February 1, 2022
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 December 31, 2021.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2022 with a surplus of $1,483.3 million, an increase in $571.4 million from last month. The projected surplus represents 7.1 percent of net General Fund appropriations. The improvement is due to a combination of higher revenues from the January 18th consensus forecast reached between OPM and the Office of Fiscal Analysis (OFA) and lower anticipated expenditures.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2022 operations with a $269.7 million surplus, a $14.8 million increase from last month. The net change is based on $18.5 million in revenue improvements from the consensus forecast combined with $3.7 million in higher expenditures. Current projections would leave a positive STF balance of $510.8 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 December 31, 2021. As the state’s economy has improved during FY 2022, so has the General Fund’s operating results to date. As noted, the $571.4 million improvement in the General Fund surplus was partly based on higher projected revenues from the recent consensus forecast, which increased revenues by a net $363 million or 1.7 percent over OPM’s December 2021 estimates. Four major tax categories saw significant increases as the economic recovery continues to take hold. The withholding portion of the Personal Income Tax was raised by $255 million reflecting job growth in recent months and better than expected receipts to date. The Sales and Use Tax grew by $137.5 million as collections continue to exceed budget targets. In addition, both the Corporation Tax (+$85 million) and the Real Estate Conveyance Tax (+$50 million) were revised upward. In the other revenue category, lottery transfers to the General Fund increased by $9.8 million. The only reductions to revenue were in higher projected tax refunds, up $80.0 million, and Federal grants revenue which declined $94.3 million primarily due to shifts in timing between fiscal years.
For this month’s projection, estimated lapses have increased in several General Fund accounts, leading to $208.4 million in lower net projected spending. The largest change is for the Department of Social Services ($113.9 million) due to the extension of the public health emergency through June 30, 2022, and continuation of the enhanced federal contribution has reduced the General Fund’s portion of Medicaid costs. In addition, OPM projected savings of $55 million in the Department of Correction’s personal services account due to public safety related offsets from Federal Coronavirus Relief Funds. The State Treasurer’s debt service accounts are projected to lapse $39.7 million due to lower interest rates in the most recent bond offering. The fringe benefit appropriations administered by my office are projected to lapse a net $20.1 million due to improved expenditures trends in several accounts. These savings were partially offset by a $49.5 million deficiency in the Department of Administrative Services other expenses account due the emergency purchase of COVID-19 rapid test kits and personal protective equipment.
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 $1.48 billion would bring the BRF balance to $5.56 billion or 26.8 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 $2.33 billion would be available to reduce unfunded pension liability and other types of debt. 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 or to the Teachers' Retirement Fund.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends:
National employment growth slowed in December as a surge in COVID-19 cases continued due the spread of the omicron variant. The Bureau of Labor Statistics (BLS) reported the U.S. added 199,000 jobs after adding 249,000 in November and 648,000 in October. However, despite lower-than-expected growth, this marks twelve straight months of improvements. Job gains occurred in leisure and hospitality (+53,000), professional and business services (+43,000), and trade, transportation, and utilities (+30,000). Only the government sector declined month over month (-12,000) with losses specifically in state and local non-education jobs. Nonfarm payroll employment is up by 18.8 million since April 2020 but is down by 3.6 million, or 2.3 percent, from its pre-pandemic level in February 2020.
In December, the national unemployment rate declined by 0.3 percentage points to 3.9 percent. This is still slightly higher than pre-pandemic levels (3.5 percent) but demonstrates how fast unemployment has recovered compared to previous recessions. The COVID-19 virus created the highest national unemployment rate (14.8 percent) since the Great Depression (25.6 percent) yet rebounded to under 5 percent in less than a year and a half. The number of unemployed people decreased to 6.3 million, edging closer to pre-pandemic levels (5.7 million). The number of long-term unemployed people, those jobless for 27 weeks or more, decreased to 2 million, and account for 31.7 percent of the total unemployed in December. The labor force participation rate was 61.9 percent changing little since June of 2020.
On January 24, the Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for December 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 600 net jobs (0.04 percent) in December to a level of 1,622,000 jobs seasonally adjusted. This follows job growth of 2,800 positions in November and represents twelve consecutive months of employment gains. However, November’s employment growth was revised downward from the 5,800 jobs initially reported last month. Connecticut has now recovered 74.6 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. Manufacturing led the way (+800), followed by other services (+600), and education and health services (+400). Manufacturing employment has increased for six consecutive months. Trade, transportation, and utilities (-1,000), professional and business services (-700), information (-100), and leisure and hospitality (-100) lost jobs month over month. Connecticut's official unemployment rate dropped to 5.8 percent in December, down from 6 percent a month earlier and 8.2 percent from a year ago. On a year-over-year basis, eight sectors experienced gains and two experienced losses. The leisure & hospitality sector, hardest hit during the pandemic, experienced the largest gains (+15,900), growing 13.4 percent from a year ago. Information and financial activities lost jobs over the same period.
According to the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 6.9 percent in the fourth quarter of 2021. This follows a 2.3 percent real GDP increase in the third quarter. Fourth quarter growth was better than economists expected. Gains came from increases in retail and wholesale inventory investment, strong consumer spending on goods and services, exports, and business investment. These were partly offset by decreases in both federal and state & local government spending. With the strong fourth quarter results, U.S. GDP growth for the full 2021 calendar year was 5.7 percent, the highest annual increase since 1984.
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 $626.8 billion in December, down 1.9 percent from November, and up 16.9 from December of last year. This month over month decrease was larger than analysts expected due to the holiday shopping season, and some pointed to higher prices to explain the decline in sales. Most sectors experienced a step back in December including online retailers (-8.7 percent), furniture stores (-5.5 percent), and sporting goods, hobby, musical instrument and book stores (-4.3 percent). Sectors with gains included miscellaneous store retailers, building material and garden equipment, and health and personal care stores. Core retail sales, a category that excludes automobiles, gasoline, building materials and food services, decreased 2.1 percent.
Connecticut’s housing market experienced mixed results in December as sales and new listings declined while prices increased across the board. Berkshire Hathaway HomeServices reported year over year sales of all property types decreased 18.66 percent and new listings were down 17.87 percent. Median sales price increased by 7.08 percent and median list price increased by 6.67 percent. Average sales price increased 3.66 percent and average list price increased 2.51 percent. Average days on the market decreased to 46 days from 55 a year ago. On average, sales prices came in above list prices, with a list/sell price ratio of 100.7 percent. Inventory sits at a 1-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 decreased 4.6 percent to a seasonally adjusted annual rate of 6.18 million in December. All four major U.S. regions had month-over-month and year-over-year decreases in sales. Year-over-year sales decreased 7.1 percent from December 2020 (6.65 million). However, for calendar year 2021, existing-home sales totaled 6.12 million, an increase of 8.5 percent from 2020 and the highest annual level since 2006.
NAR reported the median existing-home price for all housing types was $358,000, up 15.8 percent from last year as prices increased in every region. This price growth marks 118 straight months of year-over-year gains dating back to March 2012, the longest-running streak on record. All regions of the country experienced price growth from a year ago. The largest regional gains on a percentage basis were in the South (+20.2%), followed by the Midwest (+10.0%), the West (+8.4%), and the Northeast (+6.3%). December’s inventory totaled 910,000 units, down 18 percent from November and down 14.2 percent from one year ago. Unsold inventory sits at a 1.8-month supply at the current sales pace, below the desired pace of six months.
My office also issues an Annual Comprehensive 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. OSC will report the new unassigned fund balance figure for Fiscal Year 2021 later this month 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.