May 1, 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 March 31, 2018.
In its revised letter of April 30th, the Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2018 with a deficit of $381.8 million, an increase of $18.3 million over its original April 20th letter and $189.1 million above the March projection. The revised estimates incorporate the consensus revenue forecast reached with the Office of Fiscal Analysis yesterday. My office is currently projecting a somewhat higher deficit of $386.7 million for reasons explained below.
Approximately $172.9 million of the increase in the deficit is due to delays in the anticipated receipt of Federal reimbursements for increases in hospital supplemental payments and other Medicaid-related claims, which are now expected to be received in FY 2019. The remaining increase in OPM’s deficit projection is due to the net impact of the revised revenue estimates contained in the consensus forecast.
The projected operating results included in the OPM financial statements continue to forecast a deficit greater than one percent of net General Fund appropriations. As required by Connecticut General Statutes, Section 4-85, your office submitted a deficit mitigation plan to the Connecticut General Assembly on December 13, 2017 that is awaiting action by the legislature. However, due to the increase in the deficit and the limited time left in the fiscal year to achieve savings, the existing mitigation plan will no longer eliminate the full deficit.
OPM is projecting the Transportation Fund will end Fiscal Year 2018 operations with a balance of $153.3 million, a $4.9 million improvement from its March forecast. This change is due to projected increases in motor vehicle receipts and interest income, and lower than expected refunds of taxes.
The following analysis of the financial statements furnished by OPM is provided pursuant to Public Act 17-2 June Special Session, Section 713.
The difference in the Office of the State Comptroller’s (OSC) higher deficit forecast is on the expenditure side of the budget. My office is projecting a $39.9 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 unpredictable nature of this account, my office will closely monitor Adjudicated Claims activity and revise these estimates as needed in the coming months.
My office concurs with the revenue projections included in the General Fund deficit estimate, which reflect the April 30th consensus forecast. The most notable positive change in revenue is the improvement in the estimated and final payments portion of the income tax, which increased $240 million from OPM’s April 20th projection based on stronger than expected April collections.
Due to the new revenue volatility adjustment contained in Section 704 of Public Act 17-2, June Special Session, any estimated and final payment collections amount above $3.15 billion will be transferred to the Budget Reserve Fund (BRF). Estimated and final income tax collections are now expected to reach $4.44 billion, which would result in a transfer of $1.29 billion to the BRF if none of this revenue is used to mitigate the current FY 2018 deficit. Such a transfer would increase the BRF balance to just over $1.5 billion or approximately 8 percent of General Fund expenditures. While this would represent a vast improvement over the current level of $212.9 million, I have traditionally recommended that the Budget Reserve Fund reach a level of 15 percent of General Fund expenditures to protect against a future downturn.
Another improvement in the consensus revenue forecast is the $32.6 million upward revision of the withholding portion of the income tax versus OPM’s April 20th projection and $132.6 million improvement over the March estimate. Withholding receipts are growing at a 4 percent rate over the FY 2017 level, which reflects modest job growth for the year and a strong bonus season for the financial industry.
On the negative side, the consensus forecast confirmed a number of revenue categories are performing below their budget targets, including Federal grant revenue (discussed above) as well as the Sales and Use tax and the Corporation tax.
Connecticut’s overall budget results are ultimately dependent upon the performance of the national and state economies. Some key economic indicators for the State of Connecticut and the nation follow.
Department of Labor (DOL) reported preliminary data for March showing the state lost 2,000 net jobs, to a level of 1,690,000, seasonally adjusted. February’s originally-released job gain of 2,600 was unchanged after revision by the U.S. Bureau of Labor Statistics (BLS). March’s job loss was the first decline since October, following four consecutive months of job growth.
Over the year, DOL reported that nonagricultural employment in the state grew by 7,800 jobs on a seasonally-adjusted basis. This marks an improvement from 2016 levels, but it still lags behind the last period of economic recovery where employment growth averaged over 16,000 annually.
Connecticut's unemployment rate was estimated at 4.5 percent for March, down one-tenth of a percentage point from February 2018 and down four-tenths of point from a year ago when it was 4.9 percent. Nationally, the unemployment rate was 4.1 percent in March 2018, unchanged from February.
Connecticut has now recovered 80.4 percent (95,800 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 97th month and the state needs an additional 23,300 jobs to reach an overall employment expansion.
While overall income growth has been modest this fiscal year, Connecticut remains a wealthy state. Preliminary Bureau of Economic Analysis (BEA) estimates for 2017 rank Connecticut first in the nation in annual per capita personal income at $70,121, which represents 139 percent of the national average.
In its April 11th release, Berkshire Hathaway HomeServices reported results for the Connecticut housing market for March 2018 compared with March 2017. Sales of single family homes declined 14.48 percent. However, the median sale price rose 10.0 percent. New listings declined by 10.1 percent in Connecticut and the median list price rose 7.96 percent to $259,000. Average days on the market increased 12.09 percent in March 2018 compared to the same month in the previous year (102 days on average, up from 91 days). Finally, the list to sell price rose slightly to 97.1 percent, compared with 96.9 percent a year ago.
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.
To view the data in Excel format, click here:
General Fund: A-D Transportation Fund: E-H
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