December 31, 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 November 30, 2021.
The Office of Policy and Management (OPM) is projecting that the General Fund will end Fiscal Year 2022 with a surplus of $911.9 million, an increase in $17.2 million from last month. The projected surplus represents 4.4 percent of net General Fund appropriations. The improvement is due to lower anticipated expenditure requirements. Revenue estimates continue to reflect the November 10, 2021 consensus forecast and remain unchanged from the prior month.
OPM is projecting that the Special Transportation Fund (STF) will end Fiscal Year 2022 operations with a $254.9 million surplus, a $3.6 million increase from last month based on higher projected lapses in various accounts. Vacant positions are responsible for larger Personal Services savings at both Department of Motor Vehicles and Department of Transportation and there is a corresponding decrease in STF fringe benefits paid centrally by my office. Current projections would leave a positive STF balance of $496.0 million on June 30, 2022.
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 surplus projections through November 30, 2021. The vast majority of the General Fund surplus is associated with revenues exceeding the budget plan ($802.6 million) versus lower than anticipated expenditures ($109.3 million). As OPM notes in its letter, significant levels of one-time Federal support from the American Rescue Plan Act (ARPA) are driving the FY 2022 surplus higher and helping to balance the FY 2023 budget. Therefore, it remains necessary to exercise fiscal restraint in the months ahead and in the mid-term budget revisions for FY 2023. I should also note the upcoming consensus revenue forecast for January 18th could have a material impact on these projections going forward.
On the expenditure side, the largest category of General Fund lapses continues to be in the Medicaid account within the Department of Social Services. The extension of the public health emergency through March 31, 2022 and continuation of the enhanced federal contribution has reduced the General Fund’s portion of Medicaid costs.
The statutory revenue volatility cap requires receipts above a certain level to be transferred to the Budget Reserve Fund (BRF). For FY 2022, the cap is just over $3.5 billion for estimated and final income tax payments and revenue from the Pass-through Entity (PET) tax. The balance in the BRF presently stands at $3.11 billion, the statutory threshold of 15 percent. Adding the anticipated revenue volatility transfer of $969.2 million and the projected FY 2022 surplus of $911.8 million would bring the BRF balance to $4.99 billion or 24.1 percent of net General Fund appropriations for FY 2022.
After the close of the fiscal year, once the 15 percent threshold is reached, no further transfers can be made to the BRF. If current projections hold, approximately $1.76 billion would be available to reduce unfunded pension liability. By statute, the State Treasurer decides what is in the best interest of the state, whether to transfer the excess balance as an additional contribution to the State Employee Retirement Fund (SERF) or to the Teachers' Retirement System (TRS).
Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. Recent economic indicators include the following trends:
National employment growth was disappointing in November after several months of encouraging growth. The Bureau of Labor Statistics (BLS) reported the U.S. added 210,000 jobs in November after adding 546,000 in October and 379,000 in September. This marks eleven straight months of improvements. Job gains occurred in professional and business services (+90,000), transportation and warehousing (+50,000), construction (+31,000), and manufacturing (+31,000). Both the information (-2,000) and government (-25,000) sectors declined in November. Nonfarm payroll employment is up by 18.5 million since April 2020 but is down by 3.9 million, or 2.6 percent, from its pre-pandemic level in February 2020.
In November, the national unemployment rate declined by 0.4 percentage points to 4.2 percent. This is still higher than pre-pandemic levels (3.5 percent) but demonstrates how fast unemployment has recovered compared to previous recessions. The COVID-19 pandemic created the highest national unemployment rate (14.8 percent) since the Great Depression (25.6 percent) yet rebounded to under 5 percent in less than a year and a half. The number of unemployed people decreased to 6.9 million, inching closer to pre-pandemic levels (5.7 million). The number of long-term unemployed people, those jobless for 27 weeks or more, decreased to 2.2 million, and account for 32.1 percent of the total unemployed in November. The labor force participation rate inched up to 61.8 percent changing little since June of 2020.
On December 16, the Connecticut Department of Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for November 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 5,600 net jobs (0.3 percent) in November to a level of 1,624,200 jobs seasonally adjusted. This follows job growth of 7,100 positions in October and represents eleven consecutive months of employment gains. DOL reported Connecticut has now recovered 75.3 percent of the 292,400 jobs lost in March and April 2020 due to the COVID-19 lockdown.
