December 1, 2021
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 October 31, 2021.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2022 with a surplus of $894.7 million, an increase in $412.4 million from last month. The projected surplus represents 4.3 percent of net General Fund appropriations. The change is primarily due to revenue improvements of $401.1 million from the November 10th consensus forecast reached between OPM and the Office of Fiscal Analysis. The remaining $11.3 million results from lower projected net expenditures.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2022 operations with a $251.3 million surplus, a $68.3 million increase from last month due a combination of $49.1 million in higher projected revenues and $19.2 million in reduced spending requirements. The projected expenditure reductions are related to $8.8 million in lower salaries at Department of Transportation resulting from vacant positions and debt service savings of $22.4 million due to the timing and lower than expected interest rates associated with the Fall 2022 Special Tax Obligation (STO) bond sale. Current projections would leave a positive STF balance of $492.4 million on June 30, 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 OPM's General Fund and Transportation Fund surplus projections through October 31, 2021, which incorporate estimates from the consensus revenue forecast of November 10, 2021.
Overall, the consensus forecast raised General Fund revenues by a net $401.1 million. For tax revenues, the only change was a $59.1 million increase in the Sales and Use Tax. This represents a 1.4 percent increase from OPM's October estimate and is consistent with recent trends OSC has observed for this category. Changes in the Other Revenue category were modest, netting to a negative $8.8 million.
The other significant revenue change was in the Federal Grants category, which was increased by $350.8 million or 18.9 percent over the October projection. As OPM notes in its letter, this was partly due to the inclusion of $159.5 million from the American Rescue Plan Act (ARPA) for Connecticut's health and community-based services (HCBS) reinvestment plan that were not part of the initial budget for FY 2022. Another $4.1 million of the increase is for the state's Substance Use Disorder (SUD) demonstration waiver project. Finally, the consensus forecast included an additional $187.2 million in higher federal Medicaid reimbursements that are primarily for services provided by Department of Developmental Services and at the Solnit facilities, which are administered by Department of Children and Families.
On the expenditure side of the budget, OPM reduced projected expenditures by a net $11.3 million from last month. General Fund spending is now expected to end the year $92.1 million below the levels of the adopted budget. These savings are primarily the result of an additional quarter of enhanced Federal Medicaid reimbursements due to the extension of the public health emergency through the quarter ending March 31, 2022. Higher federal reimbursements, in turn, lower General Fund Medicaid expenditures.
The increase in the General Fund surplus is a positive development for FY 2022 operations. However, as OPM has pointed out in recent months, the adopted biennial budget is balanced in large part due to the inclusion of ARPA revenue replacement funds totaling $559.9 million in FY 2022 and $1,194.9 million in FY 2023. Without the infusion of these one-time federal sources, the General Fund surplus for FY 2022 would be much more modest. Therefore, in this uncertain environment, it remains necessary to exercise fiscal restraint and prudent budget management in the months ahead.
The statutory revenue volatility cap requires receipts above a certain level to be transferred to the Budget Reserve Fund (BRF). For FY 2022, the cap is just over $3.5 billion for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. The balance in the BRF presently stands at $3.11 billion, the statutory threshold of 15 percent. Adding the anticipated revenue volatility transfer of $969.2 million and the projected FY 2022 surplus of $894.7 million would bring the BRF balance to $4.98 billion or 24 percent of net General Fund appropriations for FY 2022.
After the close of the fiscal year, once the 15 percent threshold is reached, no further transfers can be made to the BRF. If current projections hold, approximately $1.75 billion would be available to reduce unfunded pension liability. By statute, the State Treasurer decides what is in the best interest of the state, whether to transfer the excess balance as an additional contribution to the State Employee Retirement Fund (SERF) or to the Teachers' Retirement System (TRS).
Connecticut's budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends:
National job growth exceeded expectations in October after several months of disappointing growth. The Bureau of Labor Statistics (BLS) reported the U.S. added 531,000 jobs after adding 312,000 in September and 483,000 in August. This marks ten straight months of gains. Job growth occurred in leisure and hospitality (+164,000), professional and business services (+100,000), manufacturing (+60,000), and transportation and warehousing (+54,000). The government sector lost 73,000 jobs, with the highest loss in local government education (-43,400). Nonfarm payroll employment is up by 18.2 million since April 2020 but is down by 4.2 million, or 2.8 percent, from its pre-pandemic level in February 2020.
In September, in a trend labeled the "Great Resignation," a record high 4.4 million people voluntarily left their jobs, representing 3.0 percent of the U.S. workforce. Industries with the highest so called quits rate continued to include public facing sectors such as leisure and hospitality (accommodation and food services & arts, entertainment, and recreation), trade, transportation, and utilities (retail trade), and professional and business services. The Northeast had the lowest quit rate at 2.2 percent, followed by the Midwest (3.0%), the West (3.1%) and the South (3.3%).
In October, the national unemployment rate declined by 0.2 percentage points to 4.6 percent. This is still higher than pre-pandemic levels (3.5%) but demonstrates how fast unemployment has recovered compared to previous recessions. The COVID-19 virus created the highest national unemployment rate (14.8%) since the Great Depression (25.6%) yet rebounded to under 5 percent in less than a year and a half. The number of unemployed decreased to 7.4 million, inching closer to pre-pandemic levels (5.7 million).
