December 3, 2018
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, 2018.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $254.9 million, an increase of $85 million from last month's estimate. My office is currently projecting a somewhat lower General Fund surplus of $245.7 million for reasons explained below.
The improvement in OPM's surplus projection is due to an increase in General Fund revenue that was reflected in the November 13th consensus revenue forecast reached with the Office of Fiscal Analysis (OFA). Overall, General Fund revenues grew by a net $87 million compared with OPM's October projection. On the expenditure side, OPM is reporting a modest net expenditure increase of $2.0 million over the budget plan compared with last month’s estimate.
OPM is projecting that the Special Transportation Fund will end Fiscal Year 2019 operations with a $67.3 million surplus, an improvement of $7.3 million from last month’s estimate, due to changes in the STF consensus revenue forecast. This would leave a positive fund balance of $313.0 million at year-end. The Office of the State Comptroller (OSC) is in general agreement with OPM’s Transportation Fund forecast.
The following analysis of the financial statements furnished by OPM is provided pursuant to Public Act 17-2 June Special Session, Section 713.
As noted above, the Office of the State Comptroller is projecting a General Fund surplus of $245.7 million for FY 2019. This represents an $87.9 million improvement from last month's estimate, largely due to the incorporation of the November consensus revenue forecast. The most significant revenue change was an upward revision of the withholding portion of the Personal Income Tax, which increased by $90.8 million. The consensus forecast also made adjustments to refunds of taxes (+$42.2 million) and the Earned Income Tax Credit (-$24.1 million), which resulted in a net decrease in revenue of $18.1 million. Casino gaming payments increased by $20 million due to better than expected results in light of new interstate competition. The remaining consensus revenue changes netted to a negative $5.7 million.
The withholding portion of the income tax continues to perform well year-to-date, in line with job gains in recent months. The stock market, after a tumultuous October, continued to experience volatility through November. Thus far estimated and final income tax payments are still ahead of last year’s pace and collections are exceeding FY 2019 budget targets. My office will be monitoring receipts closely through December and January, the next critical time period for these quarterly payments.
The difference in OSC's lower surplus forecast continues to be on the expenditure side of the budget. My office is currently projecting a $29.2 million deficiency in the non-appropriated Adjudicated Claims account. This account is responsible for paying SEBAC v. Rowland claims and related attorney’s fees, along with other negotiated settlements. Due to the often-irregular spending patterns associated with this account, my office will continue to monitor Adjudicated Claims activity closely and revise these estimates as needed.
The statutory revenue volatility cap enacted in FY 2018 requires revenues above a certain threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2019, the cap is $3,196.8 million for estimated and final income tax payments and revenue from the newly enacted Pass-through Entity tax. If current projections are realized, a $648.0 million volatility transfer would be made to the BRF.
The present balance of the BRF is $1,185,259,428. Adding the estimated $648.0 million volatility transfer and OSC’s projected FY 2019 surplus of $245.7 million would bring the year-end balance of the Budget Reserve Fund to just under $2.1 billion, representing about 10.9 percent of General Fund expenditures. This would certainly be a significant improvement from the recent past. However, the economic recovery is currently in its ninth year, as OFA noted in its recent Fiscal Accountability Report, a long period of time by historical standards. In a recent survey of economists by Reuters, the respondents' median probability of recession over the next two years edged up to 35 percent from 30 percent, as the economy begins facing stronger headwinds on a number of fronts.
While predicting the timing of recessions can be notoriously difficult, the lesson for Connecticut policy makers should be clear. State government should maintain spending discipline and continue building the balance in the Budget Reserve Fund to protect against the inevitable downturn whenever it comes. For this reason, my office has traditionally recommended the BRF reach a level of 15 percent of General Fund spending.
Connecticut’s overall budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends.
The state Department of Labor (DOL) reported preliminary data showing Connecticut gained 1,500 net jobs in October, to a level of 1,701,900, seasonally adjusted. However, September’s originally-released job loss of 500 was revised down by 900 to a loss of 1,400 jobs over the month. Therefore, October’s job gains offset the losses experienced in September, with a net gain of only 100 for the two month period. The sectors that gained the most jobs in the month of October 2018 were financial activities (+900) and professional & business services (+700). The largest monthly job losses in October were in the trade, transportation & utilities sector (-400).
Over the year, DOL reported that nonagricultural employment in the state grew by 22,300 jobs on a seasonally-adjusted basis. Construction, leisure & hospitality and manufacturing were the fastest growing sectors in the state’s labor market on a percentage basis. The information and government sectors experienced the largest losses for the period.
Connecticut's unemployment rate stood at 4.2 percent in October, unchanged from September 2018 and down three-tenths of point from a year ago when it was 4.5 percent. Nationally, the unemployment rate was 3.7 percent in October 2018, unchanged from September. Connecticut has now recovered 90.4 percent (107,700 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 104th month and the state needs an additional 11,400 jobs to reach an overall employment expansion.
In a November 14th report, the Bureau of Economic Analysis (BEA) released Real Gross Domestic Product (GDP) results by state for the second quarter of 2018. Connecticut experienced a seasonally adjusted annual growth rate of 3.1 percent, which ranked 43rd in the nation overall. This growth rate was slower than both the national average of 4.2 percent and the New England regional average of 3.7 percent. The percent change in real GDP in the second quarter ranged from 6.0 percent in Texas to 2.5 percent in Delaware.
According to a November 28th report from BEA, U.S. Real Gross Domestic Product grew at an annual rate of 3.5 percent in the third quarter of 2018, which represented a deceleration from the strong 4.2 percent growth in the second quarter. BEA reported the increase in real GDP in the third quarter reflected increases in consumer spending, inventory investment, government spending, and business investment. Notable offsets were decreases in exports and housing investment. Imports, which are treated as a subtraction in the calculation of GDP, increased during the quarter.
A November 27th release by the Federal Housing Finance Agency (FHFA) reported housing price appreciation statistics by state for the period ending September 30, 2018. FHFA’s Housing Price Index (HPI) tracks changes in home values for individual properties owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Over the past year, Connecticut home prices continued to grow more slowly than most of the nation. Connecticut homes appreciated only 2.20 percent for the year, which ranked 47th in the nation overall. The U.S. average appreciation for the period was 6.34 percent and the New England region’s average was 4.88 percent. A comparison of five-year housing prices showed similar results: Single family houses in Connecticut appreciated 7.12 percent for the period versus a 32.69 percent increase for the nation as a whole and an increase of 22.19 percent for the New England Region.
A separate measure by Berkshire Hathaway HomeServices reported results for the Connecticut housing market for October 2018 compared with October 2017. Sales of single family homes fell 2.37 percent, while the median sale price rose 2.0 percent. New listings increased by 0.42 percent in Connecticut and the median list price increased by 0.43 percent to $259,900 from a year ago. Average days on the market decreased 16.85 percent in October 2018 compared to the same month in the previous year (74 days on average, down from 89 days).
My office also issues 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 unassigned fund balance in the General Fund was a negative $821.1 million as of June 30, 2017. I will report the new unassigned fund balance figure for Fiscal Year 2018 no later than February of 2019 in accordance with U.S. Securities and Exchange Commission (SEC) requirements.
If you have any questions on this report, please do not hesitate to contact me.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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