November 2, 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 September 30, 2020.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2021 with a deficit of $1,261.6 million, an improvement of $763.3 million from last month’s estimate. This shortfall represents 6.3 percent of net General Fund appropriations.
The change from last month is due to an upward revision of projected revenues totaling a net $451.1 million combined with $309.2 million in lower anticipated net spending requirements.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2021 operations with a $55.2 million deficit, an improvement of $10.7 million from last month. The revised forecast is primarily due to enhanced sales tax collections of $8.9 million on the revenue side and lower projected expenditures totaling a net $1.3 million. The current projections would leave a positive STF balance of $113.2 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 FY 2021 deficit projections for the General and Transportation Funds through September 30, 2020. I should note these estimates are subject to change as the Office of Fiscal Analysis and OPM are scheduled to release an updated consensus revenue forecast on November 10, 2020.
Through the first quarter of FY 2021, OPM’s revenue estimates are consistent with trends my office is seeing. This month, several General Fund tax categories were revised upward to reflect better-than-expected collections to date. The largest change was in estimated and final income tax payments (+$210.0 million, or 10.9 percent) due to the strong September receipts. The Sales and Use Tax was increased by $90.7 million and the withholding portion of the income tax raised by $50 million as collections exceeded budget targets. The projection for the Pass-through Entity Tax (PET) improved by $85 million due to stronger than anticipated September estimated payments. In addition, the Real Estate Conveyance Tax was revised upward by $40 million due to improvements in the housing market and growth in sales. Finally, Federal grant revenue was increased by $22.4 million to capture an additional quarter of enhanced Medicaid payments under the Families First Coronavirus Response Act.
Improvements on the expenditure side of the budget fall into three general categories of increased lapses totaling a net $310.9 million compared with last month. First, the savings target for the Department of Social Services (DSS) has increased by a net $161.2 million, primarily due to the federal government’s extension of the pandemic public health emergency declaration through March 31, 2021 and its related impact on the Medicaid account. This change allows the state to claim enhanced federal matching for an additional quarter, thus reducing the General Fund’s share of expenditures. Second, OPM plans to transfer an additional $100 million in General Fund public health and safety expenditures to Federal Coronavirus Relief Funds (CRF) that were provided to Connecticut as part of the CARES Act. The balance of the lapse increases is largely made up of $25.3 million in rescissions from the Oct. 1 deficit mitigation plan, along with anticipated savings in various other agency accounts.
Based on current law, any General Fund deficit would be closed through a transfer from the Budget Reserve Fund (BRF). The BRF balance currently stands at $3,012,941,643, which represents 15 percent of net General Fund appropriations. The state has made enormous progress in building the BRF balance over the past three years, and temporarily exceeded the 15 percent threshold shortly after the close of FY 2020. This resulted in a transfer of $22.9 million from the BRF to the State Employee Retirement System (SERS) to reduce unfunded pension liability. As the state continues to face an unprecedented public health and economic crisis, Connecticut is better positioned to meet the challenges due to the strong position of the BRF. Factoring in the FY 2021 deficit projection of $1.26 billion, the BRF balance would be reduced to approximately $1.75 billion or 8.7 percent of net General Fund appropriations if current projections hold.
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 September and into October, the nation continued seeing high levels of initial unemployment insurance (UI) claims by historical standards. For the week ending October 24th the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled 751,000. This represents a decline of 40,000 from the 791,000 initial UI claims reported in the previous week. Analysts noted this is the lowest number of initial UI claims since mid-March. However, it is three and a half times higher than totals seen before the coronavirus hit. Prior to the pandemic, initial UI claims averaged closer to 210,000 per week. Continuing UI claims, for those who have been collecting for at least two weeks, declined by 709,000 to 7.75 million for the week ending October 17th. This measure gives a clearer picture of how many workers are still unemployed.
