OSC Letterhead

October 2, 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 August 31, 2017.

The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2018 operations with a deficit of $93.9 million, no change from last month's estimate. OPM notes that the proposed plan to offset this shortfall would be to transfer $94.5 million in unspent funds from the Municipal Revenue Sharing Account, an action that would require legislative approval. The Transportation Fund is projected to have a Fiscal Year 2018 ending balance of $130.0 million, which represents a decrease of $5.3 million from OPM's July’s forecast.

Due to the continued absence of a budget for Fiscal Year 2018, these estimates are made under the provisions of your Executive Order 58, as revised on August 18, 2017. Expenditures projections for Fiscal Year 2018 reflect the spending reduction authority that you have assumed under the executive order, which gives you significant control over future spending in discretionary program areas. This power should allow you to meet your current savings targets. Revenue projections for Fiscal Year 2018 utilize the May 1, 2017 consensus forecast revised by Public Act 17-51 and your order. These adjustments to the consensus forecast combine to add a net $74.9 million to revenue.

Fiscal Year 2018 General Fund expenditures through August reflect a problem that the state will face throughout the fiscal year. Year-to-date spending through August was 7.2 percent higher than the same period last fiscal year. Spending in discretionary areas is running lower than last year’s pace in almost all cases. Examples of vital programs have faced significant cuts include Grants for Substance Abuse Services; Mental Health Service Grants; the Connecticut Home Care Program, Aid to the Disabled; Employment Opportunities; and the Early Care and Education program.

At the same time, expenditures for fixed costs continue to rise and are driving the growth in FY 2018 outlays. Debt service payments were up $139.1 million from last year through August, and contributions to the Teachers Retirement Fund increased by $69.6 million. The combination of rising retirement health costs, higher contributions for state employee retirement, and the new state employer matching contribution for other post-employment benefits all factored into this growth, adding an additional $41.3 million over last year. Implementation of the provisions of the SEBAC 2017 agreement will start to mitigate these costs as the fiscal year progresses, but these trends will need to be monitored closely.

The current General Fund spending plan for Fiscal Year 2018 remains close to last fiscal year’s spending levels. As noted in last month’s letter, higher fixed costs will require more drastic reductions to discretionary programs in the absence of policy changes that generate additional revenue. The state's municipalities, non-profit providers, and Connecticut residents, including the most vulnerable, depend on discretionary program spending for critical services and to enhance the quality of life.

As you note in your executive order, the state's capacity to meet its spending obligations is impaired by the inability to enact a budget that provides for policy changes that increase revenue. This problem is exacerbated each month as potential sources of additional revenue are foregone due to the absence of the necessary changes to the revenue structure. As the state enters the second quarter of the fiscal year, even a potential agreement to increase in the hospital tax remains in doubt, even though it would result in higher Federal reimbursements. Moreover, ongoing budget uncertainty will slow Connecticut's economic growth and could ultimately lead to the state and its municipalities receiving downgrades in credit ratings that will cost taxpayers even more.

The state's economy continues to post mixed results across an array of key economic indicators. These results do not indicate Connecticut can grow its way out of the current revenue stagnation, especially in light of the state missing it revenue targets in the last two fiscal years.

Preliminary data for August 2017 show that Connecticut lost 3,900 jobs during the month to a level of 1,687,200 seasonally adjusted. July’s original preliminary job loss of 600 was revised down by the Bureau of Labor Statistics (BLS) to a loss of 1,100. Over the past twelve month period ending in August, the state has posted 6,000 new payroll jobs. During the last period of economic recovery, employment growth averaged over 16,000 annually. Connecticut's unemployment rate for August fell by two-tenths of a point from last month and now stands at 4.8 percent. The decrease in the unemployment rate was due to a decline in the size of the state’s labor force. Nationally, the unemployment rate was 4.4 percent in August.

A September 26th report from the Bureau of Economic Analysis showed Connecticut personal income increasing at a quarterly rate of 0.8 percent between the first and the second quarter of 2017. This ranked Connecticut 22nd nationally in personal income growth. Average hourly earnings at $30.72, not seasonally adjusted, were up $0.33, or 1.1 percent, from the August 2016 estimate. The resultant average private sector weekly pay amounted to $1,041.41, up $20.31, or 2.0 percent higher than a year ago. This slow rate of growth is barely above the level of inflation. The 12-month percent change in the Consumer Price Index for All Urban Consumers (CPI-U, U.S. City Average, not seasonally adjusted) in August 2017 was 1.9 percent.

According to a September 20th report from CT Realtors, the sale of single-family residential homes in Connecticut increased by 1.9 percent in August 2017 from the same month a year earlier. The median sales price of a home increased 2.3 percent to $274,000. The sale of townhouses and condominiums in the state posted a sales decrease of 2.8 percent, comparing August 2017 to August 2016. However, the median price was up 4.7 percent to $175,828.

The Bureau of Economic Analysis reported that U.S. Real Gross Domestic Product increased at an annual rate of 3.1 percent in the second quarter of 2017. In the first quarter, real GDP increased 1.2 percent.

My office also issues 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. The change in the GAAP balance for Fiscal Year 2017 will be available early in 2018.

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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