seal of comptroller's office, state of connecticut
STATE OF CONNECTICUT
NANCY WYMAN
COMPTROLLER
OFFICE OF THE STATE COMPTROLLER
55 ELM STREET
HARTFORD, CONNECTICUT 06106-1775
MARK OJAKIAN
DEPUTY COMPTROLLER

February 28, 2009

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, 2008. 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.

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.

Despite economic indicators that pointed to a slowing State and national economy during most of Fiscal Year 2008, revenues continued to exceed budget expectations throughout the year. General Fund revenue exceeded the initial budget projection by $103.2 million on a budgetary basis and grew by 3.2 percent overall totaling $16.2 billion.

General Fund expenditures grew by 22.7 percent in Fiscal Year 2008 to $17.9 billion. Over half of this percentage increase related to meeting long-term funding obligations of the Teachers' Retirement Pension System. Factoring out that increase, General Fund spending still grew at a healthy rate of over 9 percent.

In recent years when the State has realized a revenue windfall almost half of that amount has been reserved for future year spending and half is deposited to the Rainy Day Fund. To the extent that the windfall driven spending is used for debt reduction, debt avoidance or one-time items it does not create structural fiscal imbalances; however, an ever increasing share of the windfall in revenue has been used to support ongoing operating expenditures in the General Fund.

The practice of using revenue from prior years to fund current year operations was largely responsible for a $1.7 billion shortfall between General Fund revenues and expenditures in Fiscal Year 2008. The General Fund's total fund balance declined by $419.7 million leaving a remaining balance of $903.3 million. Of this balance $2 billion is legally reserved for specific spending purposes; therefore, the unreserved General Fund balance for Fiscal Year 2008 was actually negative by $1.1 billion. This is often referred to as the GAAP deficit and it must be considered with respect to the offsetting positive resources in the State's Rainy Day Fund.

No deposit was made to the State's Rainy Day Fund in Fiscal Year 2008. Between Fiscal Years 2004 and 2007 a total of $1,382 million had been deposited to the fund and at this writing that is the remaining balance. The balance equals approximately 8 percent of net General Fund appropriations for Fiscal Year 2009. The statutory target is 10 percent. Under current State law, the Rainy Day Fund can only be used to offset a General Fund budget deficit at the end of a fiscal year and thus it is legally restricted in use.

Major Policy Initiatives and Priorities

Teachers Retirement Funding
Authorization was provided (Public Act 07-186) for the issuance of $2 billion in General Obligation bonds to be deposited into the Teachers' Retirement System to reduce the long-term unfunded pension liability in that system. It is hoped that the earnings on the deposit to the fund will exceed the debt service cost thus improving the State's long-term fiscal position. The funded status of the system has improved from a funded ratio of 59.5% in 2006 to a current ration of 70%. This pass through expenditure is partially responsible for the large increase in General Fund spending in Fiscal Year 2008 as discussed above.

Health Care Initiatives
The Fiscal Year 2008 General Fund budget contained $323.1 million in additional funding for a variety of health care initiatives. These initiatives included $96.4 million in Medicaid rate increases to improve client access to providers within the system; $89 million for increased payments to nursing homes; and, $24.5 million for increased payments to managed care organizations.

Education Spending
The State increased education funding to municipalities through its largest education grant program known as the Education Cost Sharing Grant. Fiscal Year 2008 funding was expanded by $181.8 million to a total of $1.8 billion.

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 3,501,252 in 2008 according to 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.

State Government
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.

Internal Controls
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.

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. The State experienced modest payroll employment growth in Fiscal Year 2008, adding just 6,000 new jobs. The State ended the fiscal year with an unemployment rate of 5.5 percent.

Over the past ten years Connecticut's total population has been stagnant or shrinking. The lack of population growth has resulted in slow labor force growth and fewer workers to support an aging population.

Connecticut continues to lead the nation with per capita income of $58,230, which is more than 40 percent above the national level. Connecticut's personal income rose at a rate of 3.5 percent in Fiscal Year 2008, well off of the recent historical growth of 6 percent. The slowing economic trends experienced in Connecticut in Fiscal Year 2008 were far worse nationally.

Like most other states, Connecticut is projecting significant declines in state revenues over the next several years due to the economic crisis that is gripping the nation. At this writing policy makers are struggling to balance the State budget while not implementing policies that will worsen the long-term prospects for recovery.

Acknowledgements

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.

 

Sincerely,

Nancy Wyman
Connecticut State Comptroller