Seal of the State of Connecticut

Executive Summary

Connecticut's economy has been slow to emerge from a recession early in the decade, but showed signs of improvement in 1996. Overall, unemployment decreased as the state continued to recover jobs lost during the recession. Per capita income also grew and Connecticut continues to lead the nation in this category. Most forecasts project moderate growth for Connecticut's economy through 1997. This is certainly welcome news for our state's citizens, who have worked harder to make ends meet in recent years. Unfortunately, not all of our residents have participated in the recovery.

The current economic upturn offers our state government both an opportunity to improve its fiscal health and a challenge to help those who have been left behind. The Comptroller's Report: Connecticut's Economic Health offers a straightforward and balanced assessment of the state's financial condition. While progress has been made in the past year, there is still much more work to do to put Connecticut on a sound fiscal course. This report seeks to provide the information necessary for our policymakers to plan responsibly for the state's future.

The Comptroller's Report: Connecticut's Economic Health is divided into three sections: the state's overall fiscal position, the state's economic condition and outlook, and the changing demographics of Connecticut. A brief summary of each follows, along with a description of the Comptroller's priority initiatives for 1997.

The State's Fiscal Position
Most analyses of the state's financial performance tend to focus exclusively on the General Fund, which accounts for about 80 percent of the total financial transactions of state government. However, looking at the General Fund alone does not tell the whole story. The other major funds (special revenue funds, the debt service fund and transfers to higher education) account for a full 20 percent of state fiscal operations. In addition, the state's financial reporting is presently done using the modified cash basis of accounting. This accounting method allows the state to overcount revenues and undercount expenditures, which is not permitted when Generally Accepted Accounting Principles (GAAP) are followed.

This report provides a GAAP-based analysis of all governmental fund activities. It is, therefore, a comprehensive review of the state's financial health. Under GAAP, the General Fund posted surpluses in three of the past five years. However, when the operating results for all state funds are considered, deficits occur in each of the past five years. Looking further back, the state has produced operating deficits in each of the past nine years. These deficits result, in large part, from a persistent reliance on debt financing to cover the costs of state operations.

The state's debt position has worsened in recent years. In Fiscal Year 1996, for example, the state issued $1.364 billion in new debt in the form of bonds and notes. This represented a 26 percent increase from the previous year's borrowing. Outstanding bonded debt -- debt issued by the state over a number of years that has not yet been paid off -- reached $8.981 billion in Fiscal Year 1996.

Increases in the state's debt burden have a very real impact on the state budget. The payment of principal and interest -- referred to as debt service -- has increased dramatically in recent years. Debt service has nearly doubled since Fiscal Year 1990, rising from 5.4 percent of all state spending to 10.7 percent in Fiscal Year 1996.

Another statistic useful in illustrating increases in state borrowing is net state debt per capita. This measure calculates the amount of outstanding bonded debt attributable to every man, woman and child in Connecticut. In Fiscal Year 1990, Connecticut's net debt per capita totaled $1,204; by Fiscal Year 1996, that figure had more than doubled to $2,670.

These disturbing trends -- persistent GAAP deficits and increased reliance on debt -- must be reversed. Connecticut should use the current economic recovery as an opportunity to adopt accurate fiscal reporting and to balance our state's books.

Economic Condition and Outlook
Connecticut's economy has been slow to emerge from a recession that began in early 1989 and ended in late 1992. During the recovery period, Connecticut has lagged behind the nation and the New England region in economic growth, and has yet to regain its pre-recession strength. Overall, the recession cost Connecticut 158,000 jobs. The manufacturing sector was particularly hard hit and the largest share of these job losses is attributable to cuts in federal defense spending.

At present, Connecticut has recovered almost 40 percent of its recessionary employment loss. The fastest growing private industries are services, and wholesale and retail trade. Small business is fueling much of the growth in these industries. During the first ten months of 1996, Connecticut added a net total of 20,500 non-farm jobs. This is the strongest job growth performance since the end of the recession. The state's unemployment rate fell to 4.6 percent (unadjusted for seasonal trends) in October of 1996; however, there are still areas of very high unemployment throughout the state, especially in the larger urban centers.

