June 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 April 30, 2022. The Office of the State Comptroller (OSC) is projecting the General Fund will end Fiscal Year 2022 with a $956.4 million surplus, a $1.18 billion decrease from last month’s projection, and the Special Transportation Fund will end Fiscal Year 2022 with a $200.2 million surplus, a $118.9 million decrease from last month. These decreases are primarily due to the impact of HB 5506, the legislature’s adjustments to the FY22-23 budget which are detailed below.
The following analysis of the financial statements furnished by the Office of Policy and Management (OPM) is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
On May 20, 2022, OPM projected that the General Fund will end Fiscal Year 2022 with a surplus of $956.4 million and the Special Transportation Fund will end Fiscal Year 2022 with a surplus of $200.2 million. The Office of the State Comptroller is in general agreement with OPM’s General Fund and Special Transportation Fund projections which reflect the consensus revenue forecast reached with the Office of Fiscal Analysis (OFA) on May 2, 2022, and the passage of HB 5506, an Act Adjusting the State Budget for Fiscal Year 2022-2023.
The net $1.18 billion decrease in the General Fund surplus is due to reduced revenue by a net $758.9 million and increased expenditures by a net $421.1 million.
The $758.9 net change in revenue is due to an increase in revenue of $205 million offset by a reduction of $963.9 million. Projected revenue for the estimated and finals portion of the income tax was revised upward by $100 million, the pass-thru entity tax was revised upward by $75 million, and the inheritance and estate tax was revised upward by $30 million for a total increase of $205 million. These revised projections are due to better than estimated collections. $175 million of this revenue is subject to the revenue volatility cap, and therefore will not add to the General Fund surplus but increase the projected volatility transfer to the Budget Reserve Fund discussed below. These increases are offset by reductions in revenue due to the passage of HB 5506. The budget bill eliminated $559.9 million of American Rescue Plan Act (ARPA) revenue that was built into the original FY22 budget plan. The bill also transfers $125 million from FY22 to FY23 to fund the one-time Child Tax Credit and transfers $83.2 million of federal grant revenue from FY22 to FY23 for the Home and Community Based Services (HCBS) Medicaid program. An additional $20.8 million of transfers from FY22 is included.
The $421.1 million net change in expenditures is due to carryforwards and deficiency transfers from HB 5506 and anticipated Finance Advisory Committee (FAC) action prior to June 30, 2022. An additional requirement of $30 million is expected for my office due to expenditures within the adjudicated claims account. HB 5506 also utilizes $294.8 million from FY22 lapsing funds to support the State Employees Bargaining Agent Coalition (SEBAC) agreement and other higher education projects.
The net $118.9 million decrease in the Special Transportation Fund surplus is due to a $10 million reduction in revenue and a net $108.9 million increase in expenditures.
Revenue from the licenses, permits, and fees tax was revised downward by $10 million due to weaker than anticipated collections. The increase in expenditures this month is primarily due to a carryforward provision of $100 million in the Department of Transportation’s Bus and Rail account to support the Infrastructure Investment and Jobs Act (IIJA) matching in FY23. Current projections would leave a positive Special Transportation Fund balance of $441.3 million on June 30, 2022.
The statutory revenue volatility cap requires receipts above a certain level to be transferred to the Budget Reserve Fund (BRF). For FY22, the cap is just over $3.5 billion for Estimated and Final Income Tax payments and revenue from the Pass-through Entity Tax. The balance in the BRF presently stands at $3.11 billion, which represents the statutory threshold of 15 percent. Adding the revised revenue volatility transfer of $2.8 billion and the projected surplus of $956.4 million would bring the BRF balance to $6.9 billion or 31 percent of net General Fund appropriations for FY23.
After the close of the fiscal year, since the 15 percent threshold has already been reached, no further transfers can be made to the BRF. If current projections hold, approximately $3.6 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:
The U.S. added 428,000 jobs in April while the unemployment rate remained at 3.6%. A record 4.5 million Americans quit their job amid a record 11.5 million job openings—there are approximately two job openings for every one unemployed person nationally. Due to increased demand for labor, nominal wages continue to rise, however due to high inflation, real earnings have declined. National unemployment claims ticked up from their 53-year low of 166,000 in March but remain historically low. Connecticut added 1,600 jobs in April while the state’s unemployment rate fell to 4.4%. The state has recovered 82.1% of the jobs lost during Covid-19 while the labor force participation rate continues to grow.
Inflation grew at a slower rate in April, coming in at an annual rate of 8.3%. The Federal Reserve increased rates for a second time in May by 50 basis points and are expected to continue to raise rates steadily throughout the year in an attempt to quell inflation and avoid triggering a recession. The stock market plummeted in May with the S&P briefly entering a bear market before rebounding. Investors are concerned about a looming recession, inflation and shifting monetary policy. However, consumer spending increased this month, not solely due to inflation as demand for both goods and services remained strong. Households dipped into savings as the personal saving rate declined to the lowest rate since 2008. More detailed economic data can be found in the monthly economic outlook.
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 $660,749 as of June 30, 2021.
If you have any questions on this report, please do not hesitate to contact me.