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

December 30, 2016

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, 2016. 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, my office has endeavored to present the information in a way that will help readers without a financial background to understand the State's
overall economic and fiscal position.

Between 2008 and 2010, Connecticut lost 119,100 payroll jobs or about 6 percent of the state's labor force due to the "Great Recession." Connecticut’s employment recovery began in 2010, but it was volatile with months of gains partially offset by subsequent losses. Connecticut did not experience a consistent pattern of monthly growth in payroll employment until the final months of Fiscal Year 2014.

Connecticut's employment gains have lagged slightly behind the national jobs recovery. At the close of Fiscal Year 2016, the state had recovered approximately 80 percent of the jobs lost to the 2008 recession (over 95,000 jobs). The state added 15,800 payroll jobs during the 2016 fiscal year, which is consistent with a moderate economic recovery. In June 2016, Connecticut's unemployment rate stood at 5.8 percent, continuing its decline from a high of 9.5 percent in October 2010. There were 110,600 unemployed job seekers in Connecticut in June 2016. This compares with a low of 36,500 unemployed workers recorded in October 2000 and the recessionary high of 177,200 unemployed workers in December 2010.

In the last quarter of Fiscal Year 2016, Connecticut ranked 20th nationally in personal income growth according to the Bureau of Economic Analysis. Incomes were growing at an annual rate of 4.5 percent in the state. This growth rate is well off the pace set coming out of the 2001 recession when state personal income growth peaked at 8.2 percent in 2006. Unusually slow growth in wages both nationally and in Connecticut has contributed to the slower growth in total personal income. Wages in the U.S. fell by a record setting 5.8 percent in March 2009 and have struggled to rebound. Average weekly wage gains have been running more than a percentage point below the pre-recession average, but have recently been showing some nascent signs of strengthening.

Overall economic trends have been moving toward more subdued rates of national and state growth over the past several decades. From the 1950’s to the mid-1980s, there were numerous periods of double-digit growth in U.S. Gross Domestic Product (GDP). Since that time, there has been a gradual downward slope in the GDP growth rate. During Fiscal Year 2016, U.S. GDP grew at a lackluster average annual rate of 1.3 percent. The slow pace of recovery has limited the resources available for the State's budgeted programs.

This report devotes significant attention to the state's General Fund. The General Fund is the largest single governmental fund. It is the fund most often referred to in media reports about Connecticut's finances. About 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.

On the budgetary basis of accounting, General Fund spending was $17,921.3 million in Fiscal Year 2016, which represents growth of $501.6 million or 2.9 percent over the prior fiscal year. Almost 80 percent of this spending increase was attributable to two appropriation line-items: Debt Service, which increased by $265.5 million or 18.7 percent and the State Employees' Retirement System Contribution, which grew by $125.9 million or 13 percent. The functional program areas with the largest dollar reductions in spending from last fiscal year were general government administration (down $34 million or 5.1 percent), health and hospitals (down $19.4 million or 1.1 percent) and conservation and development (down $11 million or 5.3 percent). The largest functional program area increase was to education, which grew by $96.6 million or 1.9 percent. Education is the largest single program area accounting for almost 30 percent of General Fund expenditures.

In order to support that level of spending in Fiscal Year 2016, policy changes were required to increase revenue. Those revenue changes included the introduction of a new top marginal income tax rate of 6.99 percent, limits on the use of corporate tax deductions and credits, and higher taxes on hospitals. In Fiscal Year 2016, General Fund revenue expanded by $498.8 million or 2.9 percent from the prior fiscal year. However, this was well below the original anticipated rate of growth.

The General Fund ended Fiscal Year 2016 with a deficit of $170,418,432. A transfer from the Budget Reserve Fund eliminated the shortfall returning the unappropriated balance of the fund to zero. After the transfer to the General Fund, the Budget Reserve Fund was left with a balance of $235,582,921. The reserves at the beginning of Fiscal Year 2016 were $406,001,353.

A complete discussion of Fiscal Year 2016 budget and fiscal trends is contained in the MDA section of this report.

Major Legislative Initiatives

Public Act 16-29 (as amended by PA 16-3 MSS), "An Act Creating the Connecticut Retirement Security Program" This act creates the Connecticut Retirement Security Authority to establish a retirement exchange with Roth individual retirement accounts (IRAs) for eligible private-sector employees. Eligible employees will be automatically enrolled in the program unless they opt out.

Qualified employers must automatically enroll each covered employee in the program not later than 60 days after the employer provides the employee with information required under the act. In general, if the employee does not affirmatively choose a contribution level the employer must default the employee at a 3 percent level. An employee may opt out of the program by selecting a contribution rate of zero. Employers cannot contribute to the program.

