|STATE OF CONNECTICUT|
THE STATE COMPTROLLER
55 ELM STREET
HARTFORD, CONNECTICUT 06106-1775
February 28, 2008
To the Citizens, Constitutional Executive Officers, and Members of the Legislative General Assembly of the State of Connecticut:
It is a privilege to present the State of Connecticut Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2007. This report was prepared in accordance with Generally Accepted Accounting Principles (GAAP) as prescribed by the Governmental Accounting Standards Board.
Even though much of this report must be written in a rather formal and technical manner, we hope we have designed it to help readers, without a specialized financial background, gain a reasonable understanding of the State's financial activities.
Briefly, Connecticut continued to benefit from strong tax revenue and moderate economic growth for the fiscal year ending June 30, 2007, thus improving the State's financial position in most areas of quantitative measurement.
The State's largest governmental fund is the General Fund. This is the fund most often referred to in media reports about the state's fiscal health. Over three-quarters of all governmental financial transactions relating to the cost of providing State services and the collection of revenues to pay for those services occur within the General Fund.
The State's General Fund closed Fiscal Year 2007 with $12.0 billion in tax revenue, its major source of revenue, and $15.7 billion in total revenue. Revenues exceeded estimates contained within the initial 2007 budget by about $800 million due to better than anticipated economic conditions. General Fund spending totaled $14.6 billion. The largest spending programs were income and medical supports for low income individuals, elementary education, correction facilities operations and health and hospitals. Both revenues and expenditures in the General Fund grew by approximately 5 percent in Fiscal Year 2007 as compared to the prior year.
The General Fund ended Fiscal Year 2007 with a net balance of $1,332 million, significantly up from the $859 million balance at the end of the prior fiscal year. However, this balance is legally reserved. The reserved balance is composed of: $1,382 million in rainy day funds that are restricted in use to cover unanticipated future budget shortfalls (this has increased by $269 million from last year and is 9.5 percent of Fiscal Year 2007 expenditures); $811 million that is specifically targeted for future year spending initiatives; $80 million in revenue gains from Fiscal Year 2007 that have been reserved for future year spending; and, $53 million in various other reservations of fund balance. The net result is that in Fiscal Year 2007, General Fund assets were not sufficient to cover liabilities and the reserved balances outlined above. The shortfall, which is referred to as the GAAP deficit was $994 million. The Fiscal Year 2007 GAAP deficit is more than $64 million below last year's level of $1,059 million. It should also be noted that currently the GAAP deficit is more than offset by the reserves of the rainy day fund, although, as has been seen in past recessions these reserves are quickly exhausted by the onset of an economic downturn.
Major Policy Initiatives and Priorities
Enacted tax cuts reduced Fiscal Year 2007 General Fund revenue by over $125 million. The tax cuts were targeted to individuals and businesses. The largest dollar tax reductions were on the individual income tax. The property tax credit that could be claimed on the income tax was raised from a maximum of $400 to $500 and a deduction was added for contributions to the Connecticut Higher Education Trust Fund. The sales tax free period for residential weatherization purchases was extended by two months.
Business taxes were reduced by eliminating a 15 percent corporation tax surcharge. Tax credits were also added to encourage businesses to locate in Connecticut and to hire displaced workers.
Reducing Long-Term Liabilities with Surplus Dollars
The state has committed in excess of half a billion dollars of Fiscal Year 2006 and 2007 surplus to reducing the unfunded liability in the Teachers' Retirement Fund, a state sponsored retirement program for municipal and state teachers. The percentage of liabilities covered by assets in the fund had slipped over time from just over 80 percent to just below 60 percent. These additional contributions are intended to increase the funding level and reduce the State's long-term liability in this area.
The State also committed $10 million of Fiscal Year 2007 surplus to pre-fund the Other Post Employment Benefits (OPEB) liability that will be reported on the financial statements beginning in Fiscal Year 2008. These liabilities relate to health insurance benefits extended by the state to its retirees. In Fiscal Year 2008 all states will be required to report such liabilities as they do now with pension obligations. This is a first step by the State to acknowledge the need to advance fund these benefits.
