August 3, 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 June 30, 1998. These figures are still based on projections, as we continue to process final adjustments and accruals. I will submit the actual Fiscal Year 1998 closing figures on August 31, 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 1998 that project a General Fund surplus of $304,559,000 and a Transportation Fund surplus of $50,892,000. In accordance with existing statutory requirements, the financial statements attached hereto reflect OPM's projections. I am in general agreement with the OPM estimates.
If additional spending initiatives had not been undertaken with the projected surplus, my General Fund surplus estimate for Fiscal Year 1998 would now total $587,559,000. The additional spending items that have resulted in the reduction to surplus are detailed below. The unappropriated surplus of $304.5 million will be allocated in accordance with the provisions of Article XXVIII of the State Constitution at the close of the fiscal year as follows: $161.7 million will be transferred to the Budget Reserve Fund to fill the fund to its statutory level of 5% of net General Fund appropriations for the 1999 Fiscal Year. This will bring the Budget Reserve Fund balance to $498.6 million. The remaining $142.8 million of unappropriated surplus will be used for debt payment. The state's total outstanding bonded debt as of June 30, 1997 was $9.2 billion. Although a small portion of surplus is dedicated to the payment of bonded debt, new bond authorizations for Fiscal Year 1999 amount to over $1.2 billion.
I estimate General Fund expenditures for the fiscal year to be $490.8 million higher than budgeted. This level of overspending represents an increase of 5.3% from the original General Fund budget plan for the fiscal year, and exceeds the constitutional cap on spending. Based on these estimates, General Fund spending has grown 7% from the prior year. On an inflation adjusted basis, this represents a historically high level of spending growth. Our state's positive overall budget position continues to hinge on tax receipt growth that more than offsets dramatic overspending. As the state economy reaches full employment and growth in the financial markets slow, revenue gains will be be insufficient to support this level of spending growth. Therefore, tighter controls on expenditures are required to avert future deficits.
The higher state spending results from $108.6 million in agency deficiencies, $65.6 million in lower than anticipated programmatic savings, $18.3 million for the HUSKY health plan and Medicaid expansion, $80 million for year 2000 computer conversions, $32 million for the timely payment of Medicaid billings, $40 million for additional payments to towns in lieu of property taxes, $8.5 million in additional property tax relief for the elderly, $1.7 million in food stamps for legal immigrants, $3 million for school books, $1.8 million for the University of Connecticut endowment fund, and $15.3 million in miscellaneous payment adjustments. In addition, $116 million will be used for tax rebates.
Higher than anticipated revenues more than offset the additional spending requirements. I am projecting that total General Fund revenues will end the year $795.3 million higher than budgeted. Net tax receipts are expected to end the year $789.1 million above the budget plan. This represents a gain of 11.5% over budget expectations, and a 7.7 % increase over last year's tax revenues. The largest contributors to the increased revenues are the income tax net of refunds ($550 million over budget), the sales tax ($80.5 million over budget), and the inheritance tax ($85.7 million over budget).
A strong national economy prevailed throughout the fiscal year, which propel tax receipts above budget expectations. Connecticut experienced a 2.1% rate of employment growth during Fiscal Year 1998, adding 33,900 jobs. Weekly earnings were unexpectedly strong, growing 4.4% over the year. The state's unemployment rate closed the fiscal year at a low 3.8%.
A surplus of $50.9 million 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 $30.9 million after adjusting for an additional appropriation of $15 million for debt service in accordance with Section 41 of Special Act 98-6.
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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