September 1, 2021
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, 2021.
The enacted budget for Fiscal Year 2022 anticipates a General Fund surplus of $274.9 million at year end. In its first forecast of the new year, the Office of Policy and Management (OPM) has made some minor net revenue adjustments and is projecting that the General Fund will end Fiscal Year 2021 with a surplus of $275.3 million. This represents 1.3 percent of net General Fund appropriations. Overall, the revenue revisions netted to a positive $400,000 to reflect legislative changes that occurred after the adoption of the revenue schedule contained in Special Act 21-15. My office is forecasting 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 2022 operations with a $167.9 million surplus, consistent with the adopted budget plan. The current projections would leave a positive STF balance of $413.7 million on June 30, 2022. 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 $265.3 million, $10 million less than OPM. The difference is on the expenditure side of the budget, with OSC estimating a $10 million deficiency in the non-appropriated Adjudicated Claims account, which draws on resources of the General Fund. 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.
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 just over $3.4 billion for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. The statutory tax accruals are in the process of being finalized for FY 2021. OSC is currently projecting a $1.24 billion revenue volatility transfer to the Budget Reserve Fund (BRF), which will be completed later this month. When combined with the current balance of $3,012,941,643, the total in the BRF will total over $4.25 billion, which represents 20.5 percent of net General Fund appropriations for FY 2022.
Based on current law, any balances above the 15 percent threshold would result in additional contributions to either the State Employees Retirement Fund (SERF) or the Teachers’ Retirement Fund (TRF), depending on what the State Treasurer decides is in the best interest of the state. OSC is currently projecting the amount above BRF’s 15 percent threshold will be $1.14 billion. After decades of underfunding, a significant additional contribution of that size towards unfunded pension liability would be a welcome reversal from past practice and create more budgetary flexibility in future fiscal years.
I should caution that FY 2021 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 2021 but paid in FY 2022 back into the previous fiscal year. Preliminary reporting of unaudited operating results for FY 2021 will be presented in the September 30th monthly letter. Please note the General Fund surplus for FY 2021, which is not counted in the revenue volatility transfer above, would result in an additional contribution to SERF or TRF once the audit is completed.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends:
The national jobs and unemployment picture continued to brighten in July as the labor market improved. The Bureau of Labor Statistics (BLS) reported the U.S. added 943,000 jobs in July, a continued improvement from June’s revised estimate of +938,000. Notable job gains occurred in leisure and hospitality, local government education, and professional and business services. Nonfarm payroll employment is up by 16.7 million since April 2020, but is still down by 5.7 million, or 3.7 percent, from its pre-pandemic level in February 2020.
In July, the national unemployment rate declined by 0.5 percentage points to 5.4 percent, which is still higher than pre-pandemic levels (3.5%). In addition, the number of long-term unemployed people (those jobless for 27 weeks or more) decreased by 560,000 to 3.4 million, and account for 39.3 percent of the total unemployed in July. In recent testimony, Federal Reserve Chairman Jerome Powell acknowledged the near-term risk of the Delta variant on the nation’s economy, but still expected progress on the employment front.
On August 19th, the state Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for July 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 9,400 net jobs (0.6%) in July to a level of 1,600,300 jobs seasonally adjusted. This follows job growth of 1,500 positions in June and represents seven consecutive months of employment gains.
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 on a percentage basis, growing 24.5 percent from a year ago. This was followed by other services (+11 percent) and trade, transportation & utilities (+4.7 percent). Information, financial activities, and manufacturing sectors lost jobs over the same period.
Connecticut reached its pandemic-related employment low in April 2020. The state’s total payroll employment is now 75,300 positions higher than July 2020, representing an increase of 4.9 percent. Connecticut has now recovered 67.2 percent of the 292,400 jobs lost in March and April 2020 due to the COVID-19 lockdown. Connecticut's official unemployment rate stood at 7.3 percent in July 2021, down from 7.7 percent a month earlier and 11.3 percent from a year ago.
Twenty-six states, not including Connecticut, have already ended supplemental federal unemployment benefits between June and July to encourage people to get back to work. However, many economists argue that factors related to the pandemic are keeping some people from re-joining the labor market, not unemployment benefits. Factors including health and safety concerns, lack of childcare, early retirement, and switching industries are keeping unemployment higher than anticipated. In Connecticut, for the week ending August 7th, continued claims (not seasonally adjusted) for the Pandemic Unemployment Assistance (PUA) program totaled 22,174. For the Pandemic Emergency Unemployment Compensation Program (PEUC), continued claims totaled 59,560. As of September 4th, these programs will no longer be available.
According to an August 26th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 6.6 percent in the second quarter of 2021. This follows a 6.3 percent real GDP increase in the first quarter of 2021. BEA noted the second quarter results reflected the continued economic recovery, reopening of establishments, and continued government response related to the COVID-19 pandemic.
Consumer spending is the main engine of the U.S. economy, accounting for more than two-thirds of total economic output. On August 17th, the U.S. Department of Commerce reported that U.S. advance retail sales were $617.7 billion in July, down 1.1 percent from June. This was a larger drop than analysts expected, possibly due to rising number of COVID-19 cases.
The Conference Board reported that the Consumer Confidence Index dropped in August for the second month in a row after July’s results were revised downward. The Index now stands at 113.8, a decrease from July’s revised reading of 125.1. Consumers expressed concerns about the Delta variant of COVID-19, as well as rising gas and food prices.
For Connecticut’s housing market, sales declined in July while prices continued to rise. Berkshire Hathaway HomeServices reported year over year sales of all property types decreased 10.75 percent and new listings were down 12.17 percent. However, median sales price increased by 13.33 percent and the median list price increased by 9.97 percent. Average sales price increased 24.71 percent indicating a strong market for higher priced homes. At the same time average days on the market decreased 50.72 percent - 34 days in July 2021 compared with 69 days in July of 2020. On average, sales prices came in above list prices, with a list/sell price ratio of 102.8 percent.
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales increased 2.0 percent to a seasonally adjusted annual rate of 5.99 million in July. Three of the four major U.S. regions had month-over-month sales increases in July and year-over-year sales were up 1.5 percent from a year ago.
NAR reported the median existing-home price for all housing types was $359,900, up 17.8 percent from July 2020 as prices increased in every region. July’s national price growth marks 113 straight months of year-over-year gains dating back to March 2012. All regions of the country experienced double-digit price growth from a year ago. The largest regional gains on a percentage basis were in the Northeast (+23.6%), followed by the South (+14.4%), the Midwest (+13.1%), and the West (+12.5%). July’s inventory increased 7.3 percent from the previous month, with 1.32 million homes for sale offering some relief from the recent tight inventory conditions.
My office also issues a Comprehensive Annual Financial Report as an accounting supplement to the budgetary report. The annual report for FY 2020 was published on February 19, 2021 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.
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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