COMPTROLLER LEMBO PROJECTS
$800,000 SURPLUS FOR FISCAL YEAR 2016 WITH AN EYE ON FINANCIAL MARKETS AND OTHER
Tuesday, September 1, 2015 |
Downes (860.702.3308 |
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Comptroller Kevin Lembo announced today that the volatility of the financial
markets complicates the budget outlook for Fiscal Year 2016 at this early stage,
but said the state is currently on track to end the fiscal year with an $800,000
In a letter to Gov. Dannel P. Malloy, Lembo said he agrees with the Office of
Policy and Management's (OPM) estimates at this early point in the year - though
he shares OPM's concerns related to potential revenue shortfalls.
"The revenue accruals for Fiscal Year 2015 were not as strong as expected, and
there is concern that this trend could continue into Fiscal Year 2016," Lembo
said. "There are also numerous revenue policy changes in Fiscal Year 2016,
including an estimated $13.6 million in new revenue from the roll-out of Keno
gaming, which will be carefully monitored in the coming months. Undoubtedly,
revenues will be adjusted in future months as trends become better defined."
The Fiscal Year 2016 budget also relies on $200.6 million in forced savings from
state agencies, which Lembo said could be challenging given the savings
extracted from agency budgets in prior fiscal years.
"The current volatility in financial markets has also complicated the budget
outlook for Fiscal Year 2016," Lembo said. "Over the past several years, the
state has experienced significant fluctuations in capital gains related
Lembo noted that in late 2012, investors turned over a large volume of long-term
capital gains to take advantage of the expiring 15-percent tax rate, which
increased to a top long-term rate of 23.8 percent on Jan. 1, 2013. As a result,
the state realized a windfall on the capital gains driven portion of the income
tax in Fiscal Year 2013. Because this left little in unrealized gains, this
significant component of the income tax experienced a sharp drop in Fiscal Year
2014. As the market surged, investors were reluctant to take short-term gains
because such gains are taxed at a higher ordinary income rate, Lembo said.
Fiscal Year 2015 estimated and final tax receipts were below initial budget
"The recent downturn in the market increased sales volume," Lembo said. "It
remains to be seen if the increase in gains related to sales will help to
mitigate the negative impact of the present market decline."
Pointing to a rebound in retail sales, automobile purchases and other
indicators, Lembo said, "The fundamentals of the national economy continue to
point to future economic growth."
The latest economic indicators from federal and state Departments of Labor and
other sources show:
- Retail sales rebounded in July as households boosted purchases of automobiles
and a range of other goods, suggesting solid momentum in the economy early in
the third quarter. Retail sales increased 0.6 percent last month, broadly in
line with economists' expectations. June's retail sales were revised up to show
them unchanged instead of the previously reported 0.3-percent drop. Excluding
automobiles, gasoline, building materials and food services, core retail sales
rose 0.3 percent after a revised 0.2-percent gain in June. These core retail
sales numbers correspond most closely with the consumer spending component of
- The Federal Reserve reported that consumer borrowing accelerated in June
growing at an annual rate of 7.3 percent after posting growth of 5.8 percent in
May. Revolving credit, mainly credit card debt, grew 7.4 percent in June.
Non-revolving credit, which includes car loans and student loans, expanded at a
7.3-percent rate in June.
- On Aug. 25, the Conference Board reported that consumer confidence had
rebounded in August, following a sharp decline in July. The Board stated that
consumers' assessment of current conditions was considerably more upbeat,
primarily due to a more favorable appraisal of the labor market. The uncertainty
expressed last month about the short-term outlook has dissipated and consumers
are once again feeling optimistic about the near future. Income expectations,
however, were little improved.
Business and Economic Growth
- On Aug. 27, the Bureau of Economic Analysis reported that the second estimate
of GDP in the second quarter of 2015 showed growth of 3.7 percent (up from the
preliminary estimate of 2.3 percent). Growth in the first quarter of 2015 was
0.6 percent. Due to the poor economic performance in the winter, it may be difficult
for GDP to attain a growth rate of 3 percent or better for the year.
- Corporate profits were flat in the second quarter of 2015 compared to the same
quarter last year. Corporate profit growth did not exceed 2 percent in 2013 or
- The Department of Labor's Connecticut Business Totals measures: monthly
movement in housing permits, exports, manufacturing production and hours, air
passenger counts, and gaming slot receipts. As can be seen from the graph below,
during the last recovery the index was uniformly in positive territory. During
this recovery, the results have been mixed.
- Below is the yield curve showing the difference between short-term and
long-term Treasury debt. The curve tends to flatten or invert prior to a
recession. The top line is the curve prior to the last recession and the bottom
line is the current curve. This curve is utilized by many analysts to evaluate
the impact of a stock market correction on the larger economy.
- Estimated and final income tax payments account for approximately 40 percent
of total state income tax receipts. These payments show a correlation to activity
in equity markets relating to capital gains.
- Estimated income tax receipts increased 5.3 percent in Fiscal Year 2015
compared to the prior fiscal year. The first significant month of Fiscal Year 2016 estimated payments will be posted in September. This will be an initial opportunity to
examine Fiscal Year 2016 trend relating to market volatility.
- Over the past several years, the state has experienced significant
fluctuations in capital-gains-related receipts. In late 2012, investors turned over a large
volume of long-term capital gains to take advantage of the expiring 15-percent tax rate,
which increased to a top long-term rate of 23.8 percent (20-percent rate plus 3.8
percent on AGI above $200,000 related to the ACA) on January 1, 2013. As a result, the
state realized a windfall on the capital-gains-driven portion of the income tax in
Fiscal Year 2013. Because this left little in unrealized gains, this component of the
income tax experienced a sharp drop in Fiscal Year 2014. As the market surged,
investors were reluctant to take short-term gains because such gains are taxed at the
ordinary income rate. Fiscal Year 2015 estimated and final tax receipts were
below initial budget estimates.
- The impact of current market volatility is difficult to quantify two months
into the new fiscal year. Trade volume has typically been high at lower market levels.
- Therefore, it is not certain that the recent market correction will result in
a sharp drop in capital-gains-related payments to the state. It is possible that
higher-volume gains taking could offset some of the negative state revenue impact associated
with the correction.
- At this writing the market continues to experience significant adjustments.Over the past 12 months, the Dow has declined by almost 3 percent.
- On a year-to-date basis, the Dow has dropped 6.8 percent.
- There has also been a significant upturn in trading volume as displayed below.