OSC Letterhead

April 2, 2018

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 February 28, 2018.

The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2018 with a deficit of $192.7 million, an improvement of $2.1 million from last month. The reduction in the deficit estimate is due to revised expenditure projections. My office is currently projecting a somewhat higher deficit of $197.7 million for reasons explained below. The projected operating results included in the OPM financial statements continue to forecast a deficit greater than one percent of net General Fund appropriations. As required by Connecticut General Statutes, Section 4-85, your office submitted a deficit mitigation plan to the Connecticut General Assembly on December 13, 2017 that is awaiting action by the legislature.

OPM is projecting the Transportation Fund will end Fiscal Year 2018 operations with a balance of $148.4 million, a $0.8 million deterioration from last month's forecast due to a net increase in expenditures.

The following analysis of the financial statements furnished by OPM is provided pursuant to Public Act 17-2 June Special Session, Section 713.

The difference in the Office of the State Comptrollerís (OSC) higher deficit forecast is on the expenditure side of the budget. My office is projecting a $35.0 million deficiency in the non-appropriated Adjudicated Claims account. This account is responsible for paying SEBAC v. Rowland claims and related attorney's fees, along with other negotiated settlements. Due to the unpredictable nature of this account, my office will closely monitor Adjudicated Claims activity and revise these estimates as needed in the coming months.

My office concurs with the revenue projections included in the General Fund deficit estimate, which primarily reflect the January 16th consensus forecast. The next consensus revenue forecast is scheduled for April 30th and the General Fund's operating results for FY 2018 will largely depend on the level of tax receipts collected in the next several weeks.

While I have not yet incorporated it into my projections, one development is providing reason for cautious optimism on the revenue front. Growth in the withholding portion of the Personal Income Tax is trending above budget expectations year-to-date. January and February withholding receipts were particularly strong, a time period that coincides with the traditional season when bonuses are awarded. In part this may be due to a successful year for Wall Street and the stock market, which benefits Connecticut residents who work in the financial services industry. Last week, the New York State Comptroller reported that bonuses for the securities industry were up 17 percent over last year, with a total bonus pool of $31.4 billion and an average bonus of $184,220. Of course, broader and more sustained growth is needed to stabilize Connecticutís budgetary position in light of the fiscal challenges facing our state.

On a more negative note, two tax categories are currently under-performing their budget targets for FY 2018. These include the corporation tax and sales and use tax. Shortfalls in these categories presently offset potential gains in withholding and bear close scrutiny as the year progresses.

As reported in past months, the current revenue forecast projects a significant increase in estimated and final income tax payments. Due to the new revenue volatility adjustment contained in the Section 704 of Public Act 17-2, June Special Session, any estimated and final payment collections amount above $3.15 billion will be transferred to the Budget Reserve Fund (BRF). If the consensus forecast totals are realized, $664.9 million will be deposited in the BRF, bringing the balance to $877.8 million, approximately 4.7 percent of General Fund expenditures.

Despite significant increases in a number of fixed cost areas, General Fund expenditures through February are running a modest 0.4 percent higher than last year's spending to this point. However, caution is still advised on this front. With four months remaining in FY 2018, the aggressive savings targets included in the adopted General Fund budget will continue to pose serious challenges. A combination of active budget management and legislative action will be needed to close the deficit prior to fiscal year-end.

Ultimately, Connecticutís overall budget results are largely dependent upon the performance of the national and state economies.

Preliminary data for February showed the state gained 2,600 net jobs, to a level of 1,692,000, seasonally adjusted. In addition, January's originally-released job gain of 3,400 was revised up by 400 by the Bureau of Labor Statistics to a gain of 3,800 jobs for the month. February represented the fourth consecutive month of job growth for Connecticut.

Over the year, Connecticut Department of Labor reported that nonagricultural employment in the state grew by 8,100 jobs on a seasonally-adjusted basis. This marks an improvement from 2016 levels, but lags behind the last period of economic recovery where employment growth averaged over 16,000 annually. Connecticut's unemployment rate is estimated at 4.6 percent in February, up one-tenth of a percentage point from January 2018 and down three-tenths of point from a year ago when it was 4.9 percent. Nationally, the unemployment rate was 4.1% in February, unchanged from the month before.

Connecticut has now recovered 82.1 percent (97,800 payroll job additions) of the 119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). The job recovery is into its 96th month and the state needs an additional 21,300 jobs to reach an overall employment expansion.

On March 22nd, the Bureau of Economic Analysis (BEA) reported in that Connecticut's personal income grew by only 1.5 percent between 2016 and 2017, about half the national average. This ranked Connecticut 44th in the nation for 2017 income growth. However, BEA also noted the pace of Connecticut personal income growth accelerated at a rate of 1.1 percent between the third and fourth quarters of 2017. Based on these results, Connecticut ranked 26th nationally in personal income growth, matching the national average for the fourth quarter.

Connecticut remains a wealthy state. Preliminary BEA estimates for 2017 rank Connecticut first in the nation in annual per capita personal income at $70,121, which represents 139 percent of the national average.

In its March 7th release, Berkshire Hathaway HomeServices reported mixed results for the Connecticut housing market for February 2018 compared with February 2017. Sales of single family homes declined 5.88 percent. However, the median sale price rose 7.11 percent. New listings grew by 4.70 percent in Connecticut and the median list price rose 6.59 percent to $249,900. Average days on the market increased 12.77 percent in February 2018 compared to the same month in the previous year (106 days on average, up from 94 days.

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 $821.1 million as of June 30, 2017.

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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