The number of long-term unemployed people, those jobless for 27 weeks or more, decreased by 357,000 to 2.3 million, and account for 31.6 percent of the total unemployed in October. The labor force participation rate remained stagnant at 61.6 percent since June of 2020. This is concerning to economists because it's an indication that people who left the workforce due to COVID-19 may have left long-term. Early data suggests that the expiration of expanded federal unemployment benefits did not bring back workers as quickly as anticipated.
On November 18, the Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for October 2021 from the business payroll survey administered by the U.S. Bureau of Labor Statistics (BLS). DOL's Labor Situation report showed the state gained 5,300 net jobs (0.3%) in October to a level of 1,616,800 jobs seasonally adjusted. This follows job growth of 6,500 positions in September and represents ten consecutive months of employment gains. DOL reported Connecticut has now recovered 72.8 percent of the 292,400 jobs lost in March and April 2020 due to the COVID-19 lockdown.
On a month-to-month basis, DOL noted that six of the ten major industry sectors experienced improvement while four declined. Education and health services lead the way (+1,400 jobs), followed by financial activities (+1,300), and professional and business services (+1,300). Sectors that lost jobs include government (-600), construction and mining (-300), manufacturing (-300), and information (-100). Connecticut's official unemployment rate dropped to 6.4 percent in October, down from 6.8 percent a month earlier and 8.2 percent from a year ago.
On a year-over-year basis, seven sectors experienced gains and three experienced losses. The leisure & hospitality sector, hardest hit during the pandemic, experienced the largest gains (+13,300), growing 10.9 percent from a year ago. Information, financial activities, and government lost jobs over the same period. According to BLS, in September, Connecticut's quits rate was 2.5 percent, with 41,000 people leaving their job in one month. This represented a modest increase from the prior month's quits rate of 2.2 percent, but Connecticut's rate was still lower than the national average of 3.0 percent.
According to the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 2.1 percent in the third quarter of 2021. This second estimate revision included a 0.1 percent increase to the 2.0 percent advance estimate. This follows a 6.7 percent real GDP growth the second quarter.
BEA noted the third quarter results reflected the continued economic impact of the COVID-19 pandemic. A resurgence of COVID-19 cases resulted in new restrictions and delays in the reopening of establishments in some parts of the country. Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased.
Consumer spending is the main engine of the U.S. economy, accounting for more than two-thirds of total economic output. According to the U.S. Department of Commerce, advance retail sales were $638.2 billion in October, up 1.7 percent from September. This was higher than analysts expected due to inflation concerns and is the largest increase in since March. Sectors with the biggest gains included nonstore retailers (+4.0%), gasoline stations (+3.9), and electronics and appliance stores (+3.8%), which is in-line with holiday shopping trends. Sectors that experienced a step back included clothing stores (-0.7%) and health and personal care stores (-0.6%). Core retail sales increased 1.9 percent in October. This category excludes automobiles, gasoline, building materials and food services.
The U.S. consumer confidence index (CCI) is published by the Conference Board and looks at U.S. consumer's views of current economic conditions and their expectations for the next six months. The Conference Board reported that the CCI now stands at 109.5, down moderately from October's revised reading of 111.6. November's survey noted that rising prices was the primary reason for the decline in confidence among consumers, followed to a lesser degree by concerns about the Delta variant. At the same time, the Conference Board noted it expects the upcoming holiday season to be a good one for retailers, with the economic expansion continuing into early 2022. However, the report also noted the cutoff for this month's results was prior to recent news about the Omicron COVID-19 variant.
Connecticut's housing market continued its recent slow-down in October as sales, new listings, and average prices all decreased. Berkshire Hathaway HomeServices reported year over year sales of single-family homes decreased 26.75 percent and new listings were down 26.07 percent. Median sales price increased by 3.34 percent and median list price increased by 1.79 percent. However, average sales price declined by 6 percent and average list price dropped 7.44 percent. Average days on the market decreased to 39 days from 57 a year ago. On average, sales prices came in above list prices, with a list/sell price ratio of 100.8 percent. Inventory sits at a 1.8-month supply at the current sales pace, down from last month and last year.
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales increased a modest 0.8 percent to a seasonally adjusted annual rate of 6.34 million in October. Two of the four major U.S. regions had month-over-month sales increases. Year-over-year sales dropped 5.8 percent from October 2020 (6.73 million).
NAR reported the median existing-home price for all housing types was $353,900, up 13.1 percent from last year as prices increased in every region. This price growth marks 116 straight months of year-over-year gains dating back to March 2012. All regions of the country experienced price growth from a year ago. The largest regional gains on a percentage basis were in the South (+16.1%), followed by the Midwest (+7.8%), the West (+7.7%), and the Northeast (+6.4%).
My office also issues a Comprehensive Annual Financial Report as an accounting supplement to the budgetary report. This annual report 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 $1,072.2 million as of June 30, 2020. I will report the new unassigned fund balance figure for Fiscal Year 2021 no later than February of 2022 in accordance with U.S. Securities and Exchange Commission (SEC) requirements.
If you have any questions on this report, please do not hesitate to contact me.
Sincerely,
Kevin Lembo
State Comptroller