November 2, 2015
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 September 30, 2015.
The Office of Policy and Management (OPM) is projecting that the General Fund will close Fiscal Year 2016 with a deficit of $118.4 million, after accounting for $102.8 million in rescissions announced on September 18th. I believe that this projection falls within an acceptable range of estimation variance given current economic factors discussed below. The outlook could change further with the release of the November 10th consensus revenue forecast. After adjusting for Fiscal Year 2015 accrual activity, the Transportation Fund is expected to close Fiscal Year 2016 with a balance of $212.9 million.
OPM has revised the General Fund revenue projections for Fiscal Year 2016 downward by $117.4 million from last month. The largest adjustment is to the income tax, which is reduced by $109.3 million this month reflecting lower than anticipated receipts from the payroll withholding portion of the tax. This brings the total income tax reduction for the fiscal year to $195.7 million. I share OPM's concern regarding the slow growth in income tax receipts, especially the withholding portion of that tax.
In Fiscal Year 2005, as the economy continued to expand, the withholding portion of the income tax grew at a rate of 8.1 percent. Over the past three fiscal years (FY 13-FY 15), the growth in withholding has been below 4 percent. Current projections indicate that Fiscal Year 2016 will also post growth in the withholding component of the income tax below 4 percent. One factor constraining growth in the payroll driven receipts is that Connecticut, like the nation, has experienced stagnant wage growth throughout the current recovery.
Part of the slow wage growth can be attributed to the distribution of job gains by employment sector during this recovery. The financial services sector pays wages that are more than 50 percent above the statewide average for all sectors. However, the financial services sector remains 14,900 jobs (10.2 percent) below its pre-recession level. At the same time, the leisure and hospitality sector that pays wages that are 46 percent below the statewide average for all sectors has added 19,000 jobs (13.7 percent) to its pre-recession level. Until the overall growth in the state employment numbers results in higher wage growth, which is consistent with an expanding economy, the withholding portion of the income tax will continue to present significant budget challenges.
There are also other risk factors on the horizon that could significantly alter the current projection. For example, as OPM notes in its letter, failure to conclude a successful federal budget agreement would have a negative impact on the state budget in Fiscal Year 2016 and perhaps the out years as well. While this specific federal issue was addressed after OPM issued its letter, a disruption in the flow of federal dollars to the state has been an ongoing risk factor over time.
In addition, an increase in interest rates could reduce bond premiums that are built into the current budget. However this must be weighed against the fact that credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of corporate debt relative to cash flow are rising. This may result in a continue premium on the type of high quality debt offered by Connecticut. There are numerous other economic impacts of higher interest rates that are not built into current budget projections.
Finally, our state economy is linked to the national economy which, in turn, is dependent on the global economy. Global economic events have generally constrained domestic growth. China's economy (second largest in the world) has been slowing. In response, its central bank cut interest rates in hopes of boosting growth. Less oil demand from China as the economy slowed has produced a sharp drop in oil prices as well as coal and other commodities. As a result of less demand, oil costs have nearly halved over the past year. The cheaper oil, while benefiting U.S. consumers and the domestic economy, has damaged oil exporting economies that had been expanding such as Brazil and Russia, in addition to many Middle Eastern producers. The European economy has also struggled to grow advancing at an annual pace of less than 2 percent.
Closer to home, according to the Department of Labor, preliminary September nonfarm employment estimates from the U.S. Bureau of Labor Statistics (BLS) payroll survey (seasonally adjusted) indicated that Connecticut lost 7,600 jobs in September bringing payroll employment to a level of 1,693,500. This is the first monthly state nonfarm jobs decline in five months. Connecticut is now estimated to have added 27,000 nonfarm positions over the last 12 months, which is a fairly typical gain during a period of economic expansion. August's initially estimated nonfarm job gain of 3,200 was revised upward to a gain of 5,400 jobs.
Connecticut's unemployment rate was 5.2 percent in September; the national unemployment rate was 5.1 percent. Connecticut's unemployment rate has continued to decline from a high of 9.5 percent in October 2010. There are 100,200 unemployed job seekers in Connecticut. A low of 36,500 unemployed workers was recorded in October of 2000. The number of unemployed state workers hit a recessionary high of 177,200 in December of 2010.
According to an October report from the Warren Group, Connecticut single family home sales increased 20.2 percent in August from the prior year. Home prices in the state dropped for the fifth consecutive month. The median home price in August was $255,000, a 5.5 percent drop from August 2014.
National economic growth slowed in the third quarter advancing 1.5 percent. This followed second quarter growth of 3.9 percent. Inventory reduction in the third quarter was the main cause of the drop. However since consumer demand remained strong, the inventory cut-back is assumed to be temporary.
I also issue 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 shortfall or unreserved fund balance in the General Fund was $727.2 million as of June 30, 2014. GAAP deficit reduction bonds in the amount of $598,500,000 were issued in Fiscal Year 2014 to reduce the shortfall. Results for Fiscal Year 2015 will be published at the beginning of the new calendar year.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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