STATE OF CONNECTICUT
NANCY WYMAN COMPTROLLER	OFFICE OF THE STATE COMPTROLLER 55 ELM STREET HARTFORD, CONNECTICUT 06106-1775	MARK OJAKIAN DEPUTY COMPTROLLER

To the Citizens of the State of Connecticut:

I am pleased to present this Comprehensive Annual Financial Report (CAFR) of the State of Connecticut for the fiscal year ended June 30, 2000.

This report was prepared in its entirety by this office and we take full responsibility for the accuracy of the data and the completeness and fairness of the presentation of the financial statements, supporting schedules, and statistical tables in it.

The CAFR is designed to be in conformance with generally accepted accounting principles (GAAP) for governmental units as promulgated by the Governmental Accounting Standards Board (GASB) as well as the reporting requirements prescribed by the Government Finance Officers Association and the American Institute of Certified Public Accountants. We believe that this report presents fairly the financial position of the state and the results of its operations as measured by the financial activity of its various funds. The report is consistent with full disclosure so that the reader may gain maximum understanding of the state's financial affairs. The report is presented in three sections:

The Introductory Section contains this transmittal letter, a list of the state's principal elected, appointed and administrative officials, an organizational chart of the state government, and a table of contents.

The Financial Section contains the Auditors of Public Accounts' report, the general purpose financial statements, which include the notes to the financial statements, and the combining financial statements and general fixed assets schedules.

The Statistical Section contains comprehensive statistical data and selected financial and demographic information on a multi-year basis.

THE REPORTING ENTITY

Connecticut, a state of approximately 3.4 million people in an area of 5,009 square miles, has a developed infrastructure, technologically advanced industrial base and a strong insurance and financial services industry. The State of Connecticut ratified the Constitution of the United States on January 9, 1788. It has a legislative � executive � judicial form of government with a bicameral legislature (36 Senators, 151 Representatives). The Governor, Lieutenant Governor, Secretary of State, Treasurer, Comptroller, and Attorney General are independently elected for four-year terms. Senators and Representatives are elected for two-year terms.

The state provides a broad range of services including public safety, state highways and other transportation services, state parks, social services, higher education, health services, economic development, and regulatory responsibilities.

This report includes all the funds and account groups of the state as well as all of is component units. Component units are legally separate entities for which the primary government is financially accountable. Blended component units, although legally separate entities, are, in substance, part of the primary government's operations and are included as part of the primary government. Accordingly, the Connecticut Lottery Corporation is reported as an enterprise fund of the primary government. Discretely presented component units are reported in a separate column in the combined financial statements to emphasize that they are legally separate from the primary government. These would include the Connecticut Development Authority, Connecticut Housing Finance Authority, Connecticut Resources Recovery Authority, Connecticut Higher Education Supplemental Loan Authority, Connecticut Health and Educational Facilities Authority, Connecticut Innovations, Incorporated, and Capital City Economic Development Authority.

STATE INITIATIVES

Adriaen's Landing

Due to its disparities in wealth and income, Connecticut has been called "two states." One consists of mostly suburban areas that enjoy a high standard of living; the other is largely urban with high levels of poverty and unemployment. In response, part of Connecticut's economic development policy has focused on large-scale projects to revitalize its largest cities. The most prominent of these is Adriaen's Landing in Hartford. The project � an ambitious public and private effort � is named for Adriaen Block, a 17th century Dutch explorer who is believed to be the first European to visit what is now downtown Hartford in 1614.

After years of planning and several false starts � including the withdrawal of the National Football League's New England Patriots � the Connecticut General Assembly approved a revised Adriaen's Landing plan in May 2000. The legislation calls for the development of a convention center and hotel with parking facilities, as well as retail stores, offices, housing units and an entertainment complex on the 33-acre Hartford riverfront site. A 40,000 seat University of Connecticut football stadium will be constructed across the Connecticut River at Rentschler field in East Hartford on land donated by United Technologies Corporation.

