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February 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 December 31, 2020.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2021 with a surplus of $137.6 million, an improvement of $777.8 million from last month’s estimate. This projected surplus represents 0.7 percent of net General Fund appropriations. The change from last month is primarily due to net improvements in revenues of $743.6 million as reflected in the January 15, 2021 consensus revenue forecast reached between OPM and the Office of Fiscal Analysis (OFA). This change was combined with $34.2 million in lower anticipated net spending requirements. My office is estimating a General Fund surplus that is lower by $10 million for the reasons described below.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2021 operations with a $59.5 million deficit, an improvement of $1.1 million from last month. The current projections would leave a positive STF balance of $108.9 million at year-end. My office is in general agreement with OPM’s STF forecast.
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 projecting a General Fund surplus of $127.6 million, $10 million lower than OPM’s estimate due to higher anticipated adjudicated claims payments.
On the revenue side, my office is in general agreement with the January 15th consensus revenue forecast. Revenue estimates earlier in the fiscal year were largely formulated at the end of April, during the early days of the pandemic when U.S. economic activity saw its largest drop on record. As a result, the revenue schedule reflected a worst-case scenario that has not continued into future quarters. Since then, due to better than expected collection trends and an improved outlook for the balance of the fiscal year, projections for all major tax categories showed significant improvements in the consensus forecast. At the same time, most of these tax categories still lag behind the targets set in the original budget plan and, overall, General Fund revenues are still $490.8 million below than the adopted budget for FY 2021.
Due to the unpredictable nature of the pandemic and its impact on the state economy, my office will continue to monitor revenue collections closely and revise these projections as necessary. Looking forward, the next key checkpoint will be the state’s April tax filing period.
Reflecting the strength of financial markets in calendar 2020, the largest dollar change in the consensus forecast was a $294.4 million improvement in the estimated and final payments portion of the income tax. This was followed by a $235 million increase in income tax withholding receipts. The Sales and Use Tax was revised upward by $195.5 million on the strength of updated collection trends and the Corporations Tax was raised by $91.3 million. The Pass-through Entity Tax was increased by $150.6 million making it the single major tax category that now exceeds its initial budget target. Finally, largely due to enhanced Federal matching (FMAP) for Medicaid, Federal grant revenues were increased by $126.8 million. The full statement of estimated and realized General Fund revenue is attached in Exhibit C.
The statutory revenue volatility cap requires receipts above a certain threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2021, the cap is $3,404.9 million for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. If current projections are realized, a $355.1 million volatility transfer would be made to the BRF.
The balance of the BRF presently stands at $3,012,941,643. Adding the estimated $355.1 million volatility transfer, plus the projected FY 2021 surplus of $127.6 million would bring the year-end balance of the BRF to approximately $3.49 billion, or approximately 17.4 percent of net General Fund appropriations. Based on current law, any balances above the 15 percent threshold would result in additional contributions to either the State Employees Retirement Fund or the Teachers’ Retirement Fund, depending on what the State Treasurer decides is in the best interest of the state.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Over the past several months, as Federal relief programs have expired and coronavirus cases have increased nationwide, the recovery has begun to slow. While the recently enacted Federal COVID relief package is smaller and less comprehensive than needed, it should help strengthen the economy in the early months of 2021 as the coronavirus vaccine roll out begins. Recent economic indicators include the following trends:
Throughout December and into January, the nation continued seeing high levels of initial unemployment insurance (UI) claims by historical standards. For the week ending January 23rd the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled 847,000. This represents a decrease of 67,000 from the previous week's revised level and somewhat lower than economists predicted. Still the jobs picture looking forward remains uncertain based on the number of coronavirus cases nationwide and ongoing restrictions imposed by states to combat the pandemic. The current level of initial UI claims is four times higher than totals seen before the coronavirus hit. Prior to the pandemic, initial UI claims averaged closer to 210,000 per week. In the same release, BLS reported the number of individuals receiving unemployment benefits (all programs) was approximately 18.3 million for the week ending January 9th, up from 16.0 million the previous week.