This financially self-sustaining retirement savings exchange could serve nearly 600,000 private-sector workers in Connecticut who currently have no access to workplace-based retirement savings.

Public Act 16-95 "An Act Concerning Matters Affecting Physicians, Health Care Facilities, and Medical Foundations" This act sets specific limits on non-compete agreements that can be placed on physicians. The agreements cannot extend beyond one year and cannot cover a radius of more than fifteen miles from the physician’s primary practice site. It expands the list of entities that may employ physicians by allowing independent practice associations and certain other business entities to establish medical foundations, and makes changes to medical foundations. It requires hospital bills to include the hospital’s cost-to-charge ratio. The act also changes the information that providers must give to patients when referring them to affiliated providers, and makes provisions for further study.

Passage of this act is part of an ongoing policy effort in the state to control health care spending.

Public Act 16-147 "An Act Concerning the Recommendations of the Juvenile Justice Policy and Oversight Committee" The act requires the Court Support Services Division (CSSD) to develop and implement a detention risk assessment instrument and to adopt release policies and procedures. It limits the conditions under which a child may be detained and allows graduated sanctions as an alternative to detention. The legislation requires the CSSD and Department of Children and Families to develop a plan to provide community-based services for children leaving juvenile detention. The law requires the State Department of Education, in collaboration with other agencies, to develop plans on various issue areas such as school-based diversion initiatives and educational deficiencies among children in the juvenile justice system. The act also sets up reporting requirements designed to better track outcomes of youth within the justice system.

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 full GAAP standards. 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.

The State auditors gave the CAFR for the State of Connecticut a "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. 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 3,590,886 according to the July 1, 2015 estimate of the U.S. Census. 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. Note 1 of this report contains detailed information on the reporting entity.

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.

Budgetary Controls

The State Legislature prepares a two-year 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 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.

Economic Condition and Outlook

Despite the deep recession of 2008 and the slow pace of recovery, Connecticut continues to be a wealthy state. According to current census data, in 2015 Connecticut had a per capita personal income (PCPI) of $68,704. This PCPI was 143 percent of the national average of $48,112. Connecticut had a median adjusted family income of $91,388 in 2015 ranking it second among all states.

Connecticut's high income is partially explained by the educational achievement of its citizens. Almost 22 percent of the State's
adult population has a bachelor’s degree and nearly 17 percent possess a graduate degree or higher. This ranks Connecticut 7th and 3rd respectively among the states in the educational attainment of its adult population.

The state continues to be a leader in technology and innovation within its industries. Total spending within the state on research and development activities places Connecticut 5th among all states. In 2015, Connecticut ranked 8th nationally in patents granted per population. The state's principal industries today produce jet engines and parts, submarines, electronics and electrical machinery, computer equipment, and helicopters. Much of Connecticut's manufacturing is for the military. Finance, insurance and real estate (FIRE) are important sectors that in 2015 contributed the highest dollar amount to the State's Real Gross Domestic Product.

As in many other states, Connecticut's traditional core sectors are being reshaped by national trends and global competition. Manufacturing's contribution to the state economy as measured by GDP has been cut in half over the past four decades. The 2008 recession significantly reduced employment in the state's FIRE sector. Jobs in the financial sector remain approximately 13,000 below the 2008 pre-recession peak. These are some of the highest paying jobs within the state. Over the past ten years in Connecticut, the strongest job gains have been in industries with below average wages. The largest gains have been posted in educational services, health care and social assistance, and accommodation and food services, but wages in these sectors are 20 percent below the statewide average.

Looking forward Connecticut has numerous competitive advantages and challenges in shaping its economy. As discussed in the introductory section above, Connecticut has been steadily adding jobs and those gains have now spread to all major employment sectors. There are also indications of pay gains in many sectors. The state's labor force has the 3rd highest productivity rate in the country, which should help sustain higher wages into the future. Connecticut can boast of a high quality of life in attracting and retaining businesses. Forbes magazine ranked Connecticut 3rd in quality of life measures. The state has the 2nd lowest violent crime rate among neighboring states and the 9th lowest in the nation. State residents also enjoy the 3rd highest life expectancy in the country. Connecticut surely has challenges ahead in stabilizing its state budget, improving its transportation system and revitalizing its urban centers to accommodate growing preferences for urban living. Our state is well positioned to create a strong economy moving into the future.

Acknowledgements
I want to thank my staff, the State Auditors, 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,

Kevin Lembo
Connecticut State Comptroller

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