The total cost of the project is expected to be $771.1 million and includes $355 million in state general obligation bonds and $99.5 million in state appropriations; $74.2 million in revenue bonds and loans through the Capital City Economic Development Authority; and $242.4 million in private investments. The project's development team consists of the State of Connecticut Office of Policy and Management, the Capital City Economic Development Authority and the Waterford Group.

According to projections, the Adriaen's Landing project is expected to create 1,137 permanent full time jobs, and 3,400 construction jobs. Approximately 30 percent of these jobs will be targeted to residents of Hartford and East Hartford. The Stadium at Rentschler Field is projected to generate jobs for up to 30 permanent employees and 600 game-day employees. Between 250 and 300 stadium construction jobs will also be created.

The Adriaen's Landing master plan projects positive economic benefits for the state. In addition to growth in employment, these include gains in Gross State Product, personal income, disposable income and population. From a fiscal perspective the picture is less encouraging. Given the substantial investment, Connecticut's state government will not realize a positive return on its investment and local municipal governments may only see a negligible return. However, state policy makers believe the resulting infrastructure of Adriaen's Landing is essential to ensuring the long-term economic competitiveness of the Hartford region.

Construction for Adriaen's Landing is scheduled to begin in July 2001 and be completed by September 2003. Construction for the Stadium at Rentschler Field is anticipated to begin in May 2001 and be completed in time for its first scheduled game in August 2003.

Core Financial and Administrative Systems

In February 2000, State Comptroller Nancy Wyman and Governor John Rowland jointly announced an initiative to consolidate the state's various record-keeping systems into an integrated core data system. In doing so, the Comptroller noted that the state would be replacing the current unwieldy methods of data processing with "a simple, integrated system that will deliver services in a more effective and efficient manner." The new system, utilizing so-called ERP (enterprise resource planning) software, will integrate basic human-resource, payroll, and financial work for all state agencies.

The project, named Core-CT, will replace the state's core financial and administrative computer systems including central and agency accounting, accounts payable, payroll, time and attendance, worker's compensation, and personnel systems.

The scope and significance of this endeavor is reflected in the composition of its Project Steering Committee. The Comptroller, who chairs the committee, is joined by the Commissioner of the Department of Administrative Services, the Chief Information Officer from the Department of Information and Technology, and the Secretary of the Office of Policy and Management.

To provide funds for the initial phase of this project, the legislature approved a first year budget (FY 2001) of $7.5 million from the FY 2000 surplus to cover start-up costs.

The project is intended to unfold in two stages: (1) selection of a consulting firm to define the project's requirements and select appropriate software; and (2) the implementation phase, integrating the state's core administrative and financial computer applications.

The state chose Andersen Consulting (which formally changed its name to Accenture, effective January 2001) as its consultant for the initial stage of the project. Currently, Accenture and state employee staff are meeting in various teams to determine the new system's requirements and to issue a request for proposals which will begin the software selection process. It is anticipated that this phase of the project will be completed with selection of an ERP software package in the late winter or spring of 2001.

The state estimates that the implementation phase will take two to three years to complete.

Use of Surplus Revenue

Each year since 1992, the state's General Fund has posted a year-end surplus on a modified cash, or budgetary basis of accounting. The recurring surpluses can be traced to two factors: 1) the implementation of an income tax in fiscal year 1992 that expanded General Fund revenues by $1.6 billion, or 27 percent in a single year; and 2) an expanding national economy that helped lift Connecticut out of recession and created the conditions for extraordinary state growth. Over the past nine fiscal years, the excess of revenues over expenditures has totaled $1.8 billion. In recognition of rising revenues and growing surpluses, the legislature committed to fill the Budget Reserve Fund to its statutory target of 5 percent of net General Fund appropriations, to provide tax relief, to reduce debt obligations, and to increase spending in nonrecurring program areas.

