December 1, 2015
The Honorable Dannel P. Malloy
Governor of the State of Connecticut
Dear Governor Malloy:
I write to provide you with financial statements for the General Fund and the Transportation Fund through October 31, 2015.
The Office of Policy and Management (OPM) is projecting that the General Fund will close Fiscal Year 2016 with a deficit of $122.4 million, after accounting for $102.8 million in rescissions announced on September 18th . The deficit estimate has increased by $4 million this month due to the incorporation of the November 10th consensus revenue forecast. I believe that this projection falls within an acceptable range of estimation variance based on the positive economic trends that had been established as the state began Fiscal Year 2016 and, accounting for OPM's past success in achieving overall budgeted savings goals. However, I am very concerned about more recent disruptions to the state's positive economic trends. Of greatest concern are the last two consecutive months of state job losses and the related negative impact on the withholding portion of the income tax.
Withholding receipts are the largest single General Fund revenue source. They account for over 60 percent of total income tax receipts and about 40 percent of total General Fund revenue. In Fiscal Year 2005, as the economy continued to expand, the withholding portion of the income tax grew at a rate of 8.1 percent. Over the past three fiscal years, the growth in withholding has been below 4 percent. And, on a year-to-date basis through October of Fiscal Year 2016, it was up just 1.4 percent. If this trend does not improve in the near term, additional downward adjustments to revenue will be required. I therefore support the use of $350 million as a reasonable deficit mitigation target, which does not include the $102.8 million in September rescissions.
With the incorporation of the November consensus revenue forecast, General Fund revenues for Fiscal Year 2016 have been revised down by $217.5 million from the initial budget plan. The largest single revenue revision is to the income tax, which is down $189.4 million for reasons outlined above. A complete accounting of the revenue adjustments is contained on Exhibit C of this letter.
OPM has estimated Fiscal Year 2016 General Fund lapses at $303.4 million inclusive of rescissions. Over the last three fiscal years, General Fund lapses have averaged $326.4 million per year. Significant lapses have been realized in debt service due to low borrowing costs and the related bond premiums received by the State Treasurer. An increase in interest rates will limit the state's ability to realize future savings in debt service. I am hopeful that the ongoing budget negotiations will produce the policy revisions necessary for OPM to attain the lapse target included in the current projections.
The Transportation Fund is expected to close Fiscal Year 2016 with a balance of $187.4 million. This is an erosion of $25.4 million from last month's projection of the fund's balance. The major cause of the downward adjustment is the drop in gasoline prices.
The state is likely to continue to experience significant budget pressure until the withholding portion of the income tax resumes a normal expansionary growth trend. Part of the state's slow withholding growth can be attributed to the distribution of job gains by employment sector during this recovery. The financial services sector pays wages that are more than 50 percent above the statewide average for all sectors. However, the financial services sector remains 14,700 jobs (10 percent) below its pre-recession level. At the same time, the leisure and hospitality sector that pays wages that are 46 percent below the statewide average for all sectors has added 19,200 jobs (14 percent) to its pre-recession level.
There are additional budgetary risk factors that bear watching. Our state economy is linked to the national economy which, in turn, is dependent on the global economy. Global economic events have generally constrained domestic growth. China's economy (second largest in the world) has been slowing. In response, its central bank cut interest rates. Less oil demand from China as the economy slowed has produced a sharp drop in oil prices as well as coal and other commodities. As a result of less demand, oil costs have nearly halved over the past year. The cheaper oil, while benefiting U.S. consumers and the domestic economy, has damaged oil exporting economies that had been expanding such as Brazil and Russia, in addition to many Middle Eastern producers. The Eurozone economy has also struggled to grow advancing just 1.6 percent on an annual basis through the 3rd quarter of 2015.
Closer to home, according to the Department of Labor, preliminary October nonfarm employment estimates from the U.S. Bureau of Labor Statistics (BLS) payroll survey (seasonally adjusted) indicated that Connecticut lost 2,200 jobs in October bringing payroll employment to a level of 1,694,100. This is the second consecutive monthly decline in state nonfarm jobs. Connecticut is now estimated to have added 24,100 nonfarm positions over the last 12 months, which is a fairly typical gain during a period of moderate economic expansion.
Connecticut's unemployment rate was 5.1 percent in October; the national unemployment rate was 5.0 percent. Connecticut's unemployment rate has continued to decline from a high of 9.5 percent in October 2010. There are 97,000 unemployed job seekers in Connecticut. A low of 36,500 unemployed workers was recorded in October of 2000. The number of unemployed state workers hit a recessionary high of 177,200 in December of 2010.
According to a November report from the Connecticut Realtors, state single family home sales increased in October by 5.7 percent from October of last year. At the same time, median home prices fell slightly from $242,000 to $239,900.
National economic growth slowed in the third quarter advancing at a revised rate of 2.1 percent. This followed second quarter growth of 3.9 percent. Inventory reduction in the third quarter was the main cause of the drop. However since consumer demand remained strong, the inventory cut-back is assumed to be temporary.
I also issue 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 shortfall or unreserved fund balance in the General Fund was $727.2 million as of June 30, 2014. GAAP deficit reduction bonds in the amount of $598,500,000 were issued in Fiscal Year 2014 to reduce the shortfall. Results for Fiscal Year 2015 will be published at the beginning of the new calendar year.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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