April 1, 2019
The Honorable Ned Lamont
Governor of the State of Connecticut
Dear Governor Lamont:
I write to provide you with financial statements for the General Fund and the Transportation Fund through February 28, 2019.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2019 with a surplus of $496.4 million, a decrease of $19.7 million from last month's estimate. The change in OPM's surplus projection is due to higher anticipated expenditures for Adjudicated Claims and the Care4Kids program. My office is currently projecting a somewhat lower General Fund surplus of $485.5 million for reasons explained below.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2019 operations with a $74.5 million surplus, a $1.5 million increase from last month's estimate. This would leave a positive STF balance of $320.2 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 Connecticut General Statutes (CGS) Section 3-115.
As noted above, OSC is projecting a General Fund surplus of $485.5 million for FY 2019. This represents a reduction of $23.3 million from last month's estimate. My office is currently projecting a $58.9 million deficiency in the non-appropriated Adjudicated Claims account, $10.9 million higher than OPM. 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.
In addition, my revenue projection for the estimated payments portion of the income tax remains $100 million lower than the January consensus forecast and OPM's letter of March 20th. My office reached this determination based on a drop-off in estimated payment receipts through February, which continue to under-perform their budget targets. This difference has no impact on the current surplus projection for the General Fund. However, the lower forecast for estimated payments would reduce the anticipated volatility transfer to the Budget Reserve Fund (BRF).
I would caution that April remains the most important month for revenue collections, especially for the final payments portion of the income tax. Due to significant Federal tax changes, and state level changes in response, this year's cycle is more difficult to predict than usual. The withholding portion of the income tax continues to exceed budget targets, as do refunds. The newly enacted Pass-through Entity tax on partnerships and S corporations is performing well and may help offset some of the shortfall to date in income tax estimated and final payments. As a result, current projections could change dramatically when the next consensus revenue forecast is released on April 30th.
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 Pass-through Entity tax. If OSC's current projections are realized, a $548.0 million volatility transfer would be made to the BRF.
The current balance of the BRF is $1,185,259,428. Adding OSC's estimated $548.0 million volatility transfer and the projected FY 2019 surplus of $485.5 million would bring the year-end balance of the BRF to just over $2.2 billion, or approximately 11.7 percent of General Fund expenditures. This result, if achieved, would represent a significant improvement over the recent past and move the BRF closer to the statutory target of 15 percent. At the same time, a number of forecasts are predicting slower growth for the United States and other major economies. In testimony before Congress, Federal Reserve Chairman Jerome Powell recently warned of growing risks to the economy, including a global slowdown, volatile financial markets and uncertainty about Brexit and U.S. trade policy. All of these risk factors are beyond the control of state policy makers in Connecticut. However, policy makers can help ensure that Connecticut continues to build a strong balance in the BRF to protect against any future downturn that might result.
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 400 net jobs in February, to a level of 1,693,900, seasonally adjusted. In addition, January's originally-released job gain of 1,000 was revised sharply downward to a loss of 2,500 jobs over the month. DOL noted part of the reduction was related to the normal benchmark revision process as more complete data became available. The other factor was a correction to estimates for the construction sector of the workforce. Over the year, DOL reported that nonagricultural employment in the state grew by 4,600 jobs on a seasonally-adjusted basis. Construction, information and leisure & hospitality were the fastest growing sectors in the state's labor market on a percentage basis. The professional & business services, transportation & public utilities and other services sectors experienced job losses for the year.
Connecticut's unemployment rate stood at 3.8 percent in February, unchanged from the revised January figure and down seven-tenths of a point from a year ago when it was 4.5 percent. Nationally, the unemployment rate was 3.8 percent in February 2019, down two-tenths of a point from January's revised estimate. Connecticut has now recovered 80.7 percent (97,100 payroll job additions) of the 119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). As of February, the job recovery was into its 109th month and the state needed an additional 23,200 new net jobs to reach an overall employment expansion.
On March 26th, the Bureau of Economic Analysis (BEA) reported that Connecticut"s personal income grew by a 3.4 percent annual rate for 2018. Based on this result, Connecticut ranked 42nd in the nation for 2018 income growth. This growth rate was below both the national average of 4.5 percent and the New England region's average rate of 3.9 percent. In the same report, BEA issued preliminary results for personal income growth between the third and fourth quarters of 2018. On this separate measure, Connecticut fared better growing at a seasonally adjusted 5.2 percent rate in the fourth quarter of 2018. Based on this level of growth, Connecticut ranked 22nd in the nation, equal to the U.S. average. It also represented the strongest growth rate in the New England region for the period.
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for February 2019 compared with February 2018. Sales of single-family homes fell 2.20 percent, while the median sale price declined 2.08 percent. New listings dropped by 11.91 percent in Connecticut and the median list price fell by 4.00 percent to $239,900 from a year ago. Average days on the market decreased 11.43 percent in February 2019 compared to the same month in the previous year (93 days on average, down from 105 days).
For the U.S. housing market, existing-home sales experienced a strong rebound for the month in February, according to the National Association of Realtors (NAR). February sales were up 11.8 percent from January to a seasonally adjusted annual rate of 5.51 million. Three of the four major U.S. regions saw sales gains, while the Northeast remained unchanged from the previous month. However, compared with a year ago, U.S. sales were down 1.8 percent (5.61 million in February 2018).
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 $241.1 million as of June 30, 2018.
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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