November 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 September 30, 2016.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2017 operations with a deficit of $5.7 million. The Transportation Fund is projected to have a Fiscal Year 2017 ending balance of $141.9 million, after accounting for the Fiscal Year 2016 ending balance of $142.8 million. This represents an erosion of $9 million dollars through operations this fiscal year.
Based on my analysis of spending patterns during the first quarter of the 2017 fiscal year, which closed in mid-October, I am projecting a General Fund deficit of approximately $42 million this fiscal year. My variance from OPM is primarily due to spending differentials. Continued active budget management may eliminate this shortfall which represents 0.2 percent of net budgeted expenditures. I am in agreement with OPM?s Transportation Fund projections.
Within the General Fund, OPM has made several adjustments to the Fiscal Year 2016 revenue projections. Those adjustments are detailed on Exhibit C of this letter. These changes result in a net increase of $3.4 million in General Fund revenue. I am in general agreement with the OPM revenue projections. However, it should be noted that estimated income tax payments are volatile and must be closely monitored for additional deterioration in the state's revenue outlook.
In the third quarter of 2016, estimated income tax payments dropped by over 10 percent from the prior year. Last fiscal year and in Fiscal Year 2014 the third quarter estimated payment pattern reversed sharply for the remainder of the fiscal year as taxpayers adjusted their January payments to recognize their prior year tax liability. Based on current stock market activity, it is projected that the estimated income tax payment pattern will improve during the remainder of the fiscal year. That assumption will be adjusted as necessary in the coming months.
OPM is currently estimating that General Fund expenditures will exceed the
budget by a net of $9.3 million. OPM's spending changes are outlined on Exhibit
D of this letter. I am projecting net spending to be $46.0 million over budget.
My differences from OPM are in the adjudicated claims account and the debt
service account. OPM has recognized a shortfall of $5 million in adjudicated
claims; my estimate is $22.3 million, a difference of $17.3 million due in large
part to the SEBAC vs. Rowland settlement. The State Treasurer's current
estimated shortfall in debt service is $19.4 million, which I have included in
my spending projection. OPM has not included this shortfall. There are also some
minor fund balance adjustment differentials in my estimate.
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 growth declining slightly 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.
General Fund revenue estimates for Fiscal Year 2017 are consistent with a continuation of moderate economic growth. Preliminary Connecticut payroll job estimates show that the state lost 5,200 jobs in September to a level of 1,685,000, seasonally adjusted. Over the last twelve months ending in September, employment in the state has grown by approximately 12,800 positions (0.8%, 1,067 jobs per month). August?s originally released job gain of 300 was revised down to a loss of 300. It should be noted that in past years monthly job numbers have been significantly adjusted. The jobs driven payroll withholding portion of the income tax is growing at a 4.1 percent rate that appears somewhat inconsistent with the large job loss report.
Connecticut?s unemployment rate was 5.4 percent in September; the national unemployment rate was 5.0 percent. Connecticut's unemployment rate has continued to decline from a high of 9.5 percent in October 2010.
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 an October 25th release from CT Realtors, Connecticut single-family residential home sales increased 2.6 percent in September 2016 from the same month a year earlier. The median sale price also posted an increase of 2 percent to $255,000. This marks a reversal of recent trend of consistent monthly declines in home prices. Townhouse and condominium sales and prices dropped in September by 1.4 percent and 1.8 percent respectively.
Nationally, the Bureau of Economic Analysis reported that GDP in the 3rd quarter of 2016 grew at a 2.9 percent annual rate. That was the strongest rate of growth in two years and followed 2nd quarter growth of 1.4 percent.
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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