MANAGEMENT'S DISCUSSION AND ANALYSIS (MDA)

The following discussion and analysis is intended to provide readers of the State's financial statements with a narrative overview and analysis of the financial activities of the State for the fiscal year ended June 30, 2013. The information provided here should be read in conjunction with additional information provided in the letter of transmittal and in the basic financial statements.

FINANCIAL HIGHLIGHTS

Government-wide:
As of June 30, 2013, the State had a combined net position deficit of $10.5 billion, a decrease of $106 million when compared to the prior year ending deficit balance. This annual improvement resulted from an increase of $167 million in the net position of business-type activities, which was offset by a $61 million increase in the net position deficit of governmental activities.

Fund Level:
The governmental funds had a total fund balance of $2.0 billion at year-end. Of this amount, $3.2 billion represents fund balance that is considered mainly restricted or committed for specific purposes by external constraints or by the Legislature and $1.2 billion represents unassigned fund balance deficit. This deficit, which belongs to the General Fund, did not change significantly during the fiscal year.

The Enterprise funds had a total net position of $4.6 billion at year-end, substantially all of which was invested in capital assets or restricted for specific purposes.

Long-Term Debt:
Total long-term debt was $29.5 billion for governmental activities at year-end, of which $19.1 billion was bonded debt.

Total long-term debt was $2.4 billion for business-type activities at year-end, of which $1.5 billion was bonded debt.

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is intended to serve as an introduction to the State's basic financial statements. The State's basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves.

Government-wide Financial Statements

The government-wide financial statements are designed to provide readers with a broad overview of the State's finances, in a manner similar to a private-sector business.

The statement of net position presents information on all of the State's non-fiduciary assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the State is improving or deteriorating.

The statement of activities presents information showing how the State's net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave).

The government-wide financial statements are intended to distinguish functions of the State that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the State include legislative, general government, regulation and protection, conservation and development, health and hospitals, transportation, human services, education, libraries, and museums, corrections, and judicial. The business-type activities of the State include the University of Connecticut and Health Center, State Universities, Connecticut Community Colleges, Bradley International Airport, Employment Security, and Clean Water, which are considered major funds, while the remaining business-type activities are combined into a single aggregate presentation.

The government-wide financial statements include not only the State itself (known as the primary government), but also the activities of nine legally separate Component Units for which the State is financially accountable: the Connecticut Housing Finance Authority, the Connecticut Lottery Corporation, the Connecticut Health and Educational Facilities Authority, the Connecticut Higher Education Supplemental Loan Authority, the Connecticut Resources Recovery Authority, Connecticut Innovations, Incorporated, the Capital Region Development Authority, the University of Connecticut Foundation, Incorporated, and the Clean Energy Finance and Investment Authority. Financial information for these Component Units is reported separately from the financial information presented for the primary government itself. Financial information of the individual component units can be found in the basic financial statements following the fund statements, and complete financial statements of the individual component units can be obtained from their respective administrative offices.

Fund Financial Statements

A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The State uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the State can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds.

Governmental Funds

Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the State's near-term financing requirements.

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the State's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate the comparison between governmental funds and governmental activities.

Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund, the Debt Service Fund, the Transportation Fund, the Restricted Grants and Accounts Fund, and the Grants and Loan Programs Fund, all of which are considered major funds. Data from other governmental funds is combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements elsewhere in this report.

Fund balance (difference between assets and liabilities) of governmental funds is classified as nonspendable, restricted, and unrestricted (committed, assigned or unassigned).

The State adopts a biennial budget for the General Fund, the Transportation Fund, and other Special Revenue funds. A budgetary comparison statement has been provided for the General Fund and the Transportation Fund to demonstrate compliance with the current fiscal year budgets.

Proprietary Funds

Proprietary funds (Enterprise funds and Internal Service funds) are used to show activities that operate more like those of commercial enterprises. Enterprise funds charge fees for services provided to outside customers. They are used to report the same functions presented as business-type activities in the government-wide financial statements. Internal Service funds are an accounting device used to accumulate and allocate costs internally among the State's various functions. The State uses Internal Service funds to account for correction industries, information technology, and administrative services. Because these services predominately benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements.

