January 2, 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 November 30, 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 1997-98 that project a General Fund surplus of $69,814,000 and a Transportation Fund surplus of $47,088,000. 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 $127,000,000 and a Transportation Fund surplus of $47,088,000. These projections are based on modified cash accounting, as required under current state law.
I now estimate that General Fund expenditures will end the fiscal year $208.7 million higher than budgeted. This historically high level of overspending is cause for concern. Our state's positive budget position continues to hinge on higher than anticipated tax receipts compensating for spending increases that far exceed budget targets. This is a fiscal practice that can be expected to produce budget imbalance over time. The higher spending consists of $126.4 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, a reduction of $58.8 million in targeted savings associated with the early retirement program, and miscellaneous adjustments of $5.2 million.
The agencies with significant General Fund deficiencies for the current fiscal year are: the Department of Social Services ($105.0 million), the Department of Mental Retardation ($4.5 million), the Department of Children and Families ($2.3 million), the Department of Public Works ($.7 million), the Refunds of Payments account ($2.0 million), and the Retired State Employees Health Service Cost account ($11.9 million).
About half of the Social Services deficiency is in the Medicaid account, and the remainder is in income support payments. 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 are designed to create budget savings have not been implemented on schedule. In addition to Medicaid, higher than budgeted caseloads and claims experience have created deficiencies in the Temporary Family Assistance and General Assistance programs. The deficiency in the Department of Children and Families results from the addition of 66 staff members in accordance with the Juan F. vs. O'Neill Consent Decree, which was finalized after the close of the 1997 legislative session. 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 deficit in Retired State Employees Health Service Cost account is the result of higher health care costs, higher than anticipated enrollments resulting from the early retirement program, and delays in implementation of federal Medicare risk sharing arrangements.
The $18.3 million dollars provided to the HUSKY program was approved by the legislature in an October 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 percent to 65 percent. At present it is impossible to predict the precise level of expenditures and the corresponding breakdown of federal and state shares, which will depend on the implementation schedule, the start-up costs and the number of new children enrolled in HUSKY and Medicaid.
The savings that can be achieved in the current fiscal year through the early retirement program continue to be reassessed and decreased by OPM. The budget anticipated General Fund savings of $104.7 million resulting from the early retirement program. OPM now estimates savings of approximately $45.9 million. Higher than expected refill requirements and overtime payments are the primary reasons for the lower savings figure.
Higher than anticipated revenues more than offset the additional spending requirements. I am projecting that total General Fund revenues will end the year $335.7 million higher than budgeted. Net tax receipts are expected to end the year $385.3 million above the budget plan. The largest contributors to the increased revenues are the income tax ($241.2 million over budget) and the sales tax ($75 million over budget). A strong national economy continues to propel tax receipts above budget expectations. Connecticut has experienced a 2 percent job growth rate (31,700 jobs) over the past year, and earnings have risen at a 4.0 percent annual rate. The state's unemployment rate remains low at 4.6 percent, which is down from last year's level of 5.7 percent.
As the rising revenue levels that the state is presently experiencing are closely tied to strong national economic activity, I will continue to monitor key economic indicators for signs of a weakening economy.
A surplus of $47.1 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 years operations will increase this balance by $27.1 million, which is primarily due to revenues that are $20.5 million above budget projections.
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 projected at $668 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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