December 1, 2016
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 October 31, 2016.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2017 operations with a deficit of $67.7million. The Transportation Fund is projected to end Fiscal Year 2017 with a balance of $128.8 million, after accounting for the Fiscal Year 2016 retained balance in the fund of $142.8 million. This represents an erosion of $14 million dollars through operations in this fiscal year.
Based on my analysis of current spending and revenue patterns, I am projecting a General Fund deficit of approximately $82.3 million this fiscal year. My variance from OPM is due to anticipated higher spending in the adjudicated claims account. OPM has estimated claims expenditures to be $9 million in the current fiscal year; I am projecting outlays of $23.6 million if settlement payments are not delayed. Continued active budget management may eliminate this shortfall which represents less than one half of one percent of net budgeted expenditures. I am in agreement with OPM's Transportation Fund projections.
This letter reflects the November 10th consensus revenue figures that were agreed to by OPM and The Office of Fiscal Analysis. I am in agreement with the consensus revenue forecast. The forecast reduced overall General Fund revenue by $49.3 million since last month. Transportation Fund revenue projections were lowered by $13.1 million.
The largest Fiscal Year 2017 General Fund revenue adjustments to date are the income tax (down $66.5 million), the sales tax (down $48.9 million) and federal receipts (down $28.6 million). These projected revenue shortfalls are partially offset by a legal settlement awarded to the state that increased original revenue projections by $80 million and an $18.1 million gain in estimated provider tax payments. Combined General Fund revenue is expected to fall $45.9 million short of the initial budget target.
With respect to the income tax projection, it is important to note that the estimated payment component of the tax typically realizes its largest collections during December and January. By the third week in January, a more reliable trend for this tax component will be apparent. In addition, the payroll driven withholding component of the income tax historically experiences its strongest receipts between December and March. Other revenue categories also experience uneven collection patterns. As additional receipts data becomes available, there will be revisions to the current revenue projections.
OPM is currently estimating that General Fund expenditures will exceed the budget by a net of $44.5 million. OPM's spending changes are outlined on Exhibit D of this letter.
I am projecting net spending to be $59.1 million over budget. My $14.6 million spending differences from OPM is within the adjudicated claims account and is in large part due to the scheduled timing of SEBAC vs. Rowland payments.
As I have noted in prior letters, the OPM budget estimates rely on significant lapse savings that are currently targeted at $203.3 million. While that target is not at a historically high level, it follows successive fiscal years of significant cost cutting with each year?s target becoming more challenging to achieve.
Current General Fund projections have Fiscal Year 2017 total spending flat against last fiscal year. To realize no growth in actual year-over-year outlays is a considerable management challenge that will require the skillful efforts of all agencies and branches of government. Notably, the state General Fund personal services line-item has been on a declining trajectory during the first months of Fiscal Year 2017. However, the rate of decline may not be sufficient to realize the large lapse goal. Offsetting the slower than anticipated payroll decline are significant decreases in spending trends in other line-items. On balance, current trends indicate that a large portion of the lapse goal is still achievable.
Connecticut?s budget performance is dependent upon the performance of the national and state economies. Preliminary Connecticut nonfarm job estimates from the business establishment survey administered by the US Bureau of Labor Statistics (BLS) show the state lost 7,200 payroll jobs in October 2016 to a level of 1,676,400, seasonally adjusted. September's originally released job decline of 5,200 was revised down further to a loss of 6,600. It should be noted that while the establishment survey has been showing deterioration in the Connecticut job market over the past several months, the household census survey used to calculate the unemployment rate has been pointing to job gains. The payroll withholding portion of the income tax is also not consistent with large job losses in the state. The establishment survey on job growth is benchmarked annually and adjusted. Connecticut has experienced some significant adjustments to these statistics in past years.
Connecticut ranked twentieth nationally in income growth for the second quarter of 2016 based on personal income statistics released by the Bureau of Economic Analysis on September 28th. The state?s personal income was growing at an annualized 4.5 percent rate in the second quarter of the year. This growth rate exceeds that of the prior year.
According to the November 29th release from the Bureau of Economic Analysis, GDP in the third quarter of 2016 grew at a 3.2 percent annual rate. That was the strongest rate of growth in two years and followed second quarter growth of 1.4 percent. Corporate profits also continued rebounding in the third quarter. Profits rose 3.5 percent from the second quarter, which was the third straight quarterly increase. Compared with a year earlier, after-tax profits rose 5.2 percent in the third quarter, the first annual increase since late 2014 and the strongest growth since the 4th quarter of 2012.
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 $793.2 million as of June 30, 2015. I will be releasing the 2016 CAFR early in 2017.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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