Fiduciary Funds

Fiduciary funds are used to account for resources held by the State in a trustee or agency capacity for others. Fiduciary funds are not included in the government-wide financial statements because the resources of those funds are not available to support the State's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds.

Notes to the Financial Statements

The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements.

Required Supplementary Information

The basic financial statements are followed by a section of required supplementary information that further explains and supports the information in the financial statements. The required supplementary information includes information regarding the State's progress on funding its obligation to provide pension and other postemployment benefits to its employees.

Other Information

In addition to the basic financial statements and accompanying notes, this report also contains the following information.

• Combining Fund Statements and Schedules - Nonmajor funds
• Statistical Section
  

FINANCIAL ANALYSIS OF THE GOVERNMENT AS A WHOLE

NET POSITION

As noted earlier, net position may serve over time as a useful indicator of the State's financial position. During the current fiscal year, the combined net position deficit of the State decreased 1.0 percent to $10.5 billion. In comparison, last year the combined net position deficit increased 6.1 percent.

*Restated for comparative purposes. See note 23.

The net position deficit of the State's governmental activities increased $61 million (0.4 percent) to $15.1 billion during the current fiscal year. Of this amount, $5.8 billion was invested in capital assets (buildings, roads, bridges, etc.) and $2.3 billion was restricted for specific purposes, resulting in an unrestricted net position deficit of $23.2 billion. This deficit is the result of having long-term obligations that are greater than currently available resources. Specifically, the State has recorded the following outstanding long-term obligations which contributed to the deficit; a) general obligation bonds issued in the amount of $6.3 billion to finance various municipal grant programs (e.g., school construction) and $2.3 billion issued to finance a contribution to a pension trust fund, and b) other long-term obligations in the amount of $10.4 billion, which are partially funded or not funded by the State (e.g., net pension and OPEB obligations and compensated absences).

Net position of the State's business-type activities increased $167 million (3.7 percent) to $4.6 billion during the current fiscal year. Of this amount, $3.2 billion was invested in capital assets and $1.0 billion was restricted for specific purposes, resulting in unrestricted net positions of $0.4 billion. These resources cannot be used to make up for the net position deficit of the State's governmental activities. The State can only use these net positions to finance the ongoing operations of its Enterprise funds (such as the University of Connecticut and Health Center, Bradley International Airport, and others).

CHANGE IN NET POSITION

Changes in net position for the years ended June 30, 2013 and 2012 were as follows:

*Restated for comparative purposes. See note 23.

GOVERNMENTAL ACTIVITIES
The following charts provide a two-year comparison of governmental activities revenues and expenses.

During the year, total revenues of governmental activities increased 2.6 percent to $24.4 billion, while total expenses decreased 0.3 percent to $23.4 billion. In comparison, last year total revenues increased 6.0 percent, while total expenses increased 7.2 percent. The increase in total revenues of $609 million was due mainly to an increase in taxes of $771 million or 5.3 percent, particularly in income and inheritance taxes. Although, total revenues exceeded total expenses by $1,027 million, this excess was reduced by transfers of $1,088 million, resulting in a decrease in net position of $61 million.

BUSINESS-TYPE ACTIVITIES
The following charts provide a two-year comparison of business-type activities revenues and expenses.

During the year, total revenues of business-type activities decreased 4.7 percent to $3.8 billion, while total expenses decreased 4.3 percent to $4.7 billion. In comparison, last year total revenues decreased 3.8 percent, while total expenses decreased 7.3 percent. The decrease in total expenses of $212 million was due mainly to a decrease in Employment Security expenses of $308 million or 16.9 percent. Although, total expenses exceeded total revenues by $921 million, this deficiency was reduced by transfers of $1,088 million, resulting in an increase in net position of $167 million.

FINANCIAL ANALYSIS OF THE STATE'S FUNDS

Governmental Funds

The focus of the State's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the State's financing requirements. In particular, unassigned fund balance serves as a useful measure of the State's net resources available for spending at the end of the fiscal year.

