OSC Letterhead

June 1, 2017

The Honorable Dannel P. Malloy
Governor of the State of Connecticut
State Capitol
Hartford, Connecticut

Dear Governor Malloy:

I write to provide you with financial statements for the General Fund and the Transportation Fund through April 30, 2017.

The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2017 operations with a deficit of $322.7 million. This is an improvement of $67.1 million in the General Fund's position from last month. The improvement is the result of your May 10th rescissions and other lapse savings. The Transportation Fund is expected to retain a balance of $106.1 million at the close of Fiscal Year 2017. This is a reduction of $36.7 million in the fund's balance from Fiscal Year 2016.

The Budget Reserve Fund has a current balance of $235,582,921, which is not sufficient to cover the current General Fund deficit projection. The impact of accruals after June 30th could alter the current projections. The state should avoid using economic recovery notes to finance any residual Fiscal Year 2017 deficit. It is likely that interest rates will be rising, and the state is still making debt service payments on $915.8 million in recovery notes that were issued in accordance with Public Act 09-2. A portion of those notes were refinanced in October 2013. The remaining balance on the notes at the end of Fiscal Year 2016 was $352.6 million, with a Fiscal Year 2017 payment of $167.7 million.

I am projecting a General Fund deficit of $325.4 in Fiscal Year 2017. My small variance from OPM is due to my expectation for higher adjudicated claims payments before the close of Fiscal Year 2017. I am in agreement with OPM’s Transportation Fund estimate.

Fiscal Year 2017 has seen continued revenue deterioration from initial budget estimates. Most notably, the income tax is expected to fall $532.2 million short of the budget plan, which will result in receipts that are more than 2 percent below last fiscal year. Connecticut began to phase in the income tax in the early 1990s. Income-tax growth averaged 9 percent a year from 1993 through 2008. Since then, the average has been 2 percent a year. Two income tax increases were enacted, in 2011 and 2015, raising the top rate to 6.99 percent.

According to the Department of Revenue Services (DRS), after each of the past two income-tax increases the average tax liability for the state's wealthiest residents increased in one year and then fell the next. This pattern suggests those wealthy residents either adjusted their tax strategies or earned less money in the down years. More recently, DRS reported $200 million of the drop in income tax receipts this April came from the state's closely monitored top 100 income earners. One reason may be that investors are relying more heavily on tax efficient vehicles such as Exchange Traded Fund (ETFs) to minimize taxes on capital gains. In the United States, ETF assets increased from $157 billion in 2003 to $2.8 trillion by March of 2017.

The state has also been losing population since 2013. According to U.S. census data, Connecticut saw a decline in population of 8,278 residents between July 1, 2015 and July 1, 2016. All these factors place downward pressure on state tax receipts.

Turning to the expenditure side of the General Fund in Fiscal Year 2017, net expenditures are currently estimated to be $57.1 million below the budget plan. Through April of Fiscal Year 2017, year-to-date expenditures are trending slightly below the same period last fiscal year. Notably, the state payroll is running 7 percent below last year's level. OPM is presently estimating that General Fund appropriation lapses will total $308.6 million in Fiscal Year 2017.

Connecticut's overall budget performance is ultimately dependent upon the performance of the national and state economies.

The business payroll survey showed that the state lost 1,500 net jobs (-0.1%) in April 2017, to a level of 1,683,200, seasonally adjusted. The March preliminary job gain numbers were revised downward from 1,300 added positions to an increase of 600 jobs. Over the past twelve month period ending in April, the state has posted 5,500 new payroll jobs, which is far below the growth level recorded in previous economic expansions.

Average hourly earnings in Connecticut at $31.84, not seasonally adjusted, were up $1.32, or 4.3 percent, from the April 2016 estimate ($30.52). The resultant average Private Sector weekly pay amounted to $1,073.01, up $53.64, or 5.3 percent higher than a year ago.

According to a May 24th report from CT Realtors, the sale of single-family residential homes in Connecticut decreased by 5.4 percent in April 2017 from the same month a year earlier. The median sales price of a home also fell slightly from $247,000 to $246,000. Connecticut has been in a sustained period of sales volume gains since 2012 so April's decline is an anomaly.

According to data provided by the United States Census Bureau on May 12, 2017, U.S. consumers increased their spending in April at auto dealers, hardware stores and e-commerce outlets as retail sales rebounded from two sluggish months. Retail sales increased 0.4 percent in April from March. Sales were up just 0.1 percent in March and fell in February.

On May 11, 2017 the Bureau of Economic Analysis released its data on GDP by state through the fourth quarter of 2016. Between 2013 and 2016, Connecticut's GDP grew at an annual rate of 1 percent ranking the state 32nd nationally in growth. Between 2015 and 2016, Connecticut's GDP also grew at a 1 percent rate. However, growth accelerated between the third and fourth quarters of 2016 with annualized growth of 2 percent. The strongest contributor to GDP growth came from the finance and insurance sector. This sector has been adding jobs recently, but still remains 14,400 below its pre-recession payroll employment level. Nationally, real GDP in the first quarter of 2017 grew at a 1.2 percent annual rate. In the fourth quarter of 2016 GDP grew at a 2.1 percent rate.

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.

Sincerely,

Kevin Lembo
State Comptroller

To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H

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