COMPTROLLER LEMBO PROJECTS $207.8-MILLION DEFICIT;
TRIGGERS MANDATORY DEFICIT MITIGATION PLAN
Friday December 1, 2017 |
Contact: Tara Downes 631-834-5234 |
FOR IMMEDIATE RELEASE FRIDAY, DECEMBER 1, 2017
Comptroller Kevin Lembo today projected that the state is headed for a
$207.8-million deficit for Fiscal Year 2018 – an amount that triggers a state
requirement that the governor submit a deficit mitigation plan to the
legislature because it exceeds one percent of the state’s total net General Fund
In a letter to Gov. Dannel P. Malloy, Lembo reported a deficit that is close,
but slightly higher, than a deficit reported last month by the Office of Policy
and Management (OPM) because Lembo said he expects a larger $20-million
deficiency in the state’s adjudicated claims account that is used to pay claims
and attorney fees in the SEBAC v. Rowland settlement.
Lembo also pointed to great uncertainty related to the future of federal tax
“Congress is considering significant modifications to federal tax law that
could have profound implications for Connecticut, depending on what specific
provisions, if any, are enacted,” Lembo said. Future revenue forecasts will need
to evaluate the consequences of any tax changes on the federal level.”
Lembo said that his office agrees with the November consensus revenue
forecast reached between OPM and the legislature’s Office of Fiscal Analysis,
and has reported in past months on the underperformance of the sales and use tax
to date in the FY 2018 and lower than expected receipts in the estimated payment
portion of the personal income tax.
On the spending side, Lembo said, with seven months still to go in the fiscal
year, there have already been $12.5 million spent from the adjudicated claims
account in the SEBAC v. Rowland settlement and other issues, and the account has
averaged $2.5 million per month in costs. In light of this, Lembo said he is
projecting a $20-million deficiency in adjudicated claims that could go higher
due to the unpredictable nature of the settlements involved.
“Another area of concern that will require close scrutiny is the aggressive
level of savings included in the adopted budget,” Lembo said. “Achieving these
lapse – or savings – targets will be a significant budgetary challenge,
especially in light of the high levels of fixed costs for FY 2018, such as debt
service payments, pension contributions and other costs.”
Lembo said Connecticut must also catch up to the national economy in economic
“In recent years, Connecticut has not fully participated in the nation’s
economic recovery,” Lembo said. “The national economy continues to exhibit
growing signs of strength and resilience. However, Connecticut’s economy has
experienced much more mixed results across a variety of key economic
Lembo pointed to the latest economic indicators from federal and state
Departments of Labor and other sources that show:
• Based on FY 2017 final results, the withholding portion of the income tax
increased only 1.3 percent compared with the prior fiscal year.
• In the first four months of the new fiscal year, withholding receipts were up
6.8 percent from last year. However, this growth is somewhat overstated due to
revenue accruals related to FY 2017 year-end. Adjusting for this accrual
activity, the FY 2018 year-to-date growth in withholding collections is closer
to 3 percent.
• A state Department of Labor (DOL) report dated Nov. 16 shows that the state
lost 6,600 net jobs (-0.4 percent) in October 2017, to a level of 1,680,600,
seasonally adjusted. The data is from the business payroll survey administered
by the US Bureau of Labor Statistics (BLS). Connecticut DOL noted nearly half
the decline was from the seasonal leisure and hospitality sector. September’s
originally-released job loss of 2,000 was revised upward by the BLS to a gain of
300 for the month.
• Over the year, nonagricultural employment in the state grew by only 1,400 jobs
• During the last period of economic recovery, employment growth averaged over
• Connecticut has now recovered 72.5 percent (86,400 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 92nd month and the state needs an additional 32,700
jobs to reach an overall employment expansion.
• Connecticut's unemployment rate for October fell by one-tenth of a point from
last month and now stands at 4.5 percent. The decrease in the unemployment rate
was in part due to a decline in the size of the state’s labor force. Nationally,
the unemployment rate was 4.1 percent in October.
• DOL reports that September 2017 seasonally adjusted average weekly initial
unemployment claims for first-time filers in Connecticut decreased by 591
claimants ( -14.9 percent) to 3,365 from September 2017, and were lower by 487
claims (-12.6%) from the October 2016 level of 3,852.
• Among the major job sectors listed below, six experienced gains and four
experienced losses in October 2017 versus October 2016 levels.
Payroll Employment Trend
Jobs in thousands
Sector 10/17 (P) 10/16 Gain/Loss % Change
Construction 58.7 58.6 0.1 0.2%
Manufacturing 156.8 156.6 0.2 0.1%
Transp. & Public Utilities 297.7 298.1 -0.4 -0.1%
Information 31.6 32.2 -0.6 -1.9%
Financial 132.4 130.4 2.0 1.5%
Prof . & Business Svc. 217.8 216.6 1.2 0.6%
Education & Health Svc. 333.7 330.7 3.0 0.9%
Leisure & Hospitality 154.0 155.3 -1.3 -0.8%
Other Services 66.4 66.2 0.2 0.3%
Government 230.9 233.9 -3.0 -1.3%
• The Census Bureau is scheduled to release updated state population results
for July 1, 2017 on December 20, 2017. Connecticut’s employment and revenue
numbers must be viewed in the light of its declining population in recent years.
