November 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 September 30, 2018.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $169.9 million, a slight increase from last month' s estimate. My office is currently projecting a somewhat lower General Fund surplus of $157.8 million for reasons explained below.
While OPM' s overall surplus estimate changed very little from its September letter, there were some adjustments made within various categories. Projected revenues are up by a net $3.2 million. This included a $67.7 million increase in the withholding portion of the Personal Income Tax due to stronger than anticipated collections and a forecast of accelerating wage growth. Offsetting this improvement for the month was a projected $30 million increase in tax refunds, a $4.5 million decrease in Sales of Commodities and a $30 million reduction for Licenses, Permits and Fees. This last change was the result of a recent Federal court decision regarding a planned casino in East Windsor that adds uncertainty to the project' s viability. In addition, OPM is reporting a net expenditure increase of $3 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 $60.0 million surplus, unchanged from last month' s estimate. This would leave a positive fund balance of $305.7 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 $157.8 million for FY 2019. This represents a $6.4 million reduction from last month' s estimate. OSC's revenue forecast is in line with OPM' s schedule through the first quarter. Both the withholding and estimated payment portions of the income tax continue to perform well year-to-date, in line with job growth in recent months and the overall performance of the stock market. However, after a tumultuous October and the return of volatility on Wall Street, the estimated and final income tax components will bear careful watching in the months ahead. It should be noted that the OPM and the Office of Fiscal Analysis are scheduled to issue a new consensus revenue forecast on November 13th, which could have a significant impact on next month' s projections.
The difference in OSC' s lower surplus forecast is on the expenditure side of the budget. My office is currently projecting a $27.1 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.
Fiscal Year 2018 is now closed and all required transfers have been completed. 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 $157.8 million would bring the year-end balance of the Budget Reserve Fund to just under $2 billion, representing about 10.5 percent of General Fund expenditures. My office has traditionally recommended the BRF reach a level of 15 percent of General Fund spending to protect against a future downturn.
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 lost 500 net jobs in September, to a level of 1,701,300, seasonally adjusted. However, August' s originally-released job gain of 1,100 was revised upward by 2,200 to an increase of 3,300 jobs over the month. Factoring in September' s results, Connecticut has experienced job growth in four of the last five months. The sectors that gained the most jobs in the month of September were construction (+1,000), financial activities (+1,000), and manufacturing (+800). The largest monthly job losses in September were in the trade, transportation & utilities (-2,300) and leisure & hospitality (-1,100).
Over the year, DOL reported that nonagricultural employment in the state grew by 19,900 jobs on a seasonally-adjusted basis. Construction and manufacturing were the fastest growing sectors in the state' s labor market on a percentage basis, followed by education & health services. The information and government sectors experienced the largest losses over the period.
Connecticut's unemployment rate stood at 4.2 percent in September, down one-tenth of a point from August 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 September 2018, down two-tenths of a point from August. Connecticut has now recovered 89.9 percent (107,100 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 103rd month and the state needs an additional 12,000 jobs to reach an overall employment expansion.
On September 25th, the Bureau of Economic Analysis (BEA) reported that Connecticut' s personal income grew by a 4.2 percent annual rate between the first and second quarters of 2018. Based on this result, Connecticut ranked 22nd in the nation for second quarter income growth. This growth rate was equal to the national average, but represented the strongest performance in the New England region for the period. BEA will report on third quarter state-level personal income growth in December 2018.
According to an October 26th 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. Strong consumer and federal, state and local government spending helped drive the third quarter GDP results along with business investment in inventory, plants and equipment. These growth areas were partly offset by negative contributions from exports and residential fixed investment. Imports, which are treated as a subtraction in the calculation of GDP, increased during the quarter.
The decline in residential investment may be related to rising interest rates, which has hurt the housing sector. In addition, some economists warned that the significant increase in inventory in the third quarter may be partly due to companies stocking up on goods and parts from China before prices rise in January when additional tariffs are scheduled to go into effect. BEA will release state-level GDP results for the second quarter in mid-November 2018.
In its October 7th release, Berkshire Hathaway HomeServices reported results for the Connecticut housing market for September 2018 compared with September 2017. Sales of single-family homes fell 16.33 percent, while the median sale price rose 7.07 percent. New listings declined by 5.53 percent in Connecticut and the median list price increased by 5.84 percent to $269,900 from a year ago. Average days on the market decreased 10.84 percent in September 2018 compared to the same month in the previous year (74 days on average, down from 83 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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