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

December 31, 2001

To the Citizens of the State of Connecticut:

I am pleased to present this Comprehensive Annual Financial Report (CAFR) of the State of Connecticut for the fiscal year ended June 30, 2001.

This report was prepared in its entirety by this office and we take full responsibility for the accuracy of the data and the completeness and fairness of the presentation of the financial statements, supporting schedules, and statistical tables in it.

The CAFR is designed to be in conformance with generally accepted accounting principles (GAAP) for governmental units as promulgated by the Governmental Accounting Standards Board (GASB) as well as the reporting requirements prescribed by the Government Finance Officers Association and the American Institute of Certified Public Accountants. We believe that this report presents fairly the financial position of the state and the results of its operations as measured by the financial activity of its various funds. The report is consistent with full disclosure so that the reader may gain maximum understanding of the state's financial affairs. The report is presented in three sections:

The Introductory Section contains this transmittal letter, a list of the state's principal elected, appointed and administrative officials, an organizational chart of the state government, and a table of contents.

The Financial Section contains the Auditors of Public Accounts' report, the general purpose financial statements, which include the notes to the financial statements, and the combining financial statements and general fixed assets schedules.

The Statistical Section contains comprehensive statistical data and selected financial and demographic information on a multi-year basis.

THE REPORTING ENTITY

Connecticut, a state of approximately 3.4 million people in an area of 5,009 square miles, has a developed infrastructure, technologically advanced industrial base and a strong insurance and financial services industry. The State of Connecticut ratified the Constitution of the United States on January 9, 1788. It has a legislative - executive - judicial form of government with a bicameral legislature (36 Senators, 151 Representatives). The Governor, Lieutenant Governor, Secretary of State, Treasurer, Comptroller, and Attorney General are independently elected for four-year terms. Senators and Representatives are elected for two-year terms.

The state provides a broad range of services including public safety, state highways and other transportation services, state parks, social services, higher education, health services, economic development, and regulatory responsibilities.

This report includes all the funds and account groups of the state as well as all of is component units. Component units are legally separate entities for which the primary government is financially accountable. Blended component units, although legally separate entities, are, in substance, part of the primary government's operations and are included as part of the primary government. Accordingly, the Connecticut Lottery Corporation is reported as an enterprise fund of the primary government. Discretely presented component units are reported in a separate column in the combined financial statements to emphasize that they are legally separate from the primary government. These would include the Connecticut Development Authority, Connecticut Housing Finance Authority, Connecticut Resources Recovery Authority, Connecticut Higher Education Supplemental Loan Authority, Connecticut Health and Educational Facilities Authority, Connecticut Innovations, Incorporated, and Capital City Economic Development Authority.

STATE INITIATIVES

Connecticut's Industry Cluster Economic Development Initiative and Growth of the High Technology Sector

Connecticut's economic development strategy relies heavily on the creation of industry clusters. A cluster is defined as a concentration of companies and industries in a geographic region, which are interconnected by the markets they serve and the products they produce, as well as suppliers, trade associations and educational institutions. Examples of clusters include: the Silicon Valley for its microelectronics, biotechnology and venture capital; Route 128 in Massachusetts for its software, computer communications hardware, and health care technology; and Hartford for its insurance and finance sectors.

In 1998, a task force of 125 Connecticut business leaders was established to examine the best methods for creating cluster-based growth in the state. After much work, a bioscience cluster was launched at the end of 1998. The cluster started with $300,000 in state money and $700,000 in industry contributions. Its growth strategy is overseen through a public-private partnership. The cluster's activities have led to the establishment of a biotech facilities fund that, with the addition of $20 million in 2001, will total $60 million. This fund will underwrite the development of 150,000 square feet of incubator and lab space.

In 1999, three additional clusters were added as follows: aerospace, software/information technology, and metal manufacturing. In 2001 a maritime cluster was added. As can be seen by the composition, the five clusters are concentrated toward the growth of high technology industries. High technology is becoming a large part of Connecticut's economy, even as its growth is slower as a result of the recent economic downturn.

A federal Labor Department survey put the number of high-tech workers in the state at 77,500 in 2000, up 23 percent since 1994 and placing Connecticut fifth among all states in the percentage of workers employed in technology.

The expansion of this industry was somewhat hampered by the recent economic downturn, however, as 2001 projections for hiring in high technology fell from 15,000 new positions to 8,800. Revenue projections for 2001 likewise dropped, from $13 billion to $10 billion.

