February 1, 2017
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 December 31, 2016.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2017 operations with a surplus of $23.3 million, which is an improvement from last month of $64.9. The improved outlook is due primarily to January 17th consensus revenue projections that increased General Fund receipts by $56.7 million. OPM is also expecting net General Fund expenditures to fall $8.2 million below last month's figure. The Transportation Fund is projected to end Fiscal Year 2017 with a balance of $125.7 million, after accounting for the Fiscal Year 2016 retained balance in the fund of $142.8 million. This represents an erosion of $17.1 million dollars through operations in this fiscal year.
Based on my analysis of current spending and revenue patterns, I am projecting a General Fund surplus of approximately $8.7 million this fiscal year. My variance from OPM is due to anticipated higher spending in the adjudicated claims account. OPM has estimated claims expenditures to be $9 million in the current fiscal year; I am projecting outlays of $23.6 million, which is $14.6 million higher than OPM, if settlement payments are not delayed. Continued active budget management will be required to keep the General Fund budget in balance. I am in agreement with OPM's Transportation Fund projections.
This letter reflects the January 17th consensus revenue figures that were agreed to by OPM and the Office of Fiscal Analysis. Based on the new General Fund projections, the most significant revenue shortfalls from the original Fiscal Year 2017 budget plan are in the income tax (down $81.5 million) and the sales tax (down $79.3 million). The largest tax revenue gain from the initial budget target is in the corporation tax (up $80 million). Actual receipts for the corporation tax were stronger than anticipated for the first two quarters of Fiscal Year 2017. The miscellaneous revenue category has grown by $111.5 million this fiscal year largely due to one-time settlement payments made to the state. Overall General Fund revenue for Fiscal Year 2017 exceeds the budget plan by $10.8 million. A complete analysis of General Fund revenue changes for Fiscal Year 2017 is presented on Exhibit C to this letter.
I am concerned that the January consensus forecast relies on strong April
income tax receipts. Estimated income tax payments through January were below
last fiscal year's receipts. Typically, final April payments trend in the same
direction as estimated payments. However because of stock market corrections and
subdued bonus payments in the 2015 tax year, a large number of taxpayers may be
eligible to utilize safe harbor provisions of the tax code. The safe harbor
provisions allow taxpayers to delay the payment of their full 2016 tax liability
until April of 2017 (rather than incorporating the payment into their 4th
quarter 2016 estimated payments).
This would help to explain why estimated payments remain negative despite a strong stock market run-up in the final months of the 2016 tax year. In addition to the uncertainty with respect to final income tax payments in April, the growth in the payroll driven withholding portion of the income tax has been slowing. Therefore, income tax receipts remain a significant risk factor to the current surplus projections.
OPM is currently estimating that General Fund expenditures will exceed the budget by a net of $10.2 million. Because of my higher adjudicated claims estimate as discussed above, I am assuming spending will exceed the budget plan by a net of $24.8 million. It is worth noting that through December of the current fiscal year, General Fund spending was running 2.1 percent or $161.3 million below the same period last fiscal year. A continuation of this trend could help offset the higher adjudicated claims estimate and mitigate potential future revenue shortfalls. OPM’s spending changes are outlined on Exhibit D of this letter.
Connecticut's overall budget performance is ultimately dependent upon the performance of the national and state economies. Preliminary Connecticut nonfarm job estimates from the business establishment survey administered by the US Bureau of Labor Statistics (BLS) show the state lost 1,700 payroll jobs in December 2016 to a level of 1,678,000, seasonally adjusted. It should be noted that while the establishment survey has been showing deterioration in the Connecticut job market in several months of 2016, the household census survey used to calculate the unemployment rate has been pointing to job gains throughout 2016. The establishment survey on job growth is benchmarked annually. Connecticut has experienced some significant adjustments to these statistics in past years. The benchmarked employment figures will be available in mid-March. The state’s unemployment rate fell to 4.4% in December.
Connecticut ranked eleventh nationally in income growth for the third quarter of 2016 based on personal income statistics released by the Bureau of Economic Analysis on December 20th. The state's personal income was growing at an annualized 4.9 percent rate in the third quarter of the year. This growth rate exceeds that of the prior year.
According to a January 24th release from CT Realtors, Connecticut single-family residential home sales increased 2.4 percent in December 2016 from the same month a year earlier. The median sale price also posted an increase of 3.6 percent to $248,750. This marks the fourth consecutive month of price increases, and it reverses a persistent trend of monthly declines in home prices over the past several years. Townhouse and condominium sales increased 12.4% in December and prices increased 14.1% to $166,000.
According to the January 27th advance estimate from the Bureau of Economic Analysis, GDP in the 4th quarter of 2016 grew at a 1.9 percent annual rate. The growth rate in the 3rd quarter was 3.5 percent.
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 unassigned fund balance in the General Fund was a negative $998.9 million as of June 30, 2016.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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