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 31, 2002

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, 2002.

The General Fund posted a deficit of $817,085,367 for Fiscal Year 2002. This is the first General Fund deficit recorded since Fiscal year 1991. In accordance with Connecticut General Statutes, Section 4-30a(b), the entire balance of $594,697,530 in the State's Budget Reserve Fund has been depleted to partially fund the deficit, leaving a General Fund deficit balance for Fiscal Year 2002 of $222,387,837. Under the provisions of Special Act 02-1, Section 111 of the May 9, 2002 Special Session, the remaining deficit balance will be financed with Economic Recovery Notes. Accordingly, the deficit balance was brought forward to Fiscal Year 2003 and financed with the issuance of notes during the fiscal year. Outstanding bonds redeemable from General and Transportation Fund revenues totaled $11,137,691,000 on June 30, 2002, an increase of $784,280,000 during the fiscal year.

As the monthly General Fund deficit projection rose throughout Fiscal Year 2002, deficit mitigation initiatives were enacted. These mitigation plans resulted in net appropriation rescissions after transfers of $198,026,000 ($162,675,000 represents prior year appropriations brought forward to Fiscal Year 2002). In addition, agency lapses inclusive of allotment reductions were increased by $56,278 ,000 during the fiscal year. These transactions resulted in $254,304,000 of deficit mitigation. To further reduce the anticipated deficit, the tax on cigarettes was increased by 61 cents effective April 3, 2002. The increased tax was estimated to generate $40.5 million in additional General Fund revenue. Absent these mitigation initiatives the General Fund deficit for Fiscal Year 2002 would have risen to over $1.1 billion.

General Fund spending in Fiscal Year 2002 increased 2.6 percent over the prior year. Over the past three fiscal years the average annual increase in General Fund spending has been 6 percent, and over the past five fiscal years the increase has averaged 5.8 percent. Government spending categories that have posted annual average spending growth in excess of 6 percent on both a three-year and five-year basis are: Education (includes services to the blind and hearing impaired and the State Library), Health and Hospitals (includes the Department of Public Health, the Department of Mental Retardation and the Department of Mental Health and Addiction Services, but does not include Medicaid which is under Human Services), Corrections (includes the Department of Children and Families), Judicial, Regulation and Protection (includes the Department of Public Safety and the Labor Department), and Non-functional (includes debt service, grants to towns, and employee fringe benefits.)

Functional spending areas that have experienced growth rates well below average on both a three-year and five-year basis are Human Services (comprised of the Department of Social Services inclusive of Medicaid), and Conservation and Development (includes the Department of Environmental Protection, the Department of Agriculture, and the Department of Economic and Community Development). It should be noted that in accordance with Section 18 of Public Act 02-1 of the May Special Session, certain July 2002 expenditures were accrued to Fiscal Year 2002.

In Fiscal year 2002, General Fund revenues collapsed declining 9.5 percent from the prior fiscal year. Large drops were experienced in all major tax categories. The income tax fell 10.1 percent, the sales tax was down 4.1 percent and the corporation tax declined 30.8 percent. Positive growth over last fiscal year was recorded in some of the relatively smaller tax categories. The insurance company tax increased 13.7 percent, the real estate conveyance tax was up 7.5 percent, and the tobacco tax was up 34.7 percent (due to a 61 cent cigarette tax increase effective in April). In addition, gaming revenues grew. Casino receipts rose 11 percent and lottery revenues were up 7.5 percent. The gains in gaming revenues were almost completely offset by losses in investment earnings. The steep decline in Fiscal Year 2002 revenues is in sharp contrast to the strong revenue growth of the past several years. Over the three fiscal years prior to Fiscal year 2002, General Fund revenues grew at an average annual rate of 5.7 percent. Five-year average annual revenue growth was 5.6 percent. The poor revenue performance in Fiscal Year 2002 is explained by the combination of a weak economy and declining equity values eroding state capital gains receipts.

The economic recession that officially began in March 2001 worsened throughout Fiscal year 2002. The September 11th attack combined with revelations of corporate fraud extended and deepened the recession. By the close of Fiscal Year 2002, Connecticut had lost 25,400 payroll jobs. Still, far fewer than the 158,000 jobs lost to the recession of the early 1990s. The state's job loss in Fiscal Year 2002 totaled 10,900 payroll positions; however, unemployment in Connecticut never rose above a modest 4 percent rate during the fiscal year. Preliminary data shows stagnant personal income growth in the state throughout Fiscal year 2002, and personal wealth was eroded by significant declines in financial markets. During Fiscal Year 2002, the Dow Jones Industrial Average declined 1,259 points (12 percent) and the Nasdaq lost 698 points (32 percent). The loss in personal wealth attributable to the stock market was partially offset by an increase in housing prices. Historically low mortgage rates kept the housing market strong throughout Fiscal year 2002. Consumers continued to spend in Fiscal year 2002 with retail sales advancing 3.8 percent; however, business spending declined due to poor corporate earnings and continued concern about the future economic prospects.

The Transportation Fund, with its more stable sources of revenue, posted an operating surplus of $53,961,271 for Fiscal year 2002. Revenues were $34,493,807 above estimates and lower spending contributed the remaining $19,467,464 to the surplus. The Transportation Fund began Fiscal Year 2002 with a balance of $135,720,587. The Fiscal Year 2002 operating surplus increased the fund balance to $189,681.858.

Sincerely,

Nancy Wyman
State Comptroller