Future spending plans include several major projects that are on the horizon. For example, at the beginning of the new fiscal year, the state bond commission granted approval to sell bonds to build new infrastructure throughout the state. The Governor and legislature have committed long-term funding to improve the State's roads and highways and public transportation systems. This commitment resulted in the sale, by the Treasurer in October 2007, of Special Tax Obligation bonds in the amount of $250 million. It is expected that special legislation will continue to empower the state bond commission to authorize additional financing of the infrastructure program each year. Other bond commission approvals were granted that provide for better housing, school facilities, and the continuation work on waste and drinking water control projects.
Favorable Independent Auditor Opinions
As a Connecticut Constitutional Officer, the State Comptroller is responsible for setting state-wide accounting practices. Ultimate responsibility for the accuracy, completeness, and fairness of data presented in this CAFR, including all disclosures, rests with the State of Connecticut and my office. Connecticut statutes require an annual audit of the State's basic financial statements. These include statements prepared on the budgetary basis of accounting as well as statements prepared using GAAP -the basis of accounting that is generally accepted throughout the United States. The State is also required to undergo an annual "single audit" for reporting to the Federal government. To meet all of these requirements, the State Auditors of Public Accounts have examined our financial statements and the appropriate supporting documentation.
In conducting the examination, the State Auditors used auditing standards
generally accepted in the United States and Government Auditing Standards issued
by the Comptroller General of the United States in conformity with the
provisions of the United States Office of Management and Budget's Circular A-133
-Audits of States, Local Governments and Non-Profit Organizations. Information
related to the Federal single audit, including a schedule of federal financial
assistance, the Comptrollers GAAP basis financial statements, the independent
auditor's report on internal controls and compliance with applicable laws and
regulations, and a schedule of findings and questioned costs, is included in a
separately issued single audit report. The CAFR includes the auditor's report on
the State's financial statements. The State auditors gave the CAFR for the State
of Connecticut an unqualified or "clean" opinion indicating they can
state, without reservation, that the financial statements are fairly presented
in all material respects in conformity with GAAP.
Profile of the Government and its Safeguards
The Nutmeg State
Connecticut became the fifth state of the United States on January 9, 1788. Its borders encompass 5,009 square miles. Within its compact borders, Connecticut has forested hills, urban skylines, shoreline beaches, and historic village greens. There are classic Ivy League schools, modern expressways, corporate offices, and small farms. Connecticut is a thriving center of business as well as a vacation location. It is both a New England State, and suburban to New York City. The population of Connecticut was 3,504,809 according to the July 1, 2006 U.S. Census estimates. Five large cities, Bridgeport, New Haven, Hartford (the State Capitol since 1875), Stamford and Waterbury, have populations in excess of 100,000 residents.
Separation-of-Powers provisions of the State Constitution established the three branches of State government: executive, legislative and judicial. The executive branch, which is responsible for enforcing state laws, consists of six state executive officers: Governor, Lieutenant Governor, Treasurer, Comptroller, Secretary of State and Attorney General. All are elected to four-year terms.
Connecticut's General Assembly or legislative branch is responsible for creating new laws and consists of a Senate and a House of Representatives. There are currently 36 State Senators and 151 State Representatives. Members of the General Assembly are elected to two-year terms. Connecticut also elects two U.S. Senators and five U.S. Representatives.
The judicial branch is responsible for interpreting and upholding our laws as consistent with the State Constitution and legal precedence. The judicial branch consists of three levels: The Supreme Court, the Appellate Court and, at the lowest level, the Superior Court which is further divided by state law into Civil, Criminal, Housing and Family Divisions. Judges of the Supreme Court, the Appellate Court and the Superior Court are nominated by the Governor from a list of candidates submitted by the Judicial Selection Commission and are confirmed by the General Assembly. They serve eight-year terms and are eligible for reappointment.
The Reporting Entity
The State of Connecticut financial reporting entity includes all of the funds of the primary government and of its component units. The primary government includes all funds, agencies, departments, bureaus, commissions, and component units that are considered an integral part of the State's legal entity. Component units are legally separate entities for which the primary government is financially accountable. Discretely presented component units are reported separately in the government-wide financial statements, to emphasize that they are legally separate from the primary government and to differentiate their financial position and results of operations from those of the primary government. Other component units, although legally separate entities have their financial position and operations blended with the primary government, essentially for technical reasons as explained more fully in the additional information on the reporting entity which is included in CAFR -Note 1, Summary of Significant Accounting Policies.
