February 1, 2018
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, 2017.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2018 with a deficit of $240.2 million, an increase of $17.7 from last month. Growth in the deficit projection is primarily due to a $16 million net reduction in General Fund revenue based on the consensus revenue forecast issued in January. My office is currently projecting a somewhat higher deficit of $244.6 million for reasons explained below. The projected operating results included in the OPM financial statements 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 $154.5 million, a $13.4 million improvement from last month’s forecast.
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 Comptroller’s (OSC) higher deficit forecast is on the expenditure side of the budget. My office is projecting a $26.4 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 reflect the January 16th consensus forecast. Of particular note was the significant increase in the estimated and final payment portion of the Personal Income Tax projection and the one-time nature of this activity. Two primary factors were responsible for this growth. The first is related to the recent Federal tax changes that placed limits on the amount of state and local taxes that can be deducted for Federal tax purposes. Based on this new provision, many Connecticut taxpayers made payments prior to the end of calendar 2017 to ensure these estimated income tax payments would be deductible for their Federal 2017 returns. Therefore, these payments represent a shift from collections that would likely have occurred in April 2018.
The second factor was related to an October 2008 Federal law that eliminated
a mechanism used by hedge fund managers that enabled them to defer receipt of
incentive or management fees earned by charging them to an offshore fund. Under
the new rules (Internal Revenue Code Section 475A) hedge fund managers had to
recognize these profits, earned prior to January 1, 2009, as income before
December 31, 2017. Therefore, a significant amount of the estimated payment
collections were related to hedge fund managers bringing these profits back to
the United States from overseas.
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 consensus forecast totals are realized, $664.9 million will be deposited in the BRF, bringing the balance to $877.8 million, approximately 4.6 percent of General Fund expenditures.
On the expenditure side, with six months remaining in the fiscal year, the aggressive savings targets included in the adopted General Fund budget will pose serious challenges. Fixed cost items, such as debt service, teachers’ retirement contributions and retirement health insurance, continue to drive growth in spending. Significant savings have been achieved through reductions in employee salary costs and agency outlays for other expense items. However, continued active budget management and legislative action will be needed to close the deficit prior to fiscal year-end.
While Connecticut’s recovery is still lagging behind that of the nation, there was some positive news in December on some key economic indicators. Preliminary data for December showed the state gained 6,000 net jobs during the month, to a level of 1,685,200, seasonally adjusted. Bright spots in the report included job growth in manufacturing and the financial sector. In addition, November’s originally-released job loss of 3,500 was revised down by the Bureau of Labor Statistics to a loss of 1,800 for the month.
For the year, the Connecticut Department of Labor reported that Connecticut gained 7,700 jobs on a seasonally-adjusted basis and 6,200 jobs on an annual average basis. This compared favorably with 2016, which saw annual average growth of 5,000 jobs. However, this level of increase is still lower than the last period of economic recovery where employment growth averaged over 16,000 annually. Connecticut's unemployment rate remained at 4.6 percent in December, unchanged from November 2017. Nationally, the unemployment rate was 4.1 percent in December 2017.
In a January 24th report, the Bureau of Economic Analysis released Real Gross Domestic Product (GDP) results by state for the third quarter of 2017. Connecticut experienced a seasonally adjusted annual growth rate of 3.9 percent, which ranked 8th in the nation overall. This was a significant improvement from the second quarter of 2017, when Connecticut ranked 44th in the nation with annualized growth of 1.9 percent. The sectors that contributed most to Connecticut’s strong third quarter performance were finance and insurance, durable goods manufacturing, and information services.
Earnings in Connecticut continue to show only modest growth. December 2017 average hourly earnings at $31.00, not seasonally adjusted, were up $0.34, or 1.1 percent, from the December 2016 estimate. The resultant average private sector weekly pay amounted to $1,050.90, up $17.66, or 1.7 percent higher than a year ago. By comparison, the 12-month percent change in the Consumer Price Index for All Urban Consumers in December 2017 was 2.1 percent.
In its January 7th release, Berkshire Hathaway HomeServices reported mixed results for the Connecticut housing market for December 2017 compared with December 2016. Sales of single family homes declined 11.48 percent. However, the median sale price rose 3.09 percent. New listings in Connecticut decreased by 14.94 percent, but the median list price increased 3.26 percent to $258,150. Average days on the market increased 8.99 percent in December 2017 compared to the same month in the previous year (97 days on average, up from 89 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.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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