May 1, 1997
The Honorable John G. Rowland
Governor of the State of Connecticut
Hartford, Connecticut 06106
Dear Governor Rowland:
In accordance with Section 3-115 of the General Statutes and with my duty to render all public accounts under Article IV, Section 24, of the State Constitution, I am submitting the financial statements as of March 31, 1997.
The Office of Policy and Management (OPM), pursuant to Section 4-66 of the Connecticut General Statutes, has submitted budget estimates for Fiscal Year 1996-97 that project a General Fund surplus of $107,086,000 and a Transportation Fund surplus of $104,987,000. In accordance with existing statutory requirements, the financial statements attached hereto reflect OPM's projections.
As I have previously noted, OPM's projections are predicated on the implementation of your budget submission for the 1997-99 biennium, which utilizes surplus funds from this fiscal year to cover anticipated shortfalls over the next biennium. In the General Fund, $30.4 million of this year's surplus is used to pay June 1997's capitated Medicaid bills in the current fiscal year, rather than in FY 1998 as required by Public Act 95-160; accrued sick and vacation payments associated with an early retirement program that has not yet been approved would be paid from this year's surplus in the estimated amount of $34.9 million; and, revenue in the amount of $40 million to be realized through the sale of loans to the Connecticut Housing Finance Authority, scheduled for this fiscal year, will not occur under your plan until Fiscal Year 1999. Your plan would also use $3.9 million in Transportation Fund surplus money from this year to pay for the proposed early retirement program.
I now project a Fiscal Year 1996-97 General Fund surplus of $221,800,000 and a Transportation Fund surplus of $108,887,000. Incorporating your proposed additional expenditures, my budget projections are for a $107,200,000 General Fund surplus and a Transportation Fund surplus of $104,987,000. The figures presented are my projections based on modified cash accounting, as required under current state law.
General Fund expenditures for the current fiscal year are estimated to be $104.0 million higher than budgeted. The higher spending consists of $98.6 million in additional agency requirements and $5.4 million in net miscellaneous budget adjustments. Incorporating your proposals, General Fund expenditures for FY 1997 are estimated to be $182.9 million higher than budgeted.
Inclusive of your proposed additional expenditures, the agencies with significant General Fund deficiencies for the current fiscal year are: the Department of Social Services ($80.4 million), the Department of Children and Families ($35.5 million), the University of Connecticut ($9.1 million); the Department of Education ($5.8 million), Miscellaneous Appropriations administered by the Comptroller - Health Insurance, ($5.0 million), the Judicial Department ($3.1 million), the Board of Education and Services for the Blind ($1.25 million), the State Insurance Purchasing Board ($1.0 million), the Public Defender Services Commission ($.6 million), the Department of Veterans' Affairs ($.4 million), and the County Sheriffs ($.2 million). In addition, the Reserve for Salary Adjustments account ($34.9 million), the net miscellaneous budget adjustments (5.4 million), and agency deficiencies of less than $100,000 result in a total General Fund deficiency of $182.9 million.
Almost two-thirds of the projected excess spending is attributable to three accounts: Medicaid ($80.4 million), Foster Care for Children ($23.0 million), and University of Connecticut -- Operating Expenses ($9.1 million). I have previously noted that Medicaid spending for the AFDC population was running ahead of last fiscal year. Through the first nine months of this fiscal year, Medicaid spending for the AFDC and related population is now 11 percent above spending for the same period a year ago. On December 31, 1996, I wrote to Commissioner Thomas at the Department of Social Services (DSS) requesting information on the precise source of this elevated spending. I have recently received a response to my inquiry from DSS Deputy Commissioner Michael Starkowski. DSS' analysis of Medicaid costs reveal two major reasons for the higher managed care spending. First, there were normal adjustment costs and accelerated payments that create cash flow distortions in spending patterns. Second, the capitated payments made to the managed care plans for the eligible coverage group were higher than warranted given 1) the actual rate of medical inflation, 2) delays in moving some high medical usage populations into managed care, and 3) inclusion of state provided behavioral health services within the managed care capitation rates. Regarding this last factor, it is unclear at this time whether the managed care health plans are reimbursing the state for these covered services as anticipated when the capitation rates were formulated. I am concerned that the state has double paid for certain managed care services and, consequently, did not achieve the anticipated budgeted savings. I will continue to closely monitor this issue.
Higher than anticipated revenues more than offset the additional spending requirements. I am projecting that total General Fund revenues will end the year $325.8 million higher than budgeted. Incorporating your proposals, General Fund revenues for FY 1997 will be $290.1 million higher than budgeted. Tax receipts are expected to end the year $313.4 above the budget plan. The higher than expected tax receipts are primarily due to the performance of the personal income tax.
I am projecting that income tax receipts will end the year $199.0 million over budget. The combination of high capital gains receipts, strong employment conditions (an additional 28,000 jobs have been added in Connecticut over the past year), and improved wage growth are responsible for the additional income tax revenues. The performance of the sales tax has been erratic. In March sales tax receipts increased a modest 1.8 percent over last year. This followed February receipts that were up 9.5 percent from the previous year. I am now estimating that sales tax revenues will end the year $53.1 million over budget. Refunds of taxes, which had been assumed to be running higher than budget earlier in the year, now appear on target. Federal Grant receipts are $83 million higher than anticipated. The higher federal grants will provide a partial offset to deficiencies in the Medicaid, AFDC, and Child Care accounts.
A surplus of $108.9 million is projected for the Transportation Fund. Incorporating your proposed additional expenditures, the surplus is projected to be $105.0 million, which reflects a $25.8 million increase over the projected fund balance for this fiscal year. The $25.8 million fund increase consists of $6.6 million in additional revenue, $4.9 million in lower than expected net spending, and $14.3 million in funds carried forward from the prior fiscal year.
The General Fund projection contained in this report is based upon the modified cash basis of accounting used to formulate and execute the State budget, as currently required by state law. My office also publishes a Comprehensive Annual Financial Report prepared on a modified accrual basis as prescribed by Generally Accepted Accounting Principles (GAAP). The cumulative General Fund GAAP deficit at June 30, 1996 is $640 million.
The difference between the budgetary and GAAP basis projections is primarily due to the recognition under GAAP of projected liabilities, revenues, and other items which will be outstanding at year end and which are not reflected in the modified cash basis currently used for budgetary reporting. The recognition of these adjustments under GAAP results in a more accurate statement of the General Fund's financial position.
If you have any questions, I will be pleased to discuss this report at your convenience.
Back to Monthly Letter Index
Back to Comptroller's Home Page