Comptroller's Seal
STATE OF CONNECTICUT
NANCY WYMAN
COMPTROLLER

OFFICE OF THE STATE COMPTROLLER
55 ELM STREET
HARTFORD, CONNECTICUT 06106-1775

MARK OJAKIAN
DEPUTY COMPTROLLER

LETTER OF TRANSMITTAL

December 29, 2000

The Honorable John G. Rowland
Governor of the State of Connecticut
State Capitol
Hartford, Connecticut 06106

Dear Governor Rowland:

In accordance with Section 3-115 of the General Statutes and with my duty to render all public accounts under Article IV, Section 24 of the State Constitution, I am submitting the Annual Report of the State Comptroller for the Fiscal Year ended June 30, 2000.

The General Fund posted a net surplus of $300,434,571 in Fiscal Year 2000. The gross surplus for Fiscal Year 2000 totaled $496,822,541 prior to the additional appropriations of surplus resources outlined in Special Act 00-13. This is the ninth consecutive fiscal year of a General Fund surplus. The Fiscal Year 2000 surplus amounts to three percent of General Fund expenditures. In accordance with the provisions of Article XXVIII of the Connecticut State Constitution, and the provisions of Special Act 00-13, the net surplus will be apportioned as follows: $34,960,241 will be transferred to the Budget Reserve Fund, bringing its fund balance to $564,037,776 (5% of net General Fund appropriations for Fiscal Year 2001); the remaining $265,474,330 will be used for debt avoidance relating to school wiring and construction.

The Transportation Fund recorded a net operating surplus of $70,222,196 in Fiscal Year 2000. This amount is combined with the July 1, 1999 fund balance of $20,000,000, yielding an unappropriated surplus as of June 30, 2000 of $90,222,196. The surplus balance is 11% of Fiscal Year 2000 expenditures. Spending increased 2.9% while revenues grew 5.8% for the year.

Between Fiscal Year 1999 and 2000,General Fund expenditures increased $950,094,949 or 9.3%, the fastest rate of growth in eight years. During this same period, General Fund revenues grew by $597,256,367 or 5.6%. This is the second straight year the expenditure increase exceeded revenue gains. The seeming paradox of a surplus occurring despite expenditures growing faster than revenue is explained in large part by the use of prior year surplus accumulations to fund current year spending. A dramatic one-year increase in the General Fund revenue base occurred in Fiscal Year 1992 with the implementation of the income tax. In that single year, revenues expanded by an unprecedented 27% or $1.6 billion. Since 1992, revenue growth rates have been applied to a dramatically higher revenue base yielding high dollar returns. A similar single year escalation in General Fund spending has not been experienced. The increase in spending has been persistent but somewhat more gradual. As a result, the General Fund has posted surpluses every year since 1992. Routinely, a portion of a prior year's surplus is set aside or reserved for current year spending. This allows spending additions in the current year to exceed the year's revenue gains. Over the last ten years, average annual revenue growth has outpaced yearly spending growth with revenues rising an average 6.5% while spending increased 5.4% for the period. However, during the past two years this trend has been reversed with annual spending increases exceeding revenue gains. Over this two-year period, average annual revenues have increased 5.2% while a 7.8% annual increase in expenditures has been recorded.

To the extent that the present pattern of expenditure increases exceeding revenue gains is due to one-time spending items, it should be possible to lower spending to a level that can be supported by revenue growth. However, for each of the past three years a declaration of extraordinary circumstances has been issued to allow surplus dollars to be spent on one-time requirements. For Fiscal Year 2000, the surplus appropriations placed the budget $232.8 million above the spending cap. Over the last three years, the spending cap has been lifted to permit additional spending totaling $952.5 million. After three years of additional "one-time" expenditures, it is reasonable to question the temporary nature of the upward trend in General Fund spending.

In addition to surplus spending, appropriations for operating deficiencies totaling $66.7 million were required in Fiscal Year 2000 as follows: the Department of Social Services $35 million; the Department of Corrections $7 million; the Department of Children and Families $7.3 million; the Department of Mental Health and Addiction Services $5.7 million; the Department of Mental Retardation $6.2 million; the Judicial Department $3 million; Workers' Compensation Claims $2 million; and the Department of Environmental Protection $0.5 million.

Higher health care costs, growing workers' compensation payments and a rising prison population are the major causes of the deficiencies. In addition, several of the identified agencies were unable to meet personal service and other expense budget savings targets due to position refills and overtime requirements.

The dramatic increase in General Fund expenditures for Fiscal Year 2000 was accompanied by higher levels of state debt. Outstanding bonded debt redeemable from General and Transportation Fund revenues increased by $196.2 million in Fiscal Year 2000 with $1,144.5 million in new bonding and $948.3 million in debt retired.

Revenue growth remained solid in Fiscal Year 2000. Notwithstanding tax cuts of approximately $300 million during the fiscal year, General Fund revenues posted 5.6% growth. The income tax with a gain of 10.9% outperformed all other tax categories. Combined tax receipts increased 5.8% in Fiscal Year 2000. Taxes accounted for almost three-quarters of all General Fund revenue. Non-tax revenues increased 5.1% during the fiscal year. A strong economy accompanied by rising 1999 capital gains paid in Fiscal Year 2000 taxes explain the revenue growth. Gross Domestic Product (GDP) increased at an average quarterly rate of 6% during the fiscal year, the strongest rate of growth in more than a decade. Current estimates show the state gaining 25,700 jobs in Fiscal Year 2000. Although this represents 2,700 fewer jobs than were added last fiscal year, it is respectable growth given the state's low 2.3% unemployment rate. Connecticut's personal income growth is estimated at 5.3% for Fiscal Year 2000.

This modified cash basis report is in compliance with current state law. My office also publishes a Comprehensive Annual Financial Report (CAFR), which follows the more appropriate standards of Generally Accepted Accounting Principles. The CAFR will be issued in January of 2001. Please contact me if you have any questions concerning this report.

Sincerely,

Nancy Wyman
State Comptroller