As of June 30, 2013, the State's governmental funds had fund balances of $1,998 million, an increase of $307 million over the prior year ending fund balances. Of the total governmental fund balances, $2,352 million represents fund balance that is considered restricted for specific purposes by external constrains or enabling legislation; $180 million represents fund balance that is non-spendable; $690 million represents fund balance that is committed or assigned for specific purposes by the Legislature and $1,224 million represents unassigned fund balance deficit.
General Fund

The General Fund is the chief operating fund of the State. As of June 30, 2013, the General Fund had a fund balance deficit of $589 million. Of this amount, $628 million represents fund balance that is non-spendable or committed for specific purposes by the Legislature, leaving a deficit of $1,217 million in unassigned fund balance. Total fund balance deficit decreased by $324 million during the current fiscal year.

Debt Service Fund

As of June 30, 2013, the Debt Service Fund had a fund balance of $660 million, all of which was restricted. Fund balance decreased by $43 million during the current fiscal year.

Transportation Fund

As of June 30, 2013, the Transportation Fund had a fund balance of $229 million. Of this amount, $31 million was in nonspendable form and $198 million was restricted or committed for specific purposes. Fund balance increased by $20 million during the current fiscal year.

Restricted Grants and Accounts Fund

As of June 30, 2013, the Restricted Grants and Accounts Fund had a fund balance of $359 million, all of which was restricted for specific purposes. Fund balance decreased by $35 million during the fiscal year.

Grant and Loan Programs

As of June 30, 2013, the Grant and Loan Programs Fund had a fund balance of $673 million, all of which was restricted for specific purposes. Fund balance increased by $33 million during the fiscal year.

Proprietary Funds

The State's Proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. Accordingly, a discussion of the financial activities of the Proprietary funds has been provided in that section.

Fiduciary Funds

The State maintains Fiduciary funds for the assets of Pension and Other Employee Benefit Trust funds, an Investment Trust fund, and a Private-Purpose Trust fund. As of June 30, 2013, the net positions of the State's Fiduciary funds totaled $26.9 billion, an increase of $2.0 billion when compared to the prior year ending net position.

Budgetary Highlights-General Fund

For fiscal year 2013, the General Fund had an estimated budget surplus of $3 million at the start of the fiscal year. However, due to higher than initially estimated revenues of $223 million, mainly tax revenues, and budgetary spending adjustments resulting in expenditure savings of $138 million, the fund had an estimated budget surplus of $364 million by the end of the fiscal year.

Although actual fund revenues exceeded expenditures by $379 million, this excess was increased by other financing sources of $19 million ($18 million being the net amount of appropriations continued from the previous fiscal year to the next fiscal year), resulting in an actual budget surplus of $398 million.

Actual revenues were higher than originally budgeted by $262 million for the fiscal year. This increase resulted mainly from higher than originally budgeted tax revenue of $144 million, consisting mainly of income and inheritance taxes. Final budgeted appropriations were higher than originally budgeted by $144 million. This increase resulted mainly from higher than originally budgeted appropriations for human services of $87 million, particularly Medicaid appropriations.

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital Assets

The State's investment in capital assets for its governmental and business-type activities as of June 30, 2013 totaled $15.8 billion (net of accumulated depreciation). This investment in capital assets includes land, buildings, improvements other than buildings, equipment, infrastructure, and construction in progress. The net increase in the State's investment in capital assets for the fiscal year was $1.2 billion, due mainly to an increase in governmental activities' capital assets of $1.0 billion or 9.3 percent.

Major capital asset events for governmental activities during the fiscal year include additions to buildings and infrastructure of $1.2 billion and depreciation expense of $956 million.

The following table is a two-year comparison of the investment in capital assets presented for both governmental and business-type activities:

State of Connecticut's Capital Assets
(Net of Depreciation, in Millions)

Additional information on the State's capital assets can be found in Note 10 of this report.

Long-Term Debt -Bonded Debt

At the end of the current fiscal year, the State had total bonded debt of $20.5 billion. Pursuant to various public and special acts, the State has authorized the issuance of the following types of debt: general obligation debt (payable from the General Fund), special tax obligation debt (payable from the Debt Service Fund), and revenue debt (payable from specific revenues of the Enterprise funds).