The U.S. Census reported that Connecticut saw a decline in population of 8,278
residents between July 1, 2015 and July 1, 2016. Connecticut was one of only
eight states to experience a decline in population during this period.
Connecticut has now posted three consecutive years of population decline.
• October 2017 average hourly earnings at $31.52, not seasonally adjusted,
were up $0.57, or 1.8 percent, from the October 2016 estimate. The resultant
average Private Sector weekly pay amounted to $1,071.68, up $13.19, or 1.2
percent higher than a year ago.
• The 12-month percent change in the Consumer Price Index for All Urban
Consumers (CPI-U, U.S. City Average, not seasonally adjusted) in October 2017
was 2 percent.
• The Bureau of Economic Analysis reported that Connecticut’s personal income
grew by 3 percent between 2015 and 2016. This ranked Connecticut 33rd nationally
in 2016 income growth.
• A September 26th report from the Bureau showed Connecticut personal income
increasing at a quarterly rate of 0.8 percent between the first and the second
quarter of 2017. On an annualized basis this growth would be 3.1 percent. This
ranked Connecticut 22nd nationally in personal income growth and slightly above
the national average. BEA will release data on State Personal Income for Third
Quarter 2017 on December 20, 2017.
• In its Nov. 28 release Berkshire Hathaway Home Services reported mixed results
in the Connecticut housing market for October 2017 compared with October 2016.
Sales of single family homes declined 1.88 percent. However, the median sale
price rose 2.09 percent. New listings in Connecticut increased by 3.13 percent
and the median list price grew by 3.84 percent. Average days on the market
increased nearly 9.8 percent in October 2017 compared to the same month in the
previous year. The summary below contains more detailed data for the Connecticut
• The following chart from Berkshire Hathaway Home Services shows the total
number of Connecticut single family homes for sale in October 2017 distributed
by list price:
• Consumer spending is the main engine of the U.S. economy, accounting for more
than two-thirds of total economic output. The Commerce Department reported that
advance retail sales increased a modest 0.2 percent in October 2017 from the
previous month. On an annual basis, retail sales grew by 4.6 percent compared
with October 2016.
• Gains were broad-based with month over month growth in a number of major
categories, including increased sales at automobile dealers, clothing stores,
furniture stores, electronics and appliance stores, restaurants and sporting
• In contrast, receipts at gasoline stations fell 1.2 percent after growing 6.4
percent in September. Declines were also observed in purchases of building
materials and for online retailers.
Consumer Debt and Savings Rates
• According to the Federal Reserve Bank of New York, aggregate household debt
balances rose to another new peak in the third quarter of 2017. As of September
30, 2017, overall debt – including mortgages, auto loans and student loans – hit
a record $12.96 trillion. This increase put overall household debt $280 billion
above its peak in the third quarter of 2008, and 16.2 percent above its trough
in the second quarter of 2013. Aggregate household debt balances have now
increased in 13 consecutive quarters.
• The New York Federal Reserve also noted that mortgage balances, the largest
component of household debt, increased again during the third quarter. Mortgage
balances shown on consumer credit reports on September 30 stood at $8.74
trillion, an increase of $52 billion from the second quarter of 2017. Balances
on home equity lines of credit (HELOC) have been slowly declining, dropping $4
billion from the second quarter and now stand at $448 billion. Non-housing
balances, which have been increasing steadily for nearly six years, were up
again in the third quarter, rising $68 billion. Auto loans grew by $23 billion
and credit card balances increased by $24 billion, while student loan balances
saw a $13 billion increase.
• The Federal Reserve Bank of New York also reported that aggregate delinquency
rates increased slightly in the third quarter of 2017. As of September 30, 4.9
percent of outstanding debt was in some stage of delinquency. Of the $630
billion of debt that is delinquent, $408 billion is seriously delinquent (at
least 90 days late or “severely derogatory”). Flows into delinquency
deteriorated for some types of debt. The flow into 90+ delinquent for credit
card balances has been increasing notably for one year, and that measure for
auto loans has increased, and the flow into 90+ delinquency for auto loan
balances has been slowly increasing since 2012.
• About 208,000 consumers had a bankruptcy notation added to their credit
reports in 2017Q3, a slight improvement over the same quarter last year.
• Americans have also dramatically reduced their savings in recent years.
According to the Bureau of Economic Analysis (BEA) the personal-saving rate
increased modestly to 3.2 percent in October from 3 percent in the previous
month. However, this is down from a recent peak of 6.3 percent in October 2015
and not far off from prerecession lows.
• The higher debt levels and lower savings point to U.S. wage gains that are not
keeping up with consumers' needs and desires to spend. This also signals a more
uncertain outlook for future consumer spending gains.