The state's Budget Reserve Fund had been completely drained by the 1989-92 recession. In 1995, the state legislature reinstated annual contributions to the Budget Reserve Fund, and by the close of the 2000 fiscal year the fund's balance had grown to $564,037,776. In recent years, the legislature has set aside sufficient surplus dollars to ensure that the Budget Reserve Fund is maintained at its 5 percent statutory amount. A priority had also been placed on tax relief. This resulted in two tax rebate programs funded from surplus dollars, and numerous other tax cuts. The tax rebates occurred in 1998 and 1999 and amounted to over $200 million. Other accumulated tax rate and base, phased-in reductions were projected to reduce Fiscal Year 2000 revenues by close to one billion dollars. The surpluses have also been used to retire notes and bonds and to avoid financing a portion of local school construction with new debt. Since 1992, close to one billion dollars has been reserved to improve the state's debt position. It should be noted that, due to new authorizations, the state's accumulated bonded debt has continued to grow. Finally, the legislature has reserved a portion of surplus for various one-time spending initiatives. These initiatives have included municipal grant payments, sports stadium construction, year 2000 computer compliance, core financial system upgrades, school rewiring, nonrecurring payroll expenses, and various other grants and projects.

OPERATING RESULTS

• The 1999-2000 fiscal year operating deficit of $615 million once again highlights the state's continual reliance on debt-financing.
• Long-term obligations increased $798 million, which will have to be financed by future generations.
• Debt service was 9 percent of governmental operating expenditures, a decrease from 9.8 percent in the prior year. In absolute terms, such expenditures increased almost one percent.
• Net debt per capital rose to $2,863 more than double that of fiscal 1990.
• Government expenditures showed an increase from 10.1 percent to 10.6 percent of total personal income in the state when compared to the prior fiscal year, however, in absolute terms, expenditures increased 9.4 percent.

* Surplus (Deficit) includes transfers and excludes proceeds from the sale of bonds and notes and capital lease obligations.

In the ten years since 1991, governmental expenditures have increased 60 percent while personal income increased only 53 percent.

* Includes general, special revenue and debt service funds. Operating expenditures also include higher Education expenditures that are treated as an operating transfer out in the general fund.

Uncontrollable and fixed costs continued to consume a large share of the state's spending. Total debt service decreased to 9 percent of governmental expenditures, still almost two times the ratio of fiscal year 1990. Medicaid spending increased dramatically in fiscal year 2000 to approximately $2.4 billion, however, it still remains at almost one-fifth of total General Fund spending. The net state share of Medicaid, after adjusting for the 50 percent share of federal reimbursements, was $348 for every man, woman, and child in Connecticut.

Deficit financing for operating purposes continued in fiscal year 2000. Operating deficits of $593 million were incurred in the Grant and Loan Programs and the Housing Programs special revenue funds in fiscal year 2000. This represents 34 percent of total special revenue funds spending. Debt financing for these and other special revenue programs was $639 million, which is greater than our spending on legitimate capital needs for state facilities and infrastructure.

As a result, debt per capita, exclusive of the Economic Recovery Notes, increased to $2,863 � over twice what it was in fiscal year 1990.

General Fund

Fiscal year 2000 saw the state end the year with a general fund operating deficit, the first after four years of operating surpluses. This deficit is primarily attributable to increasing Medicaid accruals and the financing of various non-recurring fiscal year 2000 expenditures with surplus funds reserved from prior years.

Revenues increased 7.7 percent in total with tax revenues increasing 6.2 percent and intergovernmental revenues (grants, etc.) increasing 10.9 percent. Expenditures increased 10 percent with all expenditure categories increasing except for general government.

As shown above, except for taxes and intergovernmental revenues, the net increase of other sources of revenues is relatively minor. A further analysis of the tax revenues shows that with the exception of the personal income tax and the sales and use tax, tax revenues continue to be fairly stagnant, increasing marginally or in many cases even decreasing. Revenue from the personal income tax increased by $409 million, an increase of approximately 12.1 percent while the sales and use tax increased $160 million or an increase of 5.5 percent.

Except for general government, all functions of government showed increases in expenditures over the prior year. Medicaid expenditures showed a dramatic increase of 16 percent over 1999.

*Includes Medicaid expenditures.

Special Revenue Funds

Special revenue funds continue to be heavily debt-financed, suggesting that we are burdening future generations of taxpayers with the cost of current programs. Grant and loan programs and housing programs have shown operating deficits for the last five years. To the extent that loan programs result in receivables that can be counted on to mature in time to service the related debt, a case may be made that the economic benefits accrue to current and future taxpayers. Financing grants with debt, however, should be undertaken sparingly and in unusual circumstances.

