Seal of the State of Connecticut

1996-97 Budget Watch List

In analyzing the state budget, I am particularly concerned about the second year of the biennium. To monitor these concerns, my office has developed a watch list of potential problem areas for Fiscal Year (FY) 1996-97. These items include:

Federal Funds Cuts: Potential Deficit: $30 - 50 million

Approximately 16% of total state revenues comes from federal funds. Proposals under debate in Washington seek to cut growth or to cap federal expenditures for basic support programs such as Medicaid. While the magnitude of the cuts is still under negotiation, the direction for the state budget is clear: Connecticut will experience major federal expenditure reductions. The impact of these cuts will begin to be felt in FY 1996-97, and will increase in severity in future fiscal years.

Over Projection of Revenues: Potential Deficit: $100 million

The budget for FY 1996-97 incorporates speculative revenue sources and revenue projections that may prove overly optimistic in light of current estimates for economic growth in Connecticut. The major revenue categories (Income, Sales, and Corporation taxes) have been budgeted for growth of over 5% in FY 1996-97, while the state economy is expected to grow at a rate no better than 2%. In addition, federal changes in the capital gains tax may reduce state income tax revenues.

Selling a Partnership Interest in the Lottery:  Potential Deficit:$160 - 200 million

The budget for FY 1996-97 is balanced on the assumption that the lottery will be converted to a quasi-public corporation and a partnership interest of about 6% will be sold to private investors. To raise the revenue necessary for FY 1996-97, the plan calls for selling $160 million of revenue enhancement anticipation notes (RANs). The $160 million represents a new revenue item over and above the $277.5 million in budgeted lottery revenue for FY 1996-97. Many questions remain concerning the wisdom of this plan over the long-term. Yet failure to adopt this financing scheme could leave the FY 1996-97 budget with a substantial shortfall.

The Uncompensated Care Tax:  Potential Deficit: $67 million

In order to help finance uncompensated care, the state assesses hospitals with an 11% tax on gross earnings and a 6% sales tax on hospital services. Through these tax revenues, the state reimburses hospitals for a portion of the care they provide to people with little or no health insurance. However, not all the tax revenue is redistributed to hospitals; a portion ($67 million in FY 1996-97) is budgeted to remain in the General Fund. The 1996 legislature will face the issue of lowering or eliminating this "over-taxation", which could result in the loss or reduction of budgeted General Fund revenues.

Welfare Reform Cost-Shift: Potential Deficit:$20 million

The state is required to provide child care and transportation assistance to AFDC recipients who are participating in the Job Connection program. The budget for this biennium provides $81 million for this account. However, as more AFDC recipients try to move from welfare to work, significant caseload increases are already occurring in this program area. It is likely that demands will exceed budgeted resources in welfare-related accounts during the second year of the biennium.

Grand Total Potential Deficit: $377 million - $437 million

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