July 1, 2020
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 May 31, 2020.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2020 with a deficit of $444.7 million, an improvement of $175.2 million from its May 20th estimate. OPM’s projection incorporates a net revenue increase of $83.6 million combined with lower net expenditures of $91.6 million.
The projected deficit represents 2.3 percent of General Fund expenditures for FY 2020. Due to the public health emergency declared on March 10, 2020 and the critical pandemic measures needed in response, no policy changes are being offered to mitigate the FY 2020 deficit. OPM notes that, according to existing state law, the deficit for FY 2020 will be addressed through a transfer from the Budget Reserve Fund after the close of the fiscal year.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2020 operations with a $162.8 million deficit, an increase of $44.5 million from last month’s estimate. This was due to net reductions in revenue of $53.6 million, which were partly offset by $9.1 million in lower anticipated spending. The current projections would leave a positive STF balance of $157.4 million at year-end.
The following analysis of the financial statements furnished by OPM is provided pursuant to Connecticut General Statutes (CGS) Section 3-115.
The Office of the State Comptroller (OSC) is in general agreement with OPM’s General and Transportation Fund deficit projections for FY 2020. As noted above, General Fund revenues improved by a net $83.6 million since last month and my office concurs with OPM’s assessment of the changes. These include a $116 million decrease in tax refunds to be issued in FY 2020 compared with earlier estimates. The refunds are now expected to be processed in FY 2021 based on delays in various tax filing deadlines. In addition, federal grant revenue has been increased by $90.9 million because the outpatient component of Medicaid hospital supplemental payments was approved and have been received in FY 2020. Further timing shifts have resulted in lower revenue estimates, including a $50 million decrease in Inheritance and Estate Taxes. Coronavirus shutdowns and distancing efforts are responsible for other revenue reductions this month. For example, the Real Estate Conveyance tax was lowered by $50 million to reflect the reduced number of transactions completed in recent months. Similarly, Licenses, Permits and Fees have been reduced by $20 million to account for lower fees due to court system closures.
Due to the delays in various tax filing deadlines and the potential shifting of revenues between years, the statutory tax accrual period will be especially important for FY 2020 final operating results. For several of the larger tax categories, payments received through the first five business days of August are accrued back and recorded as revenue in the previous fiscal year. This year, the Department of Revenue Services will have 17 business days (July 16 – August 7) to process large number of returns, which normally would have been received in April. This adds a level of uncertainty to this year’s collection efforts and makes forecasting results more difficult.
Net General Fund expenditures, inclusive of the June 4th Finance Advisory Committee transfers, are projected to be $91.6 million lower than last month’s estimate. Illustrating the unusual nature of the coronavirus’s impact on FY 2020, the Department of Correction’s personal services account is expected to end the year $21.1 million above its appropriation. Normally this type of deficiency would be resolved through legislative action. However, the General Assembly’s session was cut short due to COVID-19 related concerns. Therefore, this shortfall will become part of the General Fund deficit at year-end and will be resolved through the transfer from the Budget Reserve Fund.
The statutory revenue volatility cap requires receipts above a certain threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2020, the cap is $3,294.2 million for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. If current projections are realized, a $318.3 million volatility transfer would be made to the BRF. Due to recent economic disruptions, stock market losses and extensions of various tax filing deadlines, this projection will need to be revisited as more information becomes available from the statutory tax accrual period.
The balance of the BRF presently stands at $2,505,537,507. Adding the estimated $318.3 million volatility transfer, less the projected FY 2020 deficit of $444.7 million would bring the year-end balance of the BRF to approximately $2.38 billion. This would represent 11.9 percent of net General Fund appropriations for FY 2021. The state has made enormous progress in building the BRF balance over the past two years. Now, as the state faces this unprecedented public health and economic crisis, Connecticut is better positioned to meet the challenge.
A debate continues in Washington DC regarding whether another federal relief bill is needed, as state and local governments struggle to address the COVID-19 pandemic at a time when revenues are dropping precipitously. The drastic combination of tax increases and spending cuts needed to close future budget gaps would cause an immense amount of harm. At the same time, unemployment benefits from the CARES Act are schedule to expire on or before July 31st. With a recent resurgence of the coronavirus in the southern and western U.S., states have begun to slow or reverse some reopening decisions, adding to the nation’s economic uncertainty. Federal reserve chairman Jerome Powell has warned the recovery may take time to gather momentum and additional relief efforts will be necessary to prevent long term damage to the economy. Therefore, my office strongly supports providing continued assistance to vulnerable families and businesses as well as new efforts to provide revenue support for state and local governments to help maintain vital public services during this crisis.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Virtually all economic measures look back at past periods. In the present situation, therefore, some economic indicators presented below may appear inconsistent with more recent developments in the rapidly changing response to the COVID-19 pandemic.
