April 1, 2021
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, 2021.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2021 with a surplus of $180.6 million, an increase of $49.2 million from last month’s estimate. This projected surplus represents 0.9 percent of net General Fund appropriations. The change from last month is primarily due to improvements in revenue trends.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2021 operations with a $50.3 million deficit. This represents a $9.3 million improvement from last month, mainly due to lower anticipated personal services expenditures related to vacant positions at the Department of Transportation. The current projections would leave a positive STF balance of $118.8 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 Fund and Transportation Fund projections through February 28, 2021.
As noted, the improvement for the General Fund is primarily on the revenue side. The most significant change is to the Pass-Through Entity Tax, which is running well ahead of budget target and was increased by $200 million. Other positive changes include a $40 million upward revision to the Real Estate Conveyance tax, reflecting the strong performance of the housing market. The Corporation tax has had robust collections to date and was raised by $30 million, while other General Fund revenue changes net to a positive $20 million. On the downside, the Health Provider tax is trending below budget target and was revised downward by $30 million. These revenue changes are also in line with newly released projections by the Office of Fiscal Analysis (OFA). Despite these net improvements, General Fund revenues are still $430.8 million or 2.1 percent below the initial budget plan for FY 2021.
A recent development will introduce some additional uncertainty into projecting revenues to year-end. April is normally the key month for the final payments portion of the income tax. In a typical year, 60 to 70 percent of final payments are collected, representing over a billion dollars in revenue for the General Fund. This year, the Department of Revenue Services (DRS) has extending the filing and payment deadline for Connecticut individual income tax returns to Monday, May 17th. This change aligns Connecticut with the Federal filing deadline, which postponed as part of the American Rescue Plan Act. In terms of timing, this revenue will still fall within FY 2021 – so that is not an issue. Rather the delay will make it more difficult to project revenues to year-end. Normally OPM and OFA release a consensus revenue forecast on April 30th, which also has an impact on the revenue schedule incorporated into the following year’s budget. Therefore, information typically available at the end of April will be delayed a month to the end of May adding some unpredictability to the process.
The statutory revenue volatility cap requires receipts above a certain threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2021, the cap is $3,404.9 million for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. Therefore, the $200 million increase in the PET projection reported this month does not add to the General Fund surplus. Instead it increases the anticipated transfer to the BRF from $355.1 million to $555.1 million if current trends hold.
The balance of the BRF presently stands at $3,012,941,643. Adding the estimated $555.1 million volatility transfer, plus the projected FY 2021 surplus of $180.6 million would bring the year-end balance of the BRF to just under $3.75 billion, or approximately 18.7 percent of net General Fund appropriations. Based on current law, any balances above the 15 percent threshold would result in additional contributions to either the State Employees Retirement Fund or the Teachers’ Retirement Fund, depending on what the State Treasurer decides is in the best interest of the state. An additional contribution of that size towards unfunded pension liability would be a welcome reversal from decades of underfunding and create more budgetary flexibility in future years.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends:
Throughout February and into March, the nation continued seeing high levels of initial unemployment insurance (UI) claims, although there were improvements in the most recent report. For the week ending March 20th, the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial claims totaled 684,000. While still very high by historical standards, this represent a decrease of 97,000 from the previous week's revised level of 781,000 and was the lowest since March 14, 2020, just before the pandemic shutdowns began.
However, an ongoing issue of great concern is the high number of the long-term unemployed, which is defined as being jobless for 27 weeks or longer. BLS estimated this population at 4.1 million, which is up by 3.0 million over the same period last year. In February 2021, the long-term unemployed accounted for 41.5 percent of the total unemployed in the U.S. Analysts believe the actual number is higher because it does not include people who have lost their jobs and given up on looking for employment. The official rate can mask even higher rates for minorities and women, with women more likely to drop out of the workforce to care for children during the pandemic. Long-term unemployment can have devastating consequences for individuals, families and communities and therefore addressing this area will need to be a priority as the state and nation continue to recover from the pandemic-related recession.
After Connecticut experienced historic levels of employment losses this past March and April, the state began regaining jobs over the following six months. Later in the calendar year, the employment recovery stalled as coronavirus infection rates rose. More recently new information released by the Connecticut Department of Labor (DOL) indicates the trend is starting to move in a better direction in the early months of 2021. On March 25th DOL reported the preliminary Connecticut nonfarm job estimates for February 2021 from the business payroll survey administered by the U.S. Bureau of Labor Statistics (BLS). DOL’s Labor Situation report showed the state gained 3,000 net jobs (0.2%) in February to a level of 1,574,800 jobs seasonally adjusted. At the same time, the preliminary January 2021 job loss estimate of 100 was revised to a gain of 1,000 jobs.
