August 2, 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 June 30, 2021.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2021 with a surplus of $271.9 million, an increase of $114.9 million from last month’s estimate. This projected surplus represents 1.4 percent of net General Fund appropriations. The change from last month is due to revenue improvements of $59.6 million combined with expenditure reductions of $55.3 million. My office is forecasting a General Fund surplus that is higher by $35 million for the reasons described below.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2021 operations with a $52.8 million surplus. This represents an $11.1 million improvement from last month, primarily due to lower anticipated spending of $12.8 million. This was partially offset by a $1.7 million reduction in revenues. The current projections would leave a positive STF balance of $221.1 million at year-end. My office is in general agreement with OPM’s STF forecast.
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 projecting a General Fund surplus of $306.9 million, representing 1.5 percent of net General Fund appropriations. The difference with OPM is on the revenue side, with OSC projecting $25 million more in income tax withholding receipts due to recent job growth and positive collection trends through June 30th. In addition, my office has a $10 million higher estimate for miscellaneous revenues due to better than expected fringe benefit recoveries for the General Fund.
OSC generally agrees with OPM’s expenditure analysis and the other changes to General Fund revenue projections this month. This includes upward revisions of $50 million to the Corporation Tax and $40 million to the estimated and finals portion of the Personal Income Tax due to strong June receipts. Offsetting these improvements is a $25 million decrease in the Pass-Through Entity Tax. Based on this month’s changes, the revenue volatility transfer projection for FY 2021 increased by $15 million. All other revenue changes net to a negative $10.4 million. The full General Fund revenue schedule is attached in Exhibit C.
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 just over $3.4 billion for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. If current trends hold, the anticipated volatility transfer to the BRF will be approximately $1.22 billion.
The balance of the BRF presently stands at $3,012,941,643. Adding the estimated $1.22 billion volatility transfer, plus the projected FY 2021 surplus of $306.9 million would bring the year-end balance of the BRF to over $4.5 billion, or approximately 21.9 percent of net General Fund appropriations for FY 2022. 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. Based on the current projection, approximately $100 million of the surplus and volatility transfer would remain in the BRF in FY 2022 to keep it at 15 percent and $1.4 billion would be available to reduce unfunded pension liability. After decades of underfunding, a significant additional contribution towards unfunded pension liability would be a welcome reversal from past practice and create more budgetary flexibility in future fiscal years.
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends:
The national jobs and unemployment picture continued to brighten in June amid ongoing COVID-19 vaccination efforts and the further easing of state restrictions on businesses. The Bureau of Labor Statistics (BLS) reported the U.S. added 850,000 jobs in June, a continued improvement from May’s revised, estimated growth of 583,000. Notable job gains in June occurred in leisure and hospitality, public and private education, professional and business services, and retail trade.
In June the national unemployment rate was little changed at 5.9 percent, but still higher than pre-pandemic levels of 3.5 percent. In addition, the number of long-term unemployed people (those jobless for 27 weeks or more) increased by 233,000 to 4.0 million, following a decline of 431,000 in May. This long-term unemployed group accounted for 42.1 percent of the total unemployed in June. An issue to watch for July and the coming months will be the impact of rising COVID-19 cases on job growth due to the emergence of the delta variant amid vaccine hesitancy in various regions of the country.
On July 15th, the Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for June 2021 from the business payroll survey administered by BLS. DOL’s Labor Situation report showed the state gained 3,500 net jobs (0.2%) in June to a level of 1,592,400 jobs seasonally adjusted. This follows job growth of 8,100 positions in May and represents six consecutive months of employment gains.
DOL noted that four of the ten major industry sectors experienced improvement while six experienced declines in June. The government sector added 4,100 jobs, led by local government, followed by other services (+2,400), leisure & hospitality (+1,600) and professional and business services (+200). The sectors that lost jobs in June include trade, transportation & utilities (-1,400), construction & mining (-1,000), financial activities (-700), manufacturing (-700), education & health services (-600) and information (-400).
In terms of COVID-19 job losses, Connecticut reached its pandemic-related employment low in April of 2020. Fourteen months later, the state’s total payroll employment is now 102,000 positions higher than June 2020, representing an increase of 6.8 percent. Connecticut has now recovered 64.6 percent of the 292,400 jobs lost in March and April 2020 due to the COVID-19 lockdown. Connecticut's official unemployment rate stood at 7.9 percent in June 2021, down from 8.1 percent a month earlier and 11.4 percent from a year ago.
According to a July 29th report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 6.5 percent in the second quarter of 2021. This follows a 6.3 percent real GDP increase in the first quarter of 2021. BEA noted the second quarter results reflected the continued economic recovery, reopening of establishments, and continued government response related to the COVID-19 pandemic. However, the growth rate was lower than many experts projected. For example, economists surveyed by Dow Jones expected a gain of 8.4 percent for the second quarter.
The Conference Board reported that the Consumer Confidence Index held steady in July following gains in each of the prior five months. The Index now stands at 129.1, up from June’s revised reading of 128.9 and the highest level since February 2020, just before the pandemic began. The index is closely watched by economists because consumer spending accounts nearly 70 percent of U.S. economic activity.
Berkshire Hathaway HomeServices reported another month of strong results for the Connecticut housing market in June 2021 compared to last year. Sales of all property types grew 32.44 percent, with the median sales price increasing by 21.79 percent. New listings were down 5.67 percent this June versus last year. The median list price was up 15.79 percent while average days on the market decreased 50.67 percent in June 2021 compared to the June 2020 (37 days versus 75 in June 2020). On average, sales prices came in above list prices in June, with a list/sell price ratio of 102.9 percent.
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales bounced back in June 2021. Three of the four major U.S. regions had month-over-month sales growth in June. Total existing-home sales increased 1.4 percent from May to a seasonally adjusted annual rate of 5.86 million in June. Year-over-year sales were up 22.9 percent from a year ago (4.8 million in June 2020) reflecting the pandemic’s impact on the housing market.
Nationally, home prices have remained strong during the pandemic. NAR reported the median existing-home price for all housing types in June was $363,300, up 23.4 percent from June 2020 as prices increased in every region. June’s national price growth marks 112 straight months of year-over-year gains dating back to March 2012. All regions of the country experienced double-digit price growth from a year ago. The largest regional gains on a percentage basis were in the Northeast (+23.6%), followed by the South (+21.4%). The Midwest increased 18.5 percent and the West grew 17.6 percent.
While some residents have benefitted from the booming housing market, not all felt the positive effects. Rising prices in the housing market have also had an impact on renters. According to Apartment Guide’s June 2021 Rent Report, the national average price to rent a one-bedroom apartment was $1,711, up 5.2 percent from the prior year. In Connecticut, average rent has increased even more year-over-year, up 12.42 percent from $1,661 to $1,868. Thirty five percent of households rent their homes in Connecticut. Studies by Pew Charitable Trusts and other organizations have shown rent increases have long outpaced income growth, placing a particular burden on lower income households. Now, as pandemic-related protections and eviction moratoria expire, this problem will grow more acute in the coming months, demanding a response from state and national policy makers.
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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