On a month-to-month basis, DOL noted that nine of the ten major industry sectors experienced improvement while one declined. Manufacturing led the way (+1,700), followed by construction and mining (+1,200), and government (+1,200). The financial activities sector was the only one that lost jobs month over month (-1,100). Connecticut's official unemployment rate dropped to 6.0 percent in November, down from 6.4 percent a month earlier and 8.2 percent from a year ago. On a year-over-year basis, eight sectors experienced gains and two experienced losses. The leisure & hospitality sector, hardest hit during the pandemic, experienced the largest gains (+16,100), growing 13.5 percent from a year ago. Information and financial activities lost jobs over the same period.
According to a December 22 report from the Bureau of Economic Analysis (BEA), U.S. Real Gross Domestic Product (GDP) increased at an annual rate of 2.3 percent in the third quarter of 2021, a 0.2 percent increase to the 2.1 percent first estimate. This follows a 6.7 percent real GDP increase in the second quarter. BEA noted the third quarter results reflected the continued economic impact of the COVID-19 pandemic. A resurgence of COVID-19 cases resulted in new restrictions and delays in the reopening of establishments in some parts of the country. Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased.
According to BEA, real gross domestic product (GDP) increased in 37 states and the District of Columbia in the third quarter of 2021. The percent change in real GDP in the first quarter ranged from 6 percent in Hawaii to -3.3 percent in New Hampshire. Connecticut’s GDP growth rate of 2.7 percent ranked 15th in the nation and came in above the New England regional average of 2.6 percent and the national average of 2.3 percent. Connecticut industries experiencing the largest gains on a percentage basis were finance and insurance (+1.29%), professional, scientific, and technical services (+0.75%), and nondurable goods manufacturing (+0.51%).
Consumer spending is the main engine of the U.S. economy, accounting for more than two-thirds of total economic output. According to the U.S. Department of Commerce, advance retail sales were $639.8 billion in November, up 0.3 percent from October. This modest increase was lower than analysts expected due to the holiday shopping season. Sectors with the largest gains include gasoline stations (+1.7%), sporting goods, hobby, musical instrument, & bookstores (+1.3%), food and beverage stores (+1.3%), and food services and drinking places (+1.0%). Sectors that experienced a step back include electronic and appliance stores (-4.6%), general merchandise stores (-1.2%), and health and personal care stores (-0.6%). Core retail sales increased 0.2 percent in November which excludes automobiles, gasoline, building materials and food services.
The U.S. consumer confidence index (CCI) is published by the Conference Board and looks at U.S. consumer’s views of current economic conditions and their expectations for the next six months. Confidence improved in December with the CCI now standing at 115.8, up from November’s revised reading of 111.9. The Conference Board noted that fears about inflation declined after hitting a 13-year high last month as did concerns about COVID-19, despite reports of continued price increases and the emergence of the Omicron variant. However, looking forward to 2022, the Conference Board predicted both confidence and consumer spending will continue to face headwinds from rising prices and an expected winter surge of the pandemic.
Connecticut’s housing market continued its recent slow-down in November as sales, new listings, and average list prices all decreased. Berkshire Hathaway HomeServices reported year over year sales of single-family homes decreased 17.17 percent and new listings were down 13.62 percent. Median sales price increased by 6.25 percent and median list price increased by 6.25 percent. Average sales price increased 0.98 percent and average list price decreased 0.65 percent. Average days on the market decreased to 41 days from 54 a year ago. On average, sales prices came in above list prices, with a list/sell price ratio of 100.9 percent. Inventory sits at a 1.7-month supply at the current sales pace, down from last month and last year.
For the U.S. housing market, the National Association of Realtors (NAR) reported existing-home sales increased 1.9 percent to a seasonally adjusted annual rate of 6.46 million in November. Three of the four major U.S. regions had month-over-month sales increases. However, year-over-year sales dropped 2 percent from November 2020 (6.59 million).
NAR reported the median existing-home price for all housing types was $353,900, up 13.9 percent from last year as prices increased in every region. This price growth marks 117 straight months of year-over-year gains dating back to March 2012. All regions of the country experienced price growth from a year ago. The largest regional gains on a percentage basis were in the South (+18.4%), followed by the Midwest (+9%), the West (+8.4%), and the Northeast (+4.7%). November’s inventory totaled 1.11 million units, down 9.8 percent from October and down 13.3 percent from one year ago. Unsold inventory sits at a 2.1-month supply at the current sales pace, below the desired pace of six months.
My office also issues a Comprehensive Annual Financial Report as an accounting supplement to the budgetary report. This annual report 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. OSC will report the new unassigned fund balance figure for Fiscal Year 2021 no later than February of 2022 in accordance with U.S. Securities and Exchange Commission (SEC) requirements.
If you have any questions on this report, please do not hesitate to contact me.