Connecticut’s total payroll employment is still 121,500 positions below where it was a year ago, representing a decrease of 7.2 percent. The state has now recovered 170,900 of the 292,400 (or 58.4%) of the jobs lost in March and April 2020 due to the COVID-19 lockdown. Among the major job sectors, all ten experienced losses in February 2021 versus February 2020 levels. The leisure & hospitality sector remains particularly hard hit, losing nearly one-fourth of its jobs for the period, followed by the other services and government sectors. Connecticut's official unemployment rate stood at 8.5 percent in February 2021, up from 8.1 percent a month earlier and significantly higher than the 3.7 percent rate a year ago. The U.S. jobless rate in February was 6.2 percent, down one-tenth of a point from the previous month, but up from the 3.5 percent rate in February 2020.
According to a March 25th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 4.3 percent in the fourth quarter of 2020, according to BEA’s third estimate. This represents an upward revision from the 4.1 percent second estimate released last month. BEA reported the fourth-quarter growth in real GDP reflected increases in exports, business investment, consumer spending, housing investment, and inventory investment. These categories were partially offset by a decrease in government spending, primarily related to state and local governments. Imports, a subtraction in the calculation of GDP, increased.
On March 26th, BEA reported updated state level GDP results. Real GDP increased in all 50 states and the District of Columbia in the fourth quarter of 2020. The percent change in real GDP in the fourth quarter ranged from 9.9 percent in South Dakota to 1.2 percent in the District of Columbia. Connecticut fared better than both the national and the New England regional averages, with its GDP growing 7.0 percent at an annual rate, which ranked 4th in the U.S. overall. The Connecticut industries experiencing the largest gains on a percentage basis were finance & insurance (+2.27%), nondurable goods manufacturing (+0.70%) and health care & social assistance (+0.66%).
The Conference Board reported that the Consumer Confidence Index surged in March to its highest level in a year. The Index now stands at 109.7, up from February’s revised reading of 90.4. The result was better than expected; economists polled by The Wall Street Journal projected the indicator to come in at 96.8. The rise in confidence was driven by the increased number of vaccinations, paired with a new round of federal stimulus checks.
On March 16th, the Commerce Department reported that U.S. advance retail sales were $561.7 billion in February 2021, a decrease of 3.0 percent from the previous month. Analysts noted the drop was larger than expected and likely reflected severe winter weather across the southern United States combined with the fading impact of the $600 stimulus payments sent out as part of the December federal relief bill. The percent change in January retail sales was revised up from 5.3 percent to 7.6 percent.
According to a March 24th report by the U.S. Department of Commerce, new orders for manufactured durable goods decreased $2.9 billion or 1.1 percent in January to $254.0. Economists had not expected a decline after nine consecutive months of increases but pointed to severe winter storms in Texas and other southern U.S states for the drop. January’s increase in durable goods orders was 3.5 percent.
Continuing a trend from recent months, Berkshire Hathaway HomeServices reported another month of strong results for the Connecticut housing market in February 2021 compared with February 2020. Sales of single-family homes grew 15.48 percent, with the median sale price increasing by 29.50 percent. New listings were down 31.50 percent this February versus last year, but the median list price was up 29.44 percent, which may indicate the lack of new inventory is helping to drive prices higher. At the same time, the average sales price is up 50.29 percent pointing to a very strong market for higher priced homes. Average days on the market decreased 31.18 percent in February 2021 compared to the same month in the previous year (64 days on average compared with 93 in February 2020).
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales dropped in February 2021, after two months of growth. Only one region had month-over-month sales growth in February. However, all four major U.S. regions experienced year-over-year gains. Total existing-home sales decreased 6.6 percent from January to a seasonally adjusted annual rate of 6.22 million in February. Sales in total rose year-over-year, up 9.1 percent from a year ago (5.70 million in February 2020).
Nationally, home prices have remained strong during the pandemic. NAR reported the median existing-home price for all housing types in February was $313,000, up 15.8 percent from February 2020 ($270,400), as prices increased in every region. February's national price growth marks 108 straight months of year-over-year gains.
My office also issues a Comprehensive Annual Financial Report as an accounting supplement to the budgetary report. The annual report for FY 2020 was published on February 19, 2021 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 $1,072.2 million as of June 30, 2020.
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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