Nonetheless, Connecticut's emerging high technology industry is shaping the state's economic landscape. With the decline of the traditional manufacturing industry in the early 1990s, technology jobs are fueling growth. Technology salaries in Connecticut rank seventh nationwide, averaging $69,600 per year. This represents a 62 percent advantage over other private sector wage earners, who averaged $43,100.

State government is aggressive in its efforts to assist in the creation of high tech jobs. Connecticut Innovations Incorporated (CII) is a quasi-public agency that makes capital investments in emerging technology companies. Between 1995 and 2000, CII invested more than $84 million in such business ventures.

The bioscience industry, the state's first industry cluster, is now one of Connecticut's fastest growing. Research and development spending among bioscience companies topped $3 billion in 2000. This cluster is a collection of enterprises, which include pharmaceutical companies, biotechnology firms and academic research institutions. As of 2000, this sector of the technology field had laboratory space totaling 500,000 square feet.

Many factors contribute to Connecticut's ability to sustain a growing high technology industry including a low corporate tax rate, which is currently lower than other New England states, New York and California; and a highly educated and skilled work force.

The move towards a technology and services-oriented economy in Connecticut has been ongoing since 1990, when 21 percent of state residents were employed in manufacturing. Today, only 15 percent of residents work in that field. Conversely, the percentage of workers in technology and services has increased in that time, from 26 to 32 percent. This is reflected in the 10 fastest growing occupations in the state: computer engineer; systems analyst; computer support specialist; financial sales; physical therapy assistant; biological scientist; recreational attendant; human services worker; home care aide; and medical assistant. The industry cluster initiative is enhancing the economic benefits that can be derived from this trend.

Creating a World-Class Transportation Infrastructure

State economic growth relies on a transportation infrastructure that is capable of supporting an expanding economy. Connecticut has an extensive network of expressways and arterial highways that provide access to the state's regional markets. The state's economy experienced dramatic growth from 1995 to present, but the state's roadways have not been able to adequately accommodate the increase in traffic. The result has been growing congestion that delays the movement of people and product throughout the state. Public and private-sector leaders agree that transportation is key to improving Connecticut's position in the global market place.

In 2001, almost $50 million in state funding was appropriated for improvements to the state's transportation system. A 15-member transportation board has been established to set investment priorities that will reduce congestion and create an environment for economic growth. All aspects of transportation in the state will be examined.

A separate seven-member board of directors for Bradley International Airport (a state enterprise fund) has been established to create a strategy that will better leverage the resources of the airport to promote economic growth. The airport is strategically situated for domestic and overseas airfreight operations.

Core Financial and Administrative Systems

In February 2000, State Comptroller Nancy Wyman and Governor John Rowland jointly announced an initiative to consolidate the state's various financial and personnel record-keeping systems into an integrated core data system. The core system, called CORE-CT, will eliminate the current maze of expensive agency subsystems and provide improved management reporting. The new system, using enterprise resource planning software, will integrate basic human resources, payroll, accounting, and financial reporting functions for all state agencies.

The scope and significance of this endeavor is reflected in the composition of its Project Steering Committee. The Comptroller, who chairs the committee, is joined by the Commissioner of the Department of Administrative Services, the state's chief information officer, and the Secretary of the Office of Policy and Management. The committee's activities are supported by professional staff from various state agencies and by the consulting firm Accenture.

Initial start-up costs for this project were funded by a $7.5 million appropriation of Fiscal Year 2000 General Fund surplus dollars. In 2001, additional funding in the amount of $50 million was provided through a bond authorization. While this combined funding will cover a majority of the project's cost, additional funding will be required as implementation moves forward.

Work on defining system requirements, selecting the system and platform, and the documentation of conversion issues has proceeded on schedule. It is anticipated that the system will be operational within the next two years. This system represents an investment in the state's future and is expected to yield better service delivery at a lower cost.

OPERATING RESULTS

• The 2000-2001 fiscal year operating deficit of $505 million, once again highlighting the state's continual reliance on debt-financing.

• Long-term obligations decreased $482 million, the result of a decrease in the unfunded actuarial accrued liability.

• Debt service was 9.1 percent of governmental operating expenditures, approximately the same as the prior year. In absolute terms, such expenditures increased 4.4 percent.

• Net debt per capita rose to $2,994, almost two and one half times that of fiscal 1990.

• Government expenditures showed a decrease from 10.3 percent to 10 percent of total personal income in the state when compared to the prior fiscal year, however, in absolute terms, expenditures increased 3.4 percent.

*Surplus (Deficit) includes transfers and excludes proceeds from the sale of bonds and notes and capital lease obligations.