After Connecticut experienced historic levels of employment losses this March and April, the state began regaining jobs over the following six months. Unfortunately, over the last two months, this the employment recovery appears to have has stalled. On January 25th, Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for December 2020 from the business payroll survey administered by the U.S. Bureau of Labor Statistics (BLS). DOL’s Labor Situation report showed the state lost 3,400 net jobs (0.2%) to a level of 1,590,800 jobs seasonally adjusted. At the same time, the preliminary November 2020 job loss of 1,600 was revised downward by an additional 1,800 jobs.
As part of its analysis, DOL pointed out a noteworthy distinction in the December job numbers: The goods producing sector made up of manufacturing and construction gained 3,000 jobs while the service producing sector lost 6,400 jobs. The largest losses in December were in accommodation & food service and the government sector.
Despite overall gains since March and April, Connecticut’s employment level is still significantly down on a year-over-year basis. Compared with December 2019, nonagricultural jobs in the state fell by a net 102,700 positions (-6.1 percent) below one year ago seasonally adjusted. The leisure & hospitality sector remains particularly hard hit, losing nearly one-fifth of its jobs for the period, followed by the other services and the government sectors. Connecticut's official unemployment rate stood at 8.0 percent in December 2020, down from 8.2 percent a month ago, but significantly higher than the 3.8 percent rate a year ago.
According to a January 28th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 4.0 percent in the fourth quarter of 2020, according to BEA’s advance estimate. This level of growth was slightly lower than anticipated.
For the full 2020 calendar year, BEA reported real GDP decreased 3.5 percent after increasing 2.2 percent in 2019. Analysts noted 2020 was the worst year for economic growth since 1946 as the nation demobilized after World War II. The drop in GDP primarily reflected decreases in consumer spending, exports, inventory investment, and business investment that were partially offset by increases in housing investment and government spending. Imports, a subtraction in the calculation of GDP, decreased. The drop in consumer spending for 2020 was concentrated in the service sector, reflecting the nation’s response to the coronavirus pandemic and was led by declines in food services and accommodations, health care, and recreation services.
The Conference Board reported that the Consumer Confidence Index rose somewhat in January after a significant decline in December. The Index now stands at 89.3, up from 87.1 in December, which represented a four-month low. Despite the improvement, consumer confidence remains still well below its pre-pandemic level. The index is closely watched by economists because consumer spending accounts nearly 70 percent of U.S. economic activity. While consumers were more pessimistic about the present state of the economy, their expectations were more optimistic about business and labor market conditions over the next six months, which was attributed to the greater availability of vaccines that could lead to a broader economic recovery.
Continuing a trend from recent months, Berkshire Hathaway HomeServices reported another month of very strong results for the Connecticut housing market in December 2020 compared with December 2019. Sales of single-family homes increased by 39.83 percent, with the median sale price increasing by 23.22 percent. In addition, year-to-date sales through December 2020 were up 20.09 percent compared with 2019 results. New listings were up 22.08 percent this December versus last year, with the median list price up 18.61 percent. At the same time, average days on the market decreased 35.37 percent in December 2020 compared to the same month in the previous year (53 days on average compared with 82 in December 2019).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales rose in December 2020, reaching their highest level since 2006 before the Great Recession. The four major U.S. regions had mixed results in terms of month-over-month sales, but each region experienced significant year-over-year growth. Total existing-home sales increased 0.7 percent from November to a seasonally adjusted annual rate of 6.76 million in December. Sales in total rose year-over-year, up 22.2 percent from a year ago (5.53 million in December 2019).
Nationally, home prices have remained strong during the pandemic. NAR reported the median existing-home price for all housing types in December was $309,800, up 12.9 percent from December 2019 ($274,500), as prices increased in every region of the country. December's national price increase marks 106 straight months of year-over-year gains. One factor driving housing prices is a historically low level of housing inventory. NAR notes total housing inventory at the end of December totaled 1.07 million units, down 16.4 percent from November and down 23 percent from one year ago (1.39 million).
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. I will report the new unassigned fund balance figure for Fiscal Year 2020 no later than February 28, 2021 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
To view the data in Excel format, click here:
General Fund: A-D
Transportation Fund: E-H