrease in both categories. Total existing-home sales dropped 17.8 percent from March to a seasonally adjusted annual rate of 4.33 million in April. Overall, sales decreased year-over-year, down 17.2 percent from a year ago. While sales have declined, home prices remain strong. According to NAR, the median existing-home price for all housing types in April was $286,800, up 7.4 percent from April 2019 ($267,000), as prices rose in every region. April�s national price increase marks 98 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.
Sincerely,
Kevin Lembo
State Comptroller
To view the data in Excel format, click here:
General Fund: A-D
Transportation Fund: E-H