State of Connecticut

Comptroller's Seal
STATE OF CONNECTICUT
  OFFICE OF THE STATE COMPTROLLER  
Kevin Lembo
State Comptroller
55 ELM STREET
HARTFORD, CONNECTICUT
06106-1775
Martha Carlson
Deputy Comptroller

LETTER OF TRANSMITTAL

December 31, 2014

The Honorable Dannel P. Malloy
Governor of the State of Connecticut
State Capitol
Hartford, Connecticut

Dear Governor Malloy:

I write to provide you with the legal financial statements for Fiscal Year 2014. These statements have been prepared in accordance with specific budgetary standards adopted within the budget act by the State Legislature and signed into law by you. These statements incorporate new budgeted expenditure accruals that are consistent with specific GAAP reporting requirements used to record expenditures in the state's Comprehensive Annual Financial Report (CAFR). Fiscal Year 2014 is the first annual reporting period that has included such GAAP based accruals in an effort to mitigate the growth in the GAAP deficit as reported in the CAFR for the General Fund.

The General Fund ended Fiscal Year 2014 with a surplus of $248,479,871. The entire surplus will be deposited to the Budget Reserve Fund, which will result in a fund balance of $519,169,363. This will bring the reserves to approximately 3 percent of planned spending for the current fiscal year. As a policy matter, I have consistently recommended that any General Fund surplus dollars should be deposited to the Budget Reserve Fund until the fund balance has reached its statutory level. I have recommended a level of 15 percent.

General Fund spending in Fiscal Year 2014 dropped by over $2 billion dollars or 10.8 percent. This decline in General Fund outlays resulted from the transfer of federal Medicaid spending from the General Fund to the federal restricted grants fund. After adjusting for this movement of federal Medicaid dollars, General Fund spending rose by approximately 2.4 percent in Fiscal Year 2014. To place this spending increase into a historical context, in the four years leading up to the 2008 recession General Fund spending was advancing at an average annual rate of 7.3 percent.

It is important to note that the Fiscal Year 2014 General Fund surplus resulted from various fiscal policy initiatives that are not permanent structural changes. These actions include the following: a tax amnesty program, the use of revenue generated in a prior fiscal year, restructuring the repayment of 2009 Economic Recovery Notes, and a number of transfers from other state funds.

Reviewing General Fund spending by major category, payroll expenditures were up $134.9 million or 5.2 percent over last year. This increase follows two consecutive years of actual dollar decreases in payroll outlays. Even with the payroll increase in Fiscal Year 2014, salary costs remained $94.2 million below the level that was attained in Fiscal Year 2009. Grants to Towns increased by $128.3 million or 4.5 percent in Fiscal Year 2014 from the prior fiscal year. Grant Payments to Other than Towns, which includes the Medicaid program, declined by $2.5 billion due to the transfer of federal Medicaid dollars from the General Fund to the grants fund.

Adjusting for the federal Medicaid fund transfer, Grant Payments to Other than Towns saw no spending growth in Fiscal Year 2014. Major programs within this spending category include contributions to the Teachers' Retirement System, community and residential services provided through the Department of Developmental Services, adoption services, foster care and residential care for children, temporary assistance to needy families and child care services. The non-functional spending category increased by $77.3 million or 2 percent. Non-functional spending includes debt service payments and fringe benefit costs that are not assigned to specific function of government program areas.

General Fund revenues in Fiscal Year 2014 advanced by less than one percent after adjusting for federal Medicaid receipts that were transferred from the General Fund to the grants fund beginning in Fiscal Year 2014. The personal income tax, which is the largest single state tax, underperformed budget estimates by $90.1 million and experienced no growth over last fiscal year. The poor performance of the income tax was caused by an increase in the federal capital gains tax rate that shifted certain taxable gains from Fiscal Year 2014 receipts back into Fiscal Year 2013. In addition, Connecticut employment did not begin to show a consistent upward trend until the second half of Fiscal Year 2014. Beginning in February, the state experienced five consecutive months of employment growth. However, erratic job additions in the first half of Fiscal Year 2014 placed significant downward pressure on income tax withholding tax receipts. The sales tax and corporation tax, which are the second and third largest tax categories respectively, both grew by just over 5 percent during Fiscal Year 2014. The state's tax amnesty program, maintaining a 20 percent corporation surcharge, and eliminating sales tax transfers to a municipal revenue sharing account contributed to the growth in these two tax categories.

Operations of the Transportation Fund during Fiscal Year 2014 added $4,385,235 to the fund balance. The Transportation Fund closed Fiscal Year 2014 with a fund balance of $168,998,607.

The state added 5,800 payroll jobs during Fiscal Year 2014. According to the State Department of Labor, by the end of Fiscal Year 2014, Connecticut had regained over 60 percent of the jobs lost to the 2008 recession. The state unemployment rate at the end of the fiscal year was 6.7 percent compared to a national rate of 6.1 percent. Average hourly earnings remained relatively flat throughout Fiscal Year 2014. Connecticut's personal income for 2014 was growing at an estimated annual rate of 3.7 percent. Connecticut's housing market began to show renewed sales growth beginning in March of 2014. However, home prices at the close of the fiscal year were down 3.2 percent on a year-to-year basis. At the end of Fiscal Year 2014, the national economy was growing at a 4.6 percent rate as measured by real Gross Domestic Product.

I also issue a Comprehensive Annual Financial Report (CAFR) that converts the GAAP budgetary basis to the GAAP financial reporting basis. The CAFR accounts for various non-budgetary financial transactions as well as the budgetary basis transactions. From a CAFR balance sheet prospective, the GAAP shortfall or unassigned fund balance in the General Fund was a negative $1.217 billion as of June 30, 2013. During Fiscal Year 2014, $598.5 million in GAAP deficit reduction bonds were deposited to the General Fund to offset that negative balance. I will report the new unassigned fund balance figure for Fiscal Year 2014 in February of 2015.

If you have any questions on this report, please do not hesitate to contact me.

Sincerely,

Kevin Lembo
State Comptroller