The following table is a two-year comparison of bonded debt presented for both governmental and business-type activities:

State of Connecticut's Bonded Debt (in millions)
General Obligation and Revenue Bonds

The State's total bonded debt increased by $351 million (1.7 percent) during the current fiscal year. This increase resulted mainly from an increase in general obligation bonds of $263 million.

Section 3-21 of the Connecticut General Statutes provides that the total amount of bonds, notes or other evidences of indebtedness payable from General Fund tax receipts authorized by the General Assembly but have not been issued and the total amount of such indebtedness which has been issued and remains outstanding shall not exceed 1.6 times the total estimated General Fund tax receipts of the State for the current fiscal year. In computing the indebtedness at any time, revenue anticipation notes, refunded indebtedness, bond anticipation notes, tax increment financing, budget deficit bonding, revenue bonding, balances in debt retirement funds and other indebtedness pursuant to certain provisions of the General Statutes shall be excluded from the calculation. As of July 2013, the State had a debt incurring margin of $4.0 billion.

Other Long-Term Debt

State of Connecticut Other Long - Term Debt (in Millions)

* Restated for comparative purposes. See note 23.

The State's other long-term obligations increased by $928 million (8.9 percent) during the fiscal year. This increase was due mainly to an increase in the net OPEB obligation (Governmental activities) of $926 million or 16.1 percent. Additional information on the State's long-term debt can be found in Notes 17 and 18 of this report.

Economic Factors and Next Year's Budget

A national recession that officially commenced in December 2007 produced a pattern of job losses in Connecticut that began in the first half of 2008. These job losses persisted until the start of 2010 and claimed 121,200 payroll positions, which is just over 6 percent of Connecticut's labor force. By the close of Fiscal Year 2013, Connecticut had regained half of the jobs lost to recession. This is a slower pace of recovery than the State had experienced in past post-recession periods. The overall growth rate of the national economy has been slowing over the past several decades, and Connecticut's economy has been following that same slower growth trend. From 1950 through the mid-1980s, there were numerous double-digit periods of volatile growth in U.S Gross Domestic Product (GDP). Since that time, there has been a gradual downward slope in the GDP rate of growth with lower variances between the highs and lows. Likewise, Connecticut's personal income and employment growth rates have been moderating over time. In Connecticut, as in many other states, these economic trends have resulted in higher tax rates and the imposition of tighter budget spending controls. Connecticut has kept its tax rates competitive with other states in the region.

The national economy as measured by real GDP grew at a moderate rate of just under 2 percent on an averaged quarterly basis during Fiscal Year 2013. Growth was especially slow during the middle half of Fiscal Year 2013, but improved significantly in the final quarter with growth of 2.5 percent. The national economy has posted growth in excess of 3 percent in the first half of the new fiscal year and the outlook is for continued moderate growth.

At the end of Fiscal Year 2013, Connecticut's personal income was growing at a quarterly annualized rate of better than 5 percent. However, the fiscal year also posted quarters of negative state income growth. Personal income in Connecticut grew at a rate of 0.8 percent (annualized rate of 3.2 percent) between the second and third quarters of 2013. This ranked Connecticut 37th nationally in income growth.

Connecticut added 10,500 jobs in Fiscal Year 2013. Job growth in calendar year 2013 exceeded the pace set in 2012. At this writing, the State has been averaging just below 1,000 job additions per month. The strongest employment sector in the State has been education and health services followed by construction. The weakest job sector has continued to be manufacturing. Job losses have also been recorded in financial activities and government.

Fiscal Year 2014 was initially budgeted with a General Fund surplus of just over $4 million. At this writing, the State is anticipating a General Fund surplus in excess of $500 million. The primary reason for surplus growth is better than expected estimated income tax payments. A strong stock market in 2013 has produced the higher tax receipts.

CONTACTING THE STATE'S OFFICES OF FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, customers, investors, and creditors with a general overview of the State's finances and to demonstrate the State's accountability for the money it receives. If you have any questions about this report, please contact the State Comptroller's Office at 1-860-702-3350.

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