Five trends to watch that will affect Connecticut’s budget

To say the coronavirus pandemic has turned our state, our nation, and our world upside down would not be an understatement. The pandemic continues to impact families and communities across Connecticut, as well as impact the state and national economies in historic ways.

This letter provides a quick summary of some of those economic impacts by looking at five key trends and indicators. While by no means an exhaustive or comprehensive look at how the pandemic is affecting Connecticut’s workers, businesses, and overall economy, these five trends offer a CliffNotes version of what is happening, what is projected to happen, and what this means for our state.

1. Initial Unemployment Claims

The coronavirus pandemic has caused businesses across the country to close – either temporarily or permanently – and millions of Americans to be laid off or furloughed. As a result, initial unemployment claims have ballooned for both Connecticut and the nation as a whole. An initial claim is a claim filed by an unemployed individual, after a separation from an employer, to receive unemployment benefits.

From January 2019 to the end of February 2020, Connecticut averaged roughly 3,300 initial claims per week — slightly lower than its 20-year average of approximately 4,450 initial claims per week. However, since mid-March, Connecticut’s initial claims have skyrocketed with the state experiencing an average of nearly 51,000 initial claims per week, including almost 103,000 claims in the most recent weekly data report.

To put this in perspective, between the time Governor Ned Lamont declared a state of emergency on March 10 in response to the coronavirus pandemic and April 30, Connecticut’s Department of Labor reports roughly 430,000 residents have filed initial claims for unemployment benefits — that is approximately 22 percent of the state’s workforce.

2. Unemployment Rate

The unemployment rate is the ratio of individuals currently unemployed to those in the labor force. Similar to initial claims, the unemployment rate can show impacts to the labor market and the workforce.

However, reported monthly, rather than weekly like initial claims, the unemployment rate has yet to take into account the full effects of the coronavirus pandemic and its associated economic downturn. The April unemployment rate has yet to be released and the March unemployment rate only includes data through March 14.

As a result, the unemployment rate for both the nation and Connecticut is expected to increase significantly as more recent data is released. The nonpartisan Congressional Budget Office (CBO) is projecting the national unemployment rate to rise to an average of 15 percent during the second and third quarters of 2020. For context, the Great Recession in the late 2000s caused the national unemployment rate to hover at or above nine percent for nearly two and a half years.

3. GDP Growth Rate

As stay-at-home orders and social distancing policies remain in effect, the economy is expected to sharply contract as a result of declines in consumer spending, high unemployment, and businesses struggling to remain afloat. One measure of this contraction is the growth rate of the nation’s gross domestic product (GDP), which is the monetary value of all goods and services produced by a country or state.

After 22 straight quarters of GDP growth, the nation’s GDP growth rate for the first quarter of 2020 was -4.8 percent. While the CBO estimates the nation’s GDP will decline an additional 12 percent during the second quarter, equivalent to a decline at an annual rate of 40 percent, economic growth is projected to average about 17 percent (at an annual rate) in the second half of 2020.

For Connecticut, and every other state in the union, however, the significant economic contraction as a result of the coronavirus pandemic means budget deficits and financial challenges for, likely, several fiscal years.

4. State Budget Shortfalls

While the coronavirus pandemic and its economic consequences change daily (if not more frequently), state budget shortfalls for FYs 2020 through 2022 are projected to reach a combined $650 billion — a number even deeper than the first three fiscal years of the Great Recession.

Although Congress has provided some federal aid to states, only an estimated $65 billion of the aid provided thus far is available to states to help address these shortfalls. Additionally, states only have a combined $75 billion in “Rainy Day Funds,” meaning there is a combined $510 million in projected budget shortfalls that states will have to address.

As Congressional leaders continue to debate providing more aid to states to help cover budget deficits, states, such as Connecticut, are beginning to get a look at the fiscal hole they find themselves in as a result of the pandemic.

5. Connecticut Consensus Revenue Estimates

Connecticut got a glimpse at its state budget shortfalls with last week’s release of new consensus revenue estimates from the Office of Policy and Management and the General Assembly’s Office of Fiscal Analysis.

The first consensus revenue estimates since January, the new estimates show the projected impacts of the coronavirus pandemic on the State of Connecticut’s revenues, particularly significant reductions in the withholding portion of the personal income tax (as a result of skyrocketing unemployment) and declining sales tax revenue (as a result of non-essential business closures and social distancing policies).

While the January 2020 estimates forecasted a General Fund revenue shortfall of $60 million for FY 2020, the April 2020 estimates project FY 2020 General Fund revenues falling short by approximately $975 million (or five percent) of their originally budgeted target. The significant drop in revenue is at the heart of Connecticut’s estimated $934 million budget deficit for FY 2020, with even greater revenue declines and larger budget deficits looming in future fiscal years.

Although the latest consensus revenue estimates rely on limited data, as a result of spring tax-filing deadlines being deferred to mid-July, and take into account delayed federal Medicaid payments, the numbers do not hide the fact that Connecticut faces significant revenue shortfalls and estimated budget deficits that will not be able to be addressed solely by the state’s Budget Reserve Fund (“Rainy Day Fund”).

In addition to the state’s General Fund, Connecticut’s Special Transportation Fund (STF) is also projected to fall well short of its revenue targets. While the January 2020 consensus revenue estimates forecasted a net revenue shortfall for the STF of $2.4 million for FY 2020, the April 2020 estimates project FY 2020 revenues falling short by nearly $170 million of their originally budgeted target.

Used to pay the debt on borrowing for transportation improvements and infrastructure projects, the STF is projected to see its tax revenues decline by roughly 10 percent annually, according to the latest consensus revenue estimates. As a result, the STF is at risk of being depleted with only a $363 million reserve that is projected to be used by FY 2021.

For questions or comments about any of this content, please email us at [email protected].

School and State Finance Project