The operating deficits primarily arose in the Grant and Loan Programs Fund and the Housing Programs Fund. The Grant and Loan Fund expended $605 million in fiscal year 2000 supported by revenues of only $12 million. Bond proceeds of $592 million financed the balance. The Housing Programs Fund expended $6 million in fiscal year 2000 supported by $4 million of revenues and $10 million of bond proceeds. Other major special revenue funds include the Transportation Fund, which is generally self-supporting. Revenues of $1,026 million in fiscal year 2000 supported expenditures and transfers of $1,020 million. The fund balance of the Transportation Fund was $168 million or 16 percent of expenditures and transfers. The Employment Security Administration Fund expended $109 million on administration of the unemployment compensation program, supported by a like amount of federal financial assistance. The Environmental Programs Fund also required debt financing. Expenditures and transfers of $82 million were supported by $39 million of revenues and transfers, along with bond proceeds of $35 million.

Capital Projects Funds

Capital spending has averaged over $700 million for the past five years with most of that spending directed toward infrastructure projects. Approximately 66 percent of infrastructure expenditures were financed by federal aid and the balance by state debt. Unlike the deficit financing of certain special revenue funds, the debt used to finance capital construction will provide a tangible benefit to the future generation of taxpayers who will use the asset for which they will pay the debt service. In addition, these infrastructure investments improve the economic climate of the state both immediately and for many years to come.

Expendable Trust Funds

The Employment Security Fund saw its fund balance decrease as resources were transferred to the Special Assessment Trust Fund to help retire unemployment compensation debt incurred in the early 1990's.

Pension Trust Funds

Net assets of the pension trust funds increased 10 percent for 2000. The State Employees' Retirement System (SERS), by far the largest pension fund for state employees (the Teachers' Retirement System primarily serves municipal employees), funded status increased to 62.5 percent as of fiscal year 2000 as compared to 53.7 percent as of fiscal year 1996. The Teachers' Retirement System (TRS) funded status increased from 68.1 percent to 70.4 percent, and the Judicial Retirement System (JRS) from 48.2 percent to 67.9 percent respectively.

Enterprise Funds

Two major changes to the enterprise funds combined financial statements occurred in fiscal year 1997. The Connecticut Lottery Corporation was created by the legislature as a public instrumentality and political subdivision of the state and was, accordingly, added to the enterprise fund category. Secondly, the John Dempsey Hospital Fund was reclassified out of the higher education funds group after it was determined that the fund was better suited to enterprise fund type accounting. The largest fund, the Connecticut Lottery Corporation, continues to provide substantial support to the General Fund with revenues of $838 million providing $254 million to the General Fund after prizes and expenses of $585 million.

Higher Education

Expenditures grew at a rate of 12.6 percent in fiscal year 2000, with State support keeping pace. Total revenues increased 9.4 percent over fiscal year 1999 with Tuition and Fees and Federal and State Grants showing the biggest increases.

Debt Administration

State general obligation bonds are rated Aa3, AA, and AA by Moody's, Standard and Poor's, and Fitch IBCA, respectively, while transportation-related special tax obligation bonds are currently rated A1, AA-, and AA-, respectively.

The state issued approximately $1.1 billion of bonds in fiscal year 2000, an increase from the past two fiscal years. To the extent this bonding is for infrastructure or other assets benefiting future taxpayers, the debt is fully justifiable. The continued increase in the debt burden, however, particularly that portion that is used to finance current programs, bodes ill for the future. It means that future generations will pay for the sins of the past. And it means that the state will have reduced flexibility in future budgets, which will now be burdened by higher fixed costs for debt service.

Debt service as a percent of government operations, excluding debt service on the Economic Recovery Notes, has continued to decrease to 9 percent from a high of 10 percent.

Net state debt increased 4.2 percent to $9.8 billion from $9.4 billion in fiscal year 1999. Net State debt has more than doubled since fiscal year 1990.

