October 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 August 31, 2018.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $169.7 million. This represents a $31.8 million improvement from last month’s estimate. My office is currently projecting a slightly lower General Fund surplus of $164.2 million for reasons explained below.
The increase in OPM’s projected surplus this month is due to a combination of additional expenditure lapses that have been identified and higher General Fund interest income. In addition, OPM has revised its forecast of the estimated and final payment portion of the income tax upward by $200 million. It should be noted that this increase would not have an impact on the General Fund surplus estimate. Instead, this additional amount, if realized, would be transferred to the Budget Reserve Fund due to the statutory revenue volatility cap.
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.
Last month, the Office of the State Comptroller reported that the General Fund was approximately in balance for FY 2019 citing positive revenue trends early in the fiscal year. However, my office held off making specific changes to its revenue forecast pending the availability of more definitive data. After carefully monitoring daily collections through the end of September, along with broader economic trends, I am in general agreement with OPM’s revenue changes. Both the withholding and estimated payment components of the income tax are running ahead of their budget targets. In addition, the Sales and Use and Corporations tax are both showing strength through the first quarter of FY 2019.
While the Corporations Tax has performed well through the first quarter of FY 2019, a note of caution is in order. The FY 2019 budget established a new state tax, called the Pass-through Entity Tax (PET), to be levied on certain types of businesses. Receipts from PET will be categorized as corporate tax instead of personal income tax. As a result, the Corporate Tax budget target for FY 2019 is approximately $600 million higher than the total amount realized for corporations in FY 2018. Again, the projections to date appear to be ahead of target. However, due to the unpredictable nature of the business cycle and the lack of trend data from past years, this revenue category will require close scrutiny as the fiscal year progresses.
The difference in OSC’s lower surplus forecast is on the expenditure side of the budget. My office is currently projecting a $20.5 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 carefully and revise these estimates as needed in the coming months.
As noted earlier, the statutory revenue volatility cap 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. Based on current projections, a $684.0 million volatility transfer would be made to the BRF.
After the close of FY 2018 and all required transfers are completed, the BRF will have a balance of $1,185,259,429. Adding the estimated $684.0 million volatility transfer and OSC’s projected FY 2019 surplus of $164.2 million, would bring the year-end balance of the Budget Reserve Fund to just over $2 billion or about 10.7 percent of General Fund expenditures.
Connecticut’s overall budget results are ultimately dependent upon the performance of the national and state economies. Recent trends provide signs for cautious optimism that Connecticut’s economy is gaining strength through the first quarter of FY 2019.
The state Department of Labor (DOL) reported preliminary data showing Connecticut gained 1,100 net jobs (0.1%) in August, to a level of 1,699,600, seasonally adjusted. In addition, July’s originally-released job loss of 1,200 was revised up to a gain of 500 jobs over the month. With the upward revision for July, the state has now experienced four consecutive months of employment gains. The sectors that gained the most jobs in the month of August were education & health services (+1,000), leisure & hospitality (+700), professional & business services (+500), and construction (+500). The largest monthly job losses in August were in the trade, transportation & utilities (-900) and the government sector (-800).
Over the year, DOL reported that nonagricultural employment in the state grew by 18,800 jobs on a seasonally-adjusted basis. Construction and leisure & hospitality were the fastest growing sectors in the state’s labor market on a percentage basis, followed by education & health services and manufacturing.
Connecticut's unemployment rate stood at 4.3 percent in August, down one-tenth of a point from July 2018 and down two-tenths of point from a year ago when it was 4.5 percent. Nationally, the unemployment rate was 3.9% in August 2018, unchanged from July. Connecticut has now recovered 88.5% (105,400 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 102nd month and the state needs an additional 13,700 jobs to reach an overall employment expansion.
On September 25th, the Bureau of Economic Analysis 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. The percent change in personal income across all states ranged from 6.0 percent in Texas to 1.6 percent in Washington.
In its September 7th release, Berkshire Hathaway HomeServices reported results for the Connecticut housing market for the Connecticut housing market for August 2018 compared with August 2017. Sales of single family homes fell 6.13 percent, while the median sale price rose 3.70 percent. New listings increased by 1.38 percent in Connecticut and the median list price increased by 2.87 percent to $287,000 from a year ago. Average days on the market grew 18.31 percent in August 2018 compared to the same month in the previous year (84 days on average, up from 71 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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