• The graph below provides a long-term view of the U.S. savings rate from the
beginning of 1959 through September 2017. As can be seen there is a pronounced
downward trend over the period. It should be noted that the U.S. Personal Saving
Rate does not include capital gains from the sale of land or financial assets in
its estimate of personal income. This effectively excludes capital gains – an
important source of income for some.
• The U.S. consumer confidence index (CCI), published by the Conference
Board, is an indicator designed to measure consumer confidence. This is defined
as the degree of optimism on the state of the economy that consumers are
expressing through their activities of savings and spending.
• The Conference Board reported that consumers' assessment of current economic
conditions improved again in November 2017. The Index now stands at 129.5, up
from 126.2 in October. Consumer confidence increased for a fifth consecutive
month and remains at a 17-year high, which the Conference Board attributed to
optimism about further improvements in the national labor market.
Business and Economic Growth
• According to a Nov. 29 release from the Bureau of Economic Analysis, U.S. Real
Gross Domestic Product increased at an annual rate of 3.3 percent in the third
quarter of 2017 based on BEA’s second estimate. The economy continued to show
resilience despite concerns that the major hurricanes in August and September
would dampen economic output. In the second quarter, real GDP increased 3.1
• BEA reported that the increase in real GDP in the third quarter reflected
positive contributions from person consumption expenditures (PCE), private
inventory investment, nonresidential fixed investment, and exports. These
increases were partially offset by negative contributions from residential fixed
investment. Imports, which are a subtraction in the calculation of GDP,
decreased in the third quarter.
• Corporate profits rose 4.3 percent between the second and third quarter and
grew 5.4 percent in the third quarter compared to the same period a year ago.
• In a November 21st report, the Bureau of Economic Analysis released Real Gross
Domestic Product (GDP) results by State for the second quarter of 2017.
Connecticut experienced a seasonally adjusted annual growth rate of 1.4 percent,
which ranked 43rd in the nation overall. Connecticut’s growth rate was the
lowest in the New England region, which had an average Real GDP annualized
growth rate of 1.9 percent.
• According to a Nov. 22 report by the U.S. Department of Commerce, new
orders for manufactured durable goods in October decreased $2.8 billion or 1.2
percent to $236.0 billion. The decrease follows two consecutive monthly
increases, including a 2.2 percent growth in September. The overall decline was
large driven by transportation equipment, especially decreased orders for new
commercial airliners, which can be a volatile category from month to month.
Excluding transportation, new orders increased 0.4 percent.
• The Nov. 24 Markit Flash Purchasing Manager’s Index (PMI) reported that
November data pointed to another solid increase in U.S. private sector output,
supported by sustained growth in both manufacturing and services activity. Note
any index rating above 50 signals growth. However, Markit noted that November’s
expansion was slower than the growth recorded in October.
CBIA: 2017 Third Quarter Economic and Credit Availability Survey.
On Nov. 20, the Connecticut Business and Industry Association (CBIA) released
its 2017 Third Quarter Economic and Credit Availability Survey. CBIA noted that
Connecticut businesses reported a mixed outlook for their firms.
Key results include:
• A total of 37 percent of respondents anticipate improved conditions for
their firm, up from 29 percent in the second quarter.
• Twenty-four percent predicted worsening conditions, an increase of 10 percent
from the last quarterly survey.
• Forty percent of businesses surveyed forecasted stable conditions, down from
• Manufacturing firms had a positive point of view, with 43 percent reporting a
positive outlook, compared with 20 percent who were pessimistic.
• In terms of hiring, 21 percent of businesses expected growth in their
workforces, down from 23 percent in the previous quarter. The percentage of
firms expecting to shrink their workforces increased five points to 17 percent.
Sixty-three percent anticipated no change, down 3 points.
• Credit availability remained excellent, with 88 percent of firms reporting
access to credit was not a problem.
• Estimated and final income tax payments account for approximately 35 to 40
percent of total state income tax receipts. Both the estimated and final
payments had a negative rate of growth in both Fiscal Years 2016 and 2017.
• The bulk of the estimated and final payment receipts for Fiscal Year 2018 will
be collected between September and the end of the Fiscal Year. Therefore,
September 2017 represented the first significant collection period for quarterly
estimated tax filings and the initial results were not encouraging. Compared
with the prior fiscal year, estimated and final payment receipts came in a
combined 4.9 percent lower for the first four months of FY 2018. The
year-to-date changes for the two separate components are presented in the graph
below. Through October of 2016, estimated and final payments totaled $532.8
million versus $506.9 million through October 2017.
• Shifts in equity portfolio allocations following the presidential election
and a run-up in equity values have not resulted in capital gains related revenue
increases for the state.
• The potential for lower federal capital gains tax rates has remained unclear
since the presidential election and investors may have been unwilling to take
large gains in this environment of uncertainty. In addition, investors are
increasingly using tax efficient vehicles such as Exchange Traded Funds (ETFs)
that don’t generate as a large a number of taxable gains transactions. Assets in
these investments rose from $450 billion in 2008 to almost $2.8 trillion today.
• Both the Dow Jones Industrial Average and the Nasdaq Composite Index are
showing significant year-to-date gains in calendar 2017.
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