Connecticut also experienced historic levels of employment losses this spring, although has reversed that trend in recent months and began recovering jobs. On October 19th, Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for September 2020 from the business payroll survey administered by the U.S. Bureau of Labor Statistics (BLS). DOL’s Labor Situation report showed the state gained 17,000 net jobs (1.1 percent) to a level of 1,585,100 seasonally adjusted. At the same time, the August 2020 job gain of 20,400 was revised upward by an additional 1,500 jobs. The largest job growth in September was seen in leisure & hospitality, professional & business services and trade & information.
Despite recent gains, Connecticut’s employment level is still significantly down on a year-over-year basis. Compared with September 2019, nonagricultural jobs in the state fell by 103,200 (-6.1 percent) seasonally adjusted. All ten major job sectors experienced losses in September 2020 versus September 2019 levels. The leisure & hospitality sector remains particularly hard hit, losing almost a fifth of its jobs for the period, followed by the other services and the information sectors.
Connecticut's official unemployment rate stood at 7.8 percent in September, but DOL cautioned that figure continues to be significantly understated due to ongoing data collection and classification issues with this month’s Current Population Survey (CPS). DOL’s Office of Research estimates Connecticut’s unemployment rate to be much higher, in the range of 12-13 percent for the mid-August to mid-September period. By comparison, the official US jobless rate in September 2020 was 7.9 percent, although analysts noted that rate was likely understated due to the data collection issues noted above. One estimate by the Peterson Institute of International Economics put the U.S.’s “realistic unemployment rate” at 9.6 percent for September.
According to an October 29th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 33.1 percent in the third quarter of 2020, according to BEA’s advance estimate. This rebound comes after the worst quarter in U.S. history and was slightly better than economists predicted. In the second quarter of 2020, real GDP decreased 31.4 percent. Despite the positive GDP results for the 3rd quarter, analysts warned the U.S. economy still has a way to go to climb back to pre-pandemic levels. The reason is that third quarter GDP growth was calculated on a smaller economic base. In addition, the impact of earlier federal relief efforts in the form of supplemental unemployment payments and stimulus checks is fading, which could create a drag on fourth quarter growth.
On October 2nd, BEA reported updated state level GDP data. Real gross domestic product decreased in all 50 states and the District of Columbia in the second quarter of 2020. The percent change in real GDP in the second quarter ranged from -20.4 percent in the District of Columbia to -42.2 percent in Hawaii and Nevada. As noted above, for the nation as a whole GDP decreased at an annual rate of 31.4 percent. Connecticut fared slightly better than the nation and the New England region, with its GDP dropping 31.1 percent, which ranked 23rd overall. Connecticut industries experiencing the biggest declines on a percentage basis were health care and social assistance (-4.61 percent), accommodation and food services (-3.98 percent) and durable goods manufacturing (-3.47 percent).
The Conference Board reported that the Consumer Confidence Index declined slightly in October after a sharp increase in September. The Index now stands at 100.9, down from 101.3 in September. The October survey showed mixed results. Consumers’ assessment of current conditions improved, but expectations for the future declined. This was driven primarily by more pessimism about the short-term outlook for the job market. Overall, consumer confidence has partially recovered from the lows experienced during COVID-19 shutdowns in March and April but is still well below its pre-pandemic levels.
Berkshire Hathaway HomeServices reported another month of very strong results for the Connecticut housing market in September 2020 compared with September 2019. Sales of single-family homes increased by 47.34 percent, with the median sale price increasing by 29.06 percent. Continuing a trend from the last three months, new listings were up 11.40 percent in Connecticut. The median list price rose 27.79 percent to $344,900. At the same time, average days on the market decreased 15.07 percent in September 2020 compared to the same month in the previous year (62 days on average compared with 73 in September 2019).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales rose significantly in September 2020, representing four consecutive months of sales gains. Each of the four major regions experienced month-over-month and year-over-year growth, with the Northeast seeing the most improvement from the prior month. Total existing-home sales rose 9.4 percent from August to a seasonally adjusted annual rate of 6.54 million in September.
Nationally, home prices have remained strong during the pandemic. NAR noted the median existing-home price for all housing types in September was $311,800, up 14.8 percent from September 2019 ($271,500), as prices rose in every region. September's national price increase marks 103 straight months of year-over-year gains.
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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