Throughout May and into June, the nation continued seeing historically high levels of initial unemployment insurance (UI) claims. For the week ending June 20th, the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled 1.48 million, the 14th week in a row these claims have totaled over one million. Continuing UI claims, for those who have been collecting for at least two weeks, totaled 19.52 million for the week ending June 13th. This measure gives a clearer picture of how many workers are still unemployed. The number of continuing UI claims remains persistently high, despite dropping 667,000 from the previous week.
Connecticut has also experienced historic levels of job losses in recent months, although the extent is not be fully reflected in the most recent unemployment rate for May. On June 18th, Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for May 2020 from the business payroll survey administered BLS. DOL’s Labor Situation report showed the state gained 25,800 net jobs (1.8 percent) to a level of 1,434,000 seasonally adjusted. However, the April 2020 originally released job loss of 266,300 was revised down to a loss of 269,200 jobs.
Over the year, nonagricultural employment in the state fell by 251,400 (-14.9 percent) seasonally adjusted. The leisure & hospitality sector was particularly hard hit, losing approximately half its jobs for the period, followed by the other services and the trade, transportation & utilities sectors. Connecticut's official unemployment rate stood at 9.4 percent in May, but DOL cautioned that figure is significantly understated due to ongoing data collection and classification issues with this month’s Current Population Survey. DOL’s Office of Research estimates Connecticut’s unemployment rate to be much higher, in the range of 19 percent for the mid-April to Mid-May period. By comparison, the official US jobless rate in May 2020 was 13.3 percent, although analysts noted that rate was likely understated due to the data issues noted above. One estimate by the Peterson Institute of International Economics put the US’s “realistic unemployment rate” at 17.1 percent for May.
On June 23rd, the Bureau of Economic Analysis reported that Connecticut’s personal income grew by a 2.4 percent annual rate between the fourth quarter of 2019 and the first quarter of 2020. Based on this result, Connecticut ranked 26th in the nation for first quarter income growth. Connecticut’s growth rate was equal to the New England region’s and slightly above the national average rate of 2.3 percent. The percent change in personal income across all states ranged from 4.9 percent in New Mexico to -0.3 percent in Michigan.
The Conference Board reported that the Consumer Confidence Index increased in June after recording virtually no change in May. The Index now stands at 98.1, up from 85.9 in May. The result was better than anticipated. Economists polled by Dow Jones had expected a consumer confidence level of 91.0 in June. The release noted the partial rebound in June was well below pre-pandemic levels but reflected less pessimism among consumers due to the re-opening of the economy and relative improvement in unemployment claims.
On June 16th, the Commerce Department reported that U.S. advance retail sales rose by a record 17.7 percent in May as business began to reopen after coronavirus closures. The growth in retail sales was better than analysts predicted. Economists surveyed by Dow Jones had anticipated 8 percent growth. At the same time, retail sales were down 6.1 percent from May 2019 levels.
Berkshire Hathaway HomeServices reported results for the Connecticut housing market for May 2020 compared with May 2019. Sales of single-family homes dropped by 19.87 percent, with the median sale price increasing by 5.36 percent. Reflecting the continuing impact of COVID-19 and social distancing efforts, new listings were down 28.11 percent in Connecticut. However, the median list price rose 3.49 percent to $299,000. Average days on the market decreased 7.59 percent in May 2020 compared to the same month in the previous year (73 days on average compared with 79 in May 2019).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales fell in May 2020, continuing a three-month drop in sales brought on by the coronavirus pandemic. Each of the four major regions witnessed declines in month-over-month and year-over-year sales, with the Northeast experiencing the greatest month-over-month drop. Total existing-home sales decreased 9.7 percent from April to a seasonally adjusted annual rate of 3.91 million in May. Overall, sales fell year-over-year, down 26.6 percent from a year ago. While sales declined, home prices remained strong. According to NAR, the median existing-home price for all housing types in May was $284,600, up 2.3 percent from May 2019 ($278,200), as prices increased in every region. May’s national price increase marks 99 straight months of year-over-year gains.
On a positive note, Connecticut remains among the most innovative state economies in the nation based on Bloomberg’s 2020 U.S. State Innovation Index. Connecticut was ranked the fourth most innovative state economy for the second year in a row. The innovation index is based on six equally weighted metrics: research and development intensity; productivity; clusters of companies in technology; jobs in science, technology, engineering and mathematics (STEM); proportion of the population with degrees in science and engineering; and patent activity. Connecticut’s overall score was 82.18, behind only California, Massachusetts and Washington. On the innovation index measures, Connecticut showed strength across all six categories, including ranking second in the U.S in patent activity.
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 $771.4 million as of June 30, 2019.
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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