September 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 July 31, 2020.
The adopted budget plan for Fiscal Year 2021 anticipated a $166.2 million surplus at year end. FY 2021 represented the second year of the biennium and typically this budget would have been amended with more up-to-date information. However, due to COVID-19ís impact on the 2020 legislative session, those revisions did not occur. Today, just 14 months after the biennial budgetís initial adoption, the state finds itself in a very different environment.
In its first forecast of the new year, the Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2021 with a deficit of $2.07 billion. This shortfall represents 10.3 percent of net General Fund appropriations and is primarily due to significant revenue reductions related to the impact of the ongoing coronavirus pandemic. Revenues were revised downward by $2.2 billion compared with the adopted budget. In addition, OPM estimates FY 2021 net expenditures will exceed the budget plan by $40.9 million.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2021 operations with a $76.0 million deficit, largely due to a $192.5 million downward revision of revenues from the adopted budget, again based on the impact of COVID-19 on the stateís economy. OPM is also projecting lower expenditures of $52.0 million for the STF, mainly due to debt savings from reduced interest costs and delayed bond sales. The current projections would leave a positive STF balance of $93.0 million at year-end. However, based on current trends and economic conditions, OPM warns the fund balance in the STF will likely be exhausted during FY 2022.
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 OPMís FY 2021 deficit projections for the General and Transportation Funds through July 31, 2020. At present, my office views this level of deficit as on the high end of possible ranges, but believes it is appropriately cautious to plan for this type of scenario given the unpredictable nature of the pandemic. I should note it is still very early in the fiscal year and my projections will be refined and updated as more information becomes available in the coming months.
As noted, OPM decreased its revenue projections by nearly $2.2 billion for FY 2021. The adopted budget for FY 2021, enacted pre-pandemic, included revenue growth of 5.5 percent above realized revenues of the just concluded 2020 fiscal year. In contrast, OPMís current forecast represents a 5.9 decrease versus FY 2020 realized revenues and a 10.8 percent reduction compared with the adopted budget plan for FY 2021.
The most significant downward revisions were to the following major tax categories, all of which came in under budget target last fiscal year: estimated and final income tax payments (down $919.6 million or 32.4%); the withholding portion of the income tax (down $667.9 million or 9.3%); Sales and Use Taxes (down $472.4 million or 10.3%); and Corporation Taxes (down $318.7 million or 29.4%). Moreover, OPM increased its estimate of tax refunds by $150.2 million due to the extension of tax filing deadlines to July 15, 2020, which shifted additional tax refund payment from FY 2020 to FY 2021. Based on the ongoing nature of the pandemic and current economic conditions, these changes to the revenue schedule seem prudent and reasonable at this early stage of the fiscal year.
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 was $3,294.2 million for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. The statutory tax accruals have been finalized for FY 2020 and I am pleased to report a $530.3 million revenue volatility transfer to the Budget Reserve Fund (BRF) was completed last week. When combined with the previous balance of $2,505,537,507, the total in the BRF is now over $3 billion, specially $3,035,853,798, which represents 15.1 percent of net General Fund appropriations for FY 2021. The state has made enormous progress in building the BRF balance over the past three years. Now, as the state faces this unprecedented public health and economic crisis, Connecticut is better positioned to meet the challenge.
I should caution that FY 2020 year-end adjustments are still being processed and could have a significant impact on the final operating results. GAAP budget-related expenditure accruals will transfer expenses incurred in FY 2020 but paid in FY 2021 back into the previous fiscal year. According to existing state law, any remaining FY 2020 deficit will be addressed through a transfer from the Budget Reserve Fund after the close of the fiscal year. Preliminary reporting of unaudited operating results for FY 2020 will be presented in the September 30th monthly letter.
Connecticutís 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 July and into August, the nation continued seeing historically high levels of initial unemployment insurance (UI) claims. For the week ending August 22nd, the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled just over one million. This was the 22nd time in 23 weeks that the initial UI claims came in above 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 failed to extend supplemental unemployment benefits, including an additional $600 per week, prior to their expiration on July 31 as part of the CARES Act.
Connecticut has also experienced historic levels of employment losses this spring, although has recently reversed that trend and began recovering some jobs back. On August 20th, Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for July 2020 from the business payroll survey administered by the U.S. Bureau of Labor Statistics (BLS). DOLís Labor Situation report showed the state gained 26,500 net jobs (1.8 percent) to a level of 1,540,400 seasonally adjusted. At the same time, the June 2020 job gain of 73,300 was revised upward by an additional 4,000 jobs.
Over the year, however, nonagricultural employment in the state fell by 146,300 (-8.7 percent) seasonally adjusted. The leisure & hospitality sector was particularly hard hit, losing more than a quarter of its jobs for the period, followed by the other services and the government sectors. In this context, the government sector includes all federal, state and local employment, including public education and Native American casino employment located on tribal land. A more detailed look at DOLís dataset indicated most of the government jobs lost between July 2019 and July 2020 were at the local level, including about 7,100 in education and 7,900 in non-education roles for municipal government. The job losses in the government sector are another indication that additional help is needed from the federal level to avoid cuts to vital public services during a severe economic downturn, while the pandemic is still not under control in the United States.
Connecticut's official unemployment rate stood at 10.2 percent in July, but DOL cautioned that figure continues to be significantly understated due to ongoing data collection and classification issues with this monthís Current Population Survey (CPS). DOLís Office of Research estimates Connecticutís unemployment rate to be much higher, in the range of 15 percent for the mid-June to Mid-July period, but down from 16-17 percent in the previous month. By comparison, the official US jobless rate in July 2020 was also 10.2 percent, although analysts noted that rate was likely understated due to the same CPS data collection issues.
According to an August 27th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) decreased at an annual rate of 31.7 percent in the second quarter of 2020, according to BEAís second estimate. This represents the steepest quarterly decline on record, reflecting the significant 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 high levels of 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 expire, sustained help is still needed. Research by the Center for Budget and Policy Priorities and other groups continues to show that lower income and minority households, especially those with children, are experiencing a disproportionate level of hardship during the pandemic, including joblessness, hunger, eviction, and homelessness.
The Conference Board reported that the Consumer Confidence Index dropped significantly in August, after a smaller decline in July. The Index now stands at 84.8, down from 91.7, the lowest level since May of 2014. The report noted that consumers felt both business and employment conditions had deteriorated over the past month, leading to a more pessimistic view of their own financial prospects. The Conference Board also warned that uncertainty and concerns about the economic outlook could cause consumer spending to cool in the months ahead, potentially slowing the nationís recovery.
Berkshire Hathaway HomeServices reported strong results for the Connecticut housing market for July 2020 compared with July 2019. Sales of single-family homes increased by 14.27 percent, with the median sale price increasing by 15.52 percent. Continuing a trend from last month, new listings were up 18.39 percent in Connecticut. The median list price rose 13.68 percent to $339,900. At the same time, average days on the market increased 6.06 percent in July 2020 compared to the same month in the previous year (70 days on average compared with 66 in July 2019).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales continued a strong upward trend in July 2020, building on the rebound in sales from the previous month. Each of the four major regions experienced double-digit, month-over-month increases, while the Northeast was the only region to show a year-over-year decline. Total existing-home sales jumped a record 24.7 percent from June to a seasonally adjusted annual rate of 5.86 million in July. Nationally, home prices have remained strong during the pandemic. NAR noted the median existing-home price for all housing types in July was $304,100, up 8.5 percent from July 2019 ($280,400), as prices rose in every region of the country. Julyís national price increase marks 101 straight months of year-over-year gains, and for the first time ever, national median home prices rose above the $300,000 level.
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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