It is estimated that the jobs being created in Connecticut pay 30 to 50 percent less than the jobs that were lost during the recession. The state's unadjusted median household income fell by 2.1 percent between 1994 and 1995. This suggests that despite the employment gains of the recovery, many Connecticut families have not experienced improved economic well-being. Evidence of wage erosion can be seen in hourly manufacturing pay, which has advanced just under 2 percent on average over the last three years. This rate of wage growth failed to keep pace with inflation, resulting in reduced purchasing power.

Despite the poor showing of median income and hourly wages, per capita income in Connecticut increased 5.7 percent between 1994 and 1995, the strongest gain since 1992. The contradictory movement in these income indicators points to increasing income stratification in Connecticut: those at the top are realizing strong income gains, and those at the bottom are losing ground. This income distribution pattern is consistent with a national trend of growing income inequality. It should be noted that Connecticut's per capita income is the highest in the nation -- 33 percent above the national average for 1995.

Although all societal sectors are not benefitting equally, Connecticut is in the midst of a solid, sustained economic recovery. In addition to general employment and personal income growth, new business starts are up roughly 10 percent over last year. New auto registrations posted a 15 percent gain in the third quarter of 1996, and major state tax receipts are running well ahead of budget expectations for the current fiscal year.

A Demographic Profile of Connecticut
Between 1970 and 1991, Connecticut's population grew by 8.5 percent, from 3.032 million to 3.289 million residents. The state's recession interrupted this pattern of steady growth, resulting in a modest decline of 0.5 percent from 1991 to 1995. The recent improvement in Connecticut's economy is reflected in a slight increase in population. After reaching its lowest level since 1991 -- 3.271 million in 1995 -- the state's population grew last year by 3,500 to approximately 3.274 million residents.

Nevertheless, there is still reason for concern as Connecticut continues to have more people leave rather than locate to the state. Net domestic outmigration totaled 169,512 residents from 1990 to 1996. The good news is that outmigration was at its lowest level for the six-year period in 1996.

The racial and ethnic composition of Connecticut is becoming increasingly diverse. During the five- year period from 1990 to 1994, the state's African-American, Asian, American Indian and Hispanic populations increased in real terms even as the total population declined.

Since 1992, the state's population of children under age 5 has declined and is now below its level of 1990. The decline in the under-5 population corresponds to the state's net outmigration during this period as more families, including those with very young children, have left rather than located to the state. An improved economy, therefore, can be expected to result in an increased number of working families and a corresponding increase in the number of children under 5 years of age.

By contrast, for many years there has been a steady growth in the number of elderly state residents. Because the majority of over 65 residents are no longer working, their demographics are relatively unaffected by the economy. The aging of Connecticut's population mirrors a national phenomenon; however, the state's median age is greater than for the country as a whole. In 1995, the national median age for the United States was 34.3; Connecticut's was 35.9.

From 1990 to 1994, the proportion of Connecticut residents without health insurance increased from 8.5 percent to 12.2 percent of the non-elderly population. This trend mirrored Connecticut's declining economic fortunes through the recession. The state lost jobs in sectors that have traditionally included health benefits -- defense, manufacturing and insurance, for instance -- while it gained service sector jobs that are less likely to provide coverage.

In 1995, the uninsured population appears to have declined somewhat -- to 10.1 percent -- perhaps due to an improving state economy. However, this still represented 284,000 uninsured non-elderly residents, including 80,000 children according to the Census Bureau. An additional 5,000 residents age 65 or over were estimated to be uninsured in 1995 as well. Thus, it is still too early to tell whether this decrease in the uninsured population represents a one year aberration or the beginning of a new trend.

The demographics section of the report also contains a profile of Connecticut's uninsured population by age, income level, family type and work status.

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