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May 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 March 31, 2020.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a deficit of $934.0 million, an increase of $403.8 million from the April 20th estimate. OPM’s revised projection incorporates lower revenue estimates to account for the economic impacts of the COVID-19 pandemic as reflected in the April 30th consensus revenue forecast reached with the Office of Fiscal Analysis. The consensus forecast also includes a $325.6 million reduction in federal grant revenue due to an anticipated delay in Medicaid reimbursements for supplemental hospital payments, which are now expected to be received in FY 2021.
The projected deficit represents 4.8 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 $151.7 million deficit, a $15.9 million reduction in the fund’s operating balance from its April 20th estimate due to changes in the consensus revenue forecast. The additional revenue reductions are due to lower oil prices and a decline in gasoline consumption from an increase in telework. The current projection would leave a positive STF balance of $168.4 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 and with the consensus revenue forecast reached with the Office of Fiscal Analysis. At the same time, the delays in tax filing and payment deadlines create more uncertainty around these estimates. Therefore, the full impact of the pandemic on FY 2020 operations may not be known until September 2020.
The current General Fund deficit projection of $934 million is $764 million larger than OSC’s April 1st estimate and reflects the rapid deterioration of state revenues due to economic effects of COVID-19. General Fund revenues are now $975.1 million or 5.01 percent below the original budget plan for FY 2020.
The current revenue forecast includes significant reductions in the withholding portion of the Personal Income tax, along with decreases in the Sales and Use Tax and the Corporation Tax. In addition, gambling revenue estimates were revised downward due to closure of the state’s casinos and a drop-off in lottery sales. As noted earlier, Federal grants revenue has been reduced to reflect the delay in Medicaid reimbursement for supplemental hospital payments. Please refer to Exhibit C for the full General Fund schedule of estimated and realized revenue for FY 2020.
As more information becomes available, a clearer picture is emerging of the economic toll of the COVID-19 pandemic, although much uncertainty remains. 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. Accurate tests for antibodies may also need to be developed to identify those who may have immunity and can safely return to the workplace.
Ultimately, things may not get back to anything approaching normal until an effective vaccine is developed and widely available to protect the population. Therefore, Connecticut’s budget situation may continue to get worse before it improves. My office will continue to monitor the situation closely and update these projections in future reports.
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 $934 million would bring the year-end balance of the BRF to approximately $1.89 billion. This would represent 9.5 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.
To date four Federal emergency spending bills have been enacted by Congress that will provide financial resources to combat the corona virus and the associated economic damage. The most recent, signed into law April 24th, included additional funding for the national response, such as another $321 billion for the Paycheck Protection Program for businesses, $60 billion in loans and grants for economic disaster assistance, $75 billion for health care providers, and $25 billion to increase COVID-19 testing capacity.
In earlier relief bills, many smaller businesses did not receive the paycheck assistance intended for them. Larger, well connected businesses had the inside track for the first round of funding, leaving smaller business with the least amount of cash flow to fend for themselves as the money ran out. The federal government must ensure that does not happen again and that the funding for health care providers and testing is spent wisely and targeted to areas with the greatest needs.
A debate is currently unfolding in Washington DC about whether another relief bill is needed, as state and local governments struggle to address the pandemic at a time when revenues are dropping precipitously. The April 30th consensus revenue forecast illustrates the scope of the problem in FY 2021 and beyond. The drastic combination of tax increases and spending cuts needed to close budget gaps of that magnitude would do an immense amount of harm. Therefore, my office strongly supports the effort to provide revenue assistance to state and local governments to help maintain vital public services during this crisis and prevent further damage to the economy.
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, the nation continued seeing historically high levels of initial unemployment insurance claims. For the week ending April 25th, the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled 3.84 million, bringing the six-week total to 30.3 million. That level of job losses is enough to wipe out all the nation’s job gains since the recovery began over a decade ago.
Connecticut has also experienced a sharp increase in job losses. Since March 13th, over 400,000 workers applied for unemployment insurance benefits, according to the state Department of Labor. This is more than three times the number of jobs lost during the Great Recession. From unemployment insurance claims data, DOL is expecting severe job losses in the leisure & hospitality, healthcare and retail sectors in next month’s report that will cover April 2020.
In an April 7th report, the Bureau of Economic Analysis (BEA) released Real Gross Domestic Product (GDP) results by state for the fourth quarter of 2019. Connecticut experienced a seasonally adjusted annual growth rate of just 0.9 percent, which ranked 44th in the nation overall. This growth rate was well below both the national average of 2.1 percent and only half of the New England regional average of 1.8 percent. The percent change in real GDP in the fourth quarter ranged from 3.4 percent in Washington and Utah to –0.1 percent in West Virginia.
Last week the Congressional Budget Office (CBO) released preliminary 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.
CBO projected inflation adjusted GDP is expected to decline nearly 12 percent during between the first and second quarters, the equivalent of an annual rate decrease of 40 percent for the quarter. In addition, the nation’s unemployment rate is expected to average close to 14 percent during the second quarter, up from 3.8 percent in the first 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 (CCI) deteriorated further in April, following a sharp decline in March. The index is closely watched by economists because consumer spending accounts nearly 70 percent of U.S. economic activity. The CCI now stands at 86.9, down from 118.8 in March and represents the lowest level in nearly six years. In addition, the present conditions portion of the index dropped 90 points from 166.7 to 76.4, the largest decline on record. The Conference Board reported that this reflects the sharp contraction in economic activity and surge in unemployment claims brought about by the COVID-19 crisis.
Prior to the full impact of COVID-related closures, Berkshire Hathaway HomeServices reported results for the Connecticut housing market for March 2020 compared with March 2019. Sales of single-family homes grew by 7.39 percent, with the median sale price increasing by 8.89 percent. Perhaps reflecting social distancing efforts, new listings were down 16.32 percent in Connecticut. However, the median list price rose 11.64 percent to $279,000. Average days on the market decreased 10.53 in March 2020 compared to the same month in the previous year (85 days on average compared with 95 in March 2019).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales fell in March 2020, following significant gains in February. March sales dropped 8.5 percent from February to a seasonally adjusted annual rate of 5.27 million. All four major regions reported a decrease in sales, with the West suffering the largest decline. NAR reported that with current quarantine recommendations in place, fewer sellers listed their homes on the market. While sales have declined, home prices were still strong. According to NAR, the median existing-home price for all housing types in March was $280,600, up 8.0 percent from March 2019 ($259,700), as prices increased in every region. March’s national price increase marks 97 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