STATE OF CONNECTICUT
NANCY WYMAN COMPTROLLER	OFFICE OF THE STATE COMPTROLLER 55 ELM STREET HARTFORD, CONNECTICUT 06106-1775	MARK OJAKIAN DEPUTY COMPTROLLER

February 28, 2009

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, 2009. 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, we hope we have designed it to help readers, without a specialized financial background, gain a reasonable understanding of the State's financial activities.

The State's largest governmental fund is the General Fund. This is the fund most often referred to in media reports about the Connecticut's fiscal health. Over 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.

A national recession that officially commenced in December 2007 produced a pattern of job losses in Connecticut beginning in March 2008. At this writing, Connecticut's job numbers continue to decline. To date, the state has lost over 90,000 payroll positions. The job losses and associated decline in State revenue resulted in a Fiscal Year 2009 General Fund budgetary deficit of $947.6 million. During the course of the fiscal year, multiple deficit mitigation plans were implemented totaling approximately $600 million in transfers to the General Fund and other savings. The General Fund deficit balance was brought into Fiscal Year 2010 and financed through the issuance of Economic Recovery Notes.

On the GAAP accounting basis, the General Fund experienced a fund balance decline of $1.7 billion in Fiscal Year 2009. General Fund revenues declined $644.3 million from last fiscal year, or by almost 4 percent. The General Fund benefited from over $400 million in state stabilization federal stimulus dollars in Fiscal Year 2009. This federal funding kept the General Fund revenue decline from exceeding one billion dollars. Adjusted General Fund spending (adjusted for the Fiscal Year 2008 one-time expenditure of teachers' retirement pension reduction bond financing) grew by over one billion dollars in Fiscal Year 2009 or 6 percent. This is below the 9 percent spending growth of the prior year.

In recent years when the State has realized a revenue windfall, over half of that amount has been reserved for future year spending and the remainder has been deposited to the Rainy Day Fund. Between fiscal years 2004 and 2008, revenues exceeded budget expectations by approximately $3 billion. During this period $1.4 billion was deposited to the Rainy Day Fund (8 percent of net General Fund appropriations).

To the extent that windfall revenue is used for debt reduction, debt avoidance or one-time items it does not create structural budget imbalances; however, a large share of the windfall in revenue realized in recent years has been used to support ongoing operating expenditures in the General Fund. This spending exacerbated recessionary challenges that the State faced in Fiscal Year 2009.

The entire $1.4 billion in the Budget Reserve Fund has been committed to finance General Fund operations in Fiscal Years 2010 and 2011. The Governor and legislature have been urged to increase the ceiling for contributions to the Budget Reserve Fund from the current 10 percent of net General Fund budgeted appropriations to 15 percent of such appropriations. For Fiscal Year 2009, the 15 percent ceiling would yield maximum contributions of about $2.6 billion. A properly funded reserve is essential to long -term budget stabilization.

Major Policy Initiatives and Priorities

Labor Concessions and Retirement Incentive Program
An agreement reached between the State and its unions is expected to yield savings and payment deferrals in excess of $600 million over the next two fiscal years. Fiscal Year 2009 savings and cost deferrals were estimated at just over $70 million. Part of the savings plan included a retirement incentive program, which resulted in over 3,800 retirements. The plan also included wage concessions, furlough days, changes in employee health insurance contributions and retirement contribution deferrals.

Health Care Reform
Public Act 09-148, which was vetoed by the Governor and overridden by the State Legislature, established a SustiNet Health Partnership board of directors that must make legislative recommendations, by January 1, 2011, on the details and implementation of the "SustiNet Plan," a self-insured health care delivery plan. The act specifies that these recommendations must address:

1. establishment of a public authority or other entity with the power to contract with insurers and health care providers, develop health care infrastructure ("medical homes"), set reimbursement rates, create advisory committees, and encourage the use of health information technology;

2. provisions for the phased-in offering of the SustiNet Plan to state employees and retirees, HUSKY A and B beneficiaries, people without employer sponsored insurance (ESI), people with unaffordable ESI, small and large employers, and others;

3. guidelines for development of a model benefits package; and

4. public outreach and methods of identifying uninsured citizens.

The board must establish a number of separate committees to address and make recommendations concerning health information technology, medical homes, clinical care and safety guidelines, and preventive care and improved health outcomes. The act also establishes an independent information clearinghouse to provide employers, consumers, and the general public with information about SustiNet and private health care plans.

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 GAAP -the basis of accounting that is generally accepted throughout the United States. 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.

With the exception of the State's failure to update its OPEB liability and ARC in accordance with the requirements of GASB Statement 45, 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 3,518,288 in 2009 according to U.S. Census estimates. 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. Discretely presented component units are reported separately in the government-wide financial statements, to emphasize that they are legally separate from the primary government and to differentiate their financial position and results of operations from those of the primary government. Other component units, although legally separate entities have their financial position and operations blended with the primary government, essentially for technical reasons as explained more fully in the additional information on the reporting entity which is included in CAFR -Note 1, Summary of Significant Accounting Policies.

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 bi-annual 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 as 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. This has occurred in almost every year that the State has posted a budget surplus in the General Fund to enable the appropriation of surplus dollars that would have otherwise gone to reduce state debt and fill the rainy day fund.

Economic Condition and Outlook

Connecticut, like other states, has experienced steady erosion in total employment as a result of the present economic recession. Since March of 2008, the State has lost over 90,000 payroll jobs. In the prior two national recessions, Connecticut experienced job losses for an average of thirty-four months. If that trend holds, Connecticut will begin to experience modest job growth in early 2011. The strongest job loss has been experienced in the construction sector, although almost all employment sectors have seen declines. Connecticut has experienced slow labor force growth over the past decade, which has tempered the unemployment rate. Connecticut's unemployment rate was 8.8 percent at the end of 2009.

Connecticut is a wealthy state, with large income disparities. Connecticut continues to lead the nation with per capita income of $55,288, which is almost 40 percent above the national level. Connecticut's personal income declined at a rate of 4.4 percent through the third quarter of 2009. Over the past five years the State's per capita income growth averaged over 6 percent annually.

Connecticut is projecting significant declines in state revenues over the next several years due to the lingering impact of the recession and its heavy reliance on one-time revenue sources to balance the state budget. The budget imbalance is estimated to approach $4 billion by Fiscal Year 2012. A significant realignment of state spending and revenue will be required to avert this budget shortfall.

Acknowledgements

I want to thank my staff 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,

Nancy Wyman
Connecticut State Comptroller

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