April 1, 1998
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 February 28, 1998.
The Office of Policy and Management (OPM), pursuant to Section 4-66 of the Connecticut General Statutes, has submitted budget estimates for Fiscal Year 1997-98 that project a General Fund surplus of $221,262,000 and a Transportation Fund surplus of $33,684,000. In accordance with existing statutory requirements, the financial statements attached hereto reflect OPM's projections.
I project a Fiscal Year 1997-98 General Fund surplus of $303,068,000 and a Transportation Fund surplus of $47,084,000. My General Fund surplus projection has increased by a net of $20.9 million from last month. As discussed below, the increase in the projection is primarily due to continued above average growth in income tax receipts, which are now anticipated to end the year $381.9 million over budget. Robust economic growth continues to drive up income tax revenues. Year to date income tax receipts at the end of February were 14.8% higher than last year. This is the strongest growth rate experienced in any of the state's major General Fund revenue sources. The projections that follow are based on modified cash accounting, as required under current state law.
The General Fund surplus of $303,068,000 would be reduced by $170 million to a net surplus of $133,068,000 if the Appropriation Committee's action on the Fiscal Year 1999 budget is passed into law. The Committee voted to transfer $170 million of this year's surplus to next fiscal year in the following manner: $100 million for Tax Relief, $30 million to make the state's computers year 2000 compliant (this is in addition to the $50 million appropriated for the current fiscal year as detailed below), and $40 million for property tax relief through the payment of grants in lieu of taxes to towns.
I estimate that General Fund expenditures for the fiscal year in progress will be $247.6 million higher than budgeted. This level of overspending represents an increase of 2.7% from the original General Fund budget plan for the current fiscal year. Our state's positive overall budget position continues to hinge on tax receipt growth that more than compensates for additional spending. As the state economy reaches full capacity, revenue growth will slow. Therefore, the practice of funding ongoing expenditure items with one year's surplus should be resisted. The higher spending consists of $108.6 million in additional agency requirements, $18.3 million for an expansion of health insurance coverage to uninsured children through the new federal-state HUSKY plan, an additional $50 million appropriation to partially cover the cost of converting the state's computers for the year 2000, a reduction of $62.3 million in targeted savings associated, in large part, with the early retirement program, and miscellaneous adjustments of $8.4 million.
The agencies with significant General Fund deficiencies for the current fiscal year are: the Department of Social Services ($82.6 million), the Department of Mental Retardation ($5 million), the Department of Public Works ($1 million), the Refunds of Payments account ($2 million), the Board of Education and Services for the Blind ($0.9 million), the Office of the Chief Medical Examiner ($0.1 million), the Sundry account to discharge negative fund balances ($7 million), and the State Employee Health Service account ($10 million).
Social Service's deficiency of $82.6 million is comprised of $67.4 million in the Medicaid account, and $15.2 million in the Temporary Assistance to Families account. The Medicaid deficiency appropriation was increased by $19.6 million to reflect a prior FAC transfer from Medicaid to General Assistance ($12.5 million in large part reflecting old medical claims submitted by towns on behalf of GA recipients), ConnPACE ($6.6 million associated with higher prescription drug costs), and some miscellaneous deficiencies (totaling $.5 million). Accordingly the net Medicaid deficiency is $47.8 million. A number of structural changes to the Medicaid program (e.g competitive bidding of pharmaceutical and transportation services, and rebidding of the managed care program) that were designed to create budget savings have not been implemented on schedule. The deficiency in the Temporary Assistance to Families account of $15.2 million results from a higher than anticipated caseload. The average monthly caseload for this fiscal year is anticipated to be 2,000 more than the budget target of 49,409. However, although short of the budget target, this represents a 9% caseload decline for the fiscal year. The shortfall in the Department of Mental Retardation results from overly optimistic projections of savings that could be achieved in the agency's Other Expenses account. The shortfall in the Refunds of Payment account is due to the repayment of excess federal dollars erroneously claimed by the state in connection with the Child Nutrition Program. The Sundry account additional appropriation of $7 million dollars will be used to eliminate long standing negative balances in several inactive funds, and the $10 million appropriation to the State Employees Health Services account reflects the payment of an outstanding liability associated with higher than anticipated claims experience.
The $18.3 million appropriated to the HUSKY program was approved by the legislature in the October 1997 Special Session in order to secure new federal funding that is available to states to provide health insurance to uninsured children. Federal reimbursement for these expenditures will range from 50% to 65%. An additional $50 million is appropriated to the Department of Information and Technology for allocation to agencies for the conversion of computers to the year 2000.
The savings that can be achieved in the current fiscal year through the early retirement program have been reduced by OPM. The budget anticipated General Fund savings of $104.7 million resulting from the early retirement program. OPM now estimates savings of approximately $46.4 million. Higher than expected refill requirements and overtime payments are the primary reasons for the lower savings figure. In addition to a reduction in the early retirement lapse target, overall spending will increase by $62.3 million due to less aggressive savings targets.
Higher than anticipated revenues more than offset the additional spending requirements. I am projecting that total General Fund revenues will end the year $550.7 million higher than budgeted. Net tax receipts are expected to end the year $599.9 million above the budget plan. The largest contributors to the increased revenues are the income tax ($381.9 million over budget), the sales tax ($74.5 million over budget), and the inheritance tax ($73.5 million over budget).
A strong national economy continues to propel tax receipts above budget expectations. Connecticut has experienced a 2.4% rate of employment growth (adding 38,100 jobs) over the past twelve months, and weekly earnings have been unexpectedly strong growing by 5.4% from last year. The state's unemployment rate is a low 3.8%.
A surplus of $47,084,000 is projected for the Transportation Fund. Pursuant to Section 3 of P.A. 97-309, $94.6 million of the Transportation Fund's surplus was appropriated to the State Treasurer for purposes of retiring outstanding special tax obligation indebtedness, leaving a fund balance of $20 million. It is projected that current year operations will increase this balance by $27.1 million, which is primarily due to revenues that are $20.5 million above budget projections. I have not incorporated your proposal for a reduction in the motor fuels tax into my estimate. I am concerned that further reductions to the motor fuels tax base will accelerate the depletion of the resources of the Transportation Fund. In order to support further motor fuels tax reductions, revenues must be shifted from the General Fund to the Transportation Fund, which over time may compromise the financial stability of the General Fund.
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 as of June 30, 1997 is $670 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.
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