Our State's internal control structure has been established to ensure that the assets of the government are protected from loss, theft, or misuse, and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements in accordance with GAAP and State legal requirements. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived, and (2) the valuation of costs and benefits requires estimates and judgments by management. The monitoring and maintenance of these internal controls are the responsibility of agency managers, directors of public benefit corporations, agency commissioners and elected officials. In addition, the government maintains extensive budgetary controls.
The State Legislature prepares a bi-annual budget that contains estimates of revenues and expenditures for the ensuing two fiscal years. This budget is the result of negotiations between the Governor and the Legislature. Adjustments, in the form of budget revisions, executive orders, and financial legislation agreed to by the Governor and the Legislature, are made to the annual appropriations throughout the fiscal year. Budgetary controls are maintained at the individual appropriation account level by agency and fund as established in authorized appropriation bills. The objective of these controls is to ensure compliance with state laws embodied in the appropriations. The State Comptroller is statutorily responsible for control structures to safeguard revenues due the primary government, to determine the amount equitably due with respect to claims made and to ensure such expenditures are compliant with an appropriation contained in the budget for such purpose.
Budgeted appropriations are the expenditure authorizations that allow state agencies to purchase or create liabilities for goods and services. Before an agency can utilize funds appropriated for a particular purpose, such funds must be allotted for the specific purpose by the Governor and encumbered by the Comptroller upon request by the agency. Such funds can then be expended by the Treasurer only upon a warrant, draft or order of the Comptroller drawn at the request of the responsible agency. The allotment process, which includes limits on the power of the Governor to modify appropriations, preserves expenditure controls over special revenue, enterprise, and internal service funds and capital projects that are not budgeted as part of the annual appropriation act as revised.
The Spending Cap
In November 1992, electors approved an amendment to the State Constitution providing that the amount of budgeted expenditures authorized for any fiscal year shall not exceed the estimated amount of revenue for such fiscal year. This amendment thus provided a framework for placing a cap on budgeted appropriations.
Annual budgeted appropriations are capped at a percentage increase that is based on either the five-year average annual growth in the state's personal income or annual inflation, whichever is higher. Debt service payments, certain statutory grants to distressed municipalities, and appropriations required by federal mandate or court order are excluded from the limits of the cap.
The spending cap can be lifted if the Governor declares the existence of extraordinary circumstances and the General Assembly by three-fifths vote approves appropriations in excess of the cap. This has occurred in almost every year that the State has posted a budget surplus in the General Fund to enable the appropriation of surplus dollars that would have otherwise gone to reduce state debt and fill the rainy day fund.
Economic Condition and Outlook
After almost eight years of solid economic growth, Connecticut began to experience job losses in Fiscal Year 2001. Between fiscal years 2001 and 2003 the state lost over 60,000 payroll jobs. After three successive years of job losses, in Fiscal Year 2004 the State again experienced gains in payroll employment and by the end of Fiscal Year 2007 had regained most of the jobs lost during the recession. Connecticut ended Fiscal Year 2007 with a relatively low unemployment rate of 4.6 percent.
Business, professional and financial services account for over 20 percent of total employment in the State and retail and wholesale trade account for an additional 20 percent. These job sectors experienced solid growth during Fiscal Year 2007. Strong job growth was also seen in the leisure and hospitality sector. Manufacturing employment has continued to decline following a trend that began over a decade ago, although the sector still accounts for over 10 percent of total payroll employment.
Connecticut continues to lead the nation with per capita income at of $53,827, which is almost 40 percent above the national level. Connecticut's personal income has been growing at a rate of close to 6 percent and in Fiscal Year 2007 hourly wages increased by 4.7 percent. Connecticut's strong income growth has helped fuel the tax revenues that created budget surpluses over the past four fiscal years.
Like most other state's, Connecticut has been experiencing a recent slow down in housing activities with permits and new home sales declining. As at the national level, Connecticut's economy is expected to slow in 2008 with stagnant employment and modest income growth. Connecticut is expected to slightly outperform the national economy due to its strong income base and the diversification of its industries. The Fiscal Year 2008 budget submitted by the Governor recognizes this slowing growth trend.
I want to thank my staff and all of the agency personnel and others who
contributed to producing this report. I also want to thank its readers who bring
meaning to the work that we do.
Connecticut State Comptroller