Debt per capita has more than doubled to $2,863 from $1,204 in fiscal year 1990. Bonded debt is the primary focus of most analyses but it is only half the amount of incurred long-term obligations that will need to be paid by future generations of taxpayers. Long-term obligations also include capital leases; compensated absences which were earned by employees in past periods but which will be paid by future generations. Workers' compensation claims, which arose from past events but will be settled in future periods; and the unfunded actuarial accrued liability, which represents the value of pension benefits earned by employees but which is not funded currently are also included in long-term obligations. The total of these obligations increased $798 million in fiscal year 2000.

* Exclusive of Economic Recovery Notes.

Internal Controls

Elected officials, agency commissioners, directors of public benefit corporations and agency managers are responsible for establishing internal control structures. Good internal controls are essential to achieving the proper conduct of government business with full accountability. This means that:

• resource use is consistent with laws, regulations and policies;
• resources are safeguarded against waste, loss and misuse; and
• reliable data are obtained, maintained and fairly disclosed in reports.

Good internal controls also facilitate the achievement of management objectives. In achieving these goals, good internal controls must strike a balance, providing reasonable, not absolute assurance. This recognizes that costs should not exceed benefits, nor should controls negatively impact operations.

Good internal control is comprised of the following elements:

• Control Environment - which reflects the overall attitude, awareness, and actions of elected officials or agency managers concerning the importance of control and its emphasis in state government (i.e. What is the tone at the top?)
• Accounting System - which consists of the methods and records established to identify, assemble, analyze, classify, record, and report transactions and to maintain accountability over state resources.
• Control Procedures - which includes those procedures that elected officials and management have established to provide reasonable assurance that specific objectives are being achieved.

This office has been making consistent efforts to improve the overall internal control in state government and simultaneously to give managers authority commensurate with their responsibilities.

Budgetary Controls

The key control mechanism of government finance is the budget. The Government Accounting Standards Board (GASB) has concluded that, "The budgetary process, including comparison of the approved budget with actual experience, is... a major aspect of accountability." The budget is more than just an aspect of accountability, however, it is also:

• An expression of public policy that identifies that activity or program to be carried out, the amounts that may be expended for these purposes, and the time period in which these are to occur.
• A financial plan, or expression of financial intent. For example, what are the expected sources of financing for these programs � who bears the burden of paying for them?
• A form of control usually having the force of law.

Budget control is maintained at the individual appropriation account level by agency as established in authorized bills. The allotment process exercises control over the obligation. The Governor through the Office of Policy and Management allots funds, both for budgeted and non-budgeted funds. The Governor is further allowed to modify the allotments up to three percent of the fund or five percent of the appropriation amount. Modifications beyond those limits, but not in excess of five percent of the total funds, require the approval of the Finance Advisory committee, which is comprised of the Governor, the Lieutenant Governor, the Treasurer, the Comptroller, two senate members, not of the same party, and three house members, not more than two of the same political party.

Cash and Investments Management

The State Treasurer continually monitors cash flow to maximize the utilization of cash resources. During the year, temporary balances are invested in the State's short-term investment fund, a money market investment pool whose investments consist of certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements, federal agency securities, and other investments with various ranges of maturities. The investment income and average yield rate for the fiscal year 1999-2000 for this fund was approximately $214 million and 6.01 percent, respectively. By comparison, the IBC First Tier Institutions-Only Rated Money Fund Report Index had a 5.58 percent rate of return, during the same time period.

Bank balances at June 30, 2000 were $139 million of which about seventy-two percent was not insured or protected by collateral.

Risk Management

The state retains risk for certain property and liability claims, including workers' compensation. The State Insurance and Risk Management Board serves as the focal point of risk management and insurance matters, maintaining a balance of commercially placed coverage and risk retention to provide optimal coverage at minimal cost.

ECONOMIC CONDITION AND OUTLOOK

Connecticut, like the nation, has been moving through a period of extraordinary economic growth. The state owes its prosperity to the creativity, skill and industry of its citizens. The fundamentals of the Connecticut economy are strong. For more than a decade the state has ranked first in the nation in per capita income and employment has been growing steadily since 1993. Defense and insurance continue to be important industries, but bioscience, software development, communications, pharmaceuticals, medical technology and tourism have contributed to a diversification in Connecticut's industrial base and have fueled economic growth. According to a report by the Progressive Policy Institute, Connecticut is uniquely positioned to meet the demands of the "new economy"�an economy based on technology, highly educated workers and global markets.

The state benefits economically from its geography. Connecticut is centrally located with access to the large eastern markets of the United States. Over 30 percent of the nation's effective buying income, retail sales, manufacturing firms and population are within a day's drive. Connecticut has also expanded its role in foreign markets. The state's foreign exports have risen steadily (increasing at an 8 percent annual rate through the 3rd quarter of 2000), consistently outpacing the national growth rate. State businesses trade with more than 170 countries around the world accounting for over $8 billion in exports. About a quarter of all state exports go to Canada.

Since 1996, Connecticut's economic recovery has been robust and sustained. The state was slow to recover from the 1989-92 recession. Between 1993 and 1995 while the country was gaining economic strength, Connecticut continued to see declines in real family income, increasing poverty, and only marginal gains in employment. The state lost close to 160,000 jobs during the recession, and was one of the last states in the union to regain its pre-recession employment level. By 1996, the period of stagnant growth had ended and Connecticut was fully participating in the national expansion. Since that time, the state's economic performance has rivaled or surpassed that of the national economy. However, in mid-2000 signs of slower national and state growth began taking hold. While few projections anticipate a 2001 recession, forecasts point to a moderating economy. State government, therefore, must adjust to the revenue implications of slower growth, and build appropriate reserves to guard against the need for future tax increases.

Approximately 70 percent of all Connecticut workers are employed in manufacturing, retail and wholesale trade, and the service industry. Since the recovery began at the end of 1992, the state has added 178,300 payroll jobs based on data through October 2000, an average annual growth rate of 1.4 percent. The vast majority of the new jobs (121,100) are in the service industry. Connecticut has seen an employment shift from manufacturing to services over the past decade. The state's unemployment rate was a low 2 percent in October 2000.

Connecticut ranks first in the nation in per capita income with a 1999 figure of $39,300, compared to $28,542 nationally. This places the state at 138 percent of the national average, and over the past several years this comparative advantage has been growing. Connecticut ranks fourth in the country in real median household income at 125 percent of the national average. The state's real median household income for 1999 was $50,798. The components of Connecticut personal income are as follows: 70.5 percent is derived from normal earnings (wage and salary compensation); 18.3 percent comes from dividends, interest and rents; and the remaining 11.2 percent is from federal and other transfer payments.

As the national economy slows, Connecticut is seeing moderating growth in employment and income. In the 3rd quarter of 1999 the state added 6,400 payroll jobs; in the 3rd quarter of 2000 just 2,200 jobs had been gained. State personal income growth hit a low of 0.5 percent in the 2nd quarter of 2000, while the national average for the quarter was 1.7 percent.

Certificate of Achievement

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the State of Connecticut for its comprehensive annual financial report for the fiscal year ended June 30, 1999. The Certificate of Achievement is a prestigious national award recognizing conformance with the highest standards for preparation of state and local government financial reports.

In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. This report must satisfy both generally accepted accounting principles and applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. The State of Connecticut has received a Certificate of Achievement for the last eleven consecutive years (fiscal years ended 1989-1999). We believe our current report continues to conform to the Certificate of Achievement program requirements, and we are submitting it to GFOA.

Independent Audit

The Auditors of Public Accounts, who report to the legislature and are independent of the executive Branch, have audited the accompanying financial statements in accordance with generally accepted auditing standards and their opinion has been included in this report.

ACKNOWLEDGMENTS

I wish to express my appreciation to the many individuals in all agencies whose cooperation and assistance has made this report possible. In addition, the efforts of the GAAP Reporting Unit and others in our Budget and Financial Analysis Division deserve special acknowledgment.

Sincerely,

Nancy Wyman
State Comptroller

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