In the ten years since 1992, governmental expenditures have increased 55 percent while personal income has increased 57 percent.

* Includes general, special revenue and debt service funds. Operating expenditures also include higher Education expenditures that are treated as an operating transfer out in the general fund.

Uncontrollable and fixed costs continued to consume a large share of the state's spending. Total debt service remained approximately the same at 9.1 percent of governmental expenditures, still almost two times the ratio of fiscal year 1990. Medicaid spending increased 4.3 percent in fiscal year 2001 to approximately $2.5 billion, however, it still remains at almost one-fifth of total General Fund spending. The net state share of Medicaid, after adjusting for the 50 percent share of federal reimbursements, was $360 for every man, woman, and child in Connecticut.

Deficit financing for operating purposes continued in fiscal year 2001. Operating deficits of $417 million were incurred in the Grant and Loan Programs and the Housing Programs special revenue funds in fiscal year 2001. This represents 28 percent of total special revenue funds spending. Debt financing for these and other special revenue programs was $511 million.

As a result, debt per capita, exclusive of the Economic Recovery Notes, increased to $2,994 - almost two and one half times what it was in fiscal year 1990.

General Fund

Fiscal year 2001 saw the state end the year with a small general fund operating surplus, the fifth operating surplus in six consecutive years.

Revenues increased 5.9 percent in total with tax revenues increasing 4.6 percent and intergovernmental revenues (grants, etc.) increasing 3.4 percent. Expenditures increased 5.2 percent with all expenditure categories increasing except for human services, higher education and debt service.

As shown above, except for taxes and intergovernmental revenues, the net increase of other sources of revenues is relatively minor. A further analysis of the tax revenues shows that with the exception of the personal income tax and inheritance and estate tax, tax revenues continue to be fairly stagnant, increasing marginally or in many cases even decreasing. Revenue from the personal income tax increased by $431 million, an increase of approximately 11.4 percent while the inheritance and estate tax increased $35 million or an increase of 17.5 percent.

Except for human services and debt service, all functions of government showed increases in expenditures over the prior year.

*Includes Medicaid expenditures.

Special Revenue Funds

Special revenue funds continue to be heavily debt-financed, suggesting that we are burdening future generations of taxpayers with the cost of current programs. Grant and loan programs and housing programs have shown operating deficits for the last five years. To the extent that loan programs result in receivables that can be counted on to mature in time to service the related debt, a case may be made that the economic benefits accrue to current and future taxpayers. Financing grants with debt, however, should be undertaken sparingly and in unusual circumstances.

The operating deficits primarily arose in the Grant and Loan Programs Fund and the Housing Programs Fund. The Grant and Loan Fund expended $412 million in fiscal year 2001 supported by revenues of only $13 million. Bond proceeds of $429 million financed the balance. The Housing Programs Fund expended $15 million in fiscal year 2001 supported by $3 million of revenues and $26 million of bond proceeds.

Other major special revenue funds include the Transportation Fund, which is generally self-supporting. Revenues of $994 million in fiscal year 2001 supported expenditures and transfers of $960 million. The fund balance of the Transportation Fund was $201 million or 21 percent of expenditures and transfers.

The Employment Security Administration Fund expended $83 million on administration of the unemployment compensation program, supported by a like amount of federal financial assistance.

The Environmental Programs Fund also required debt financing. Expenditures and transfers of $78 million were supported by $34 million of revenues and transfers, along with bond proceeds of $20 million and resources from fund balance.

Capital Projects Funds

Capital spending has averaged over $736 million for the past five years with most of that spending directed toward infrastructure projects. Approximately 67 percent of infrastructure expenditures were financed by federal aid and the balance by state debt. Unlike the deficit financing of certain special revenue funds, the debt used to finance capital construction will provide a tangible benefit to the future generation of taxpayers who will use the asset for which they will pay the debt service. In addition, these infrastructure investments improve the economic climate of the state both immediately and for many years to come.

Expendable Trust Funds

The Employment Security Fund saw its fund balance decrease as resources were transferred to the Special Assessment Trust Fund to help retire unemployment compensation debt incurred in the early 1990's.

Pension Trust Funds

Net assets of the pension trust funds decreased four percent for 2001. The State Employees' Retirement System (SERS), by far the largest pension fund for state employees (the Teachers' Retirement System primarily serves municipal employees), funded status increased to 62.5 percent as of fiscal year 2000 as compared to 56.6 percent as of fiscal year 1997. The Teachers' Retirement System (TRS) funded status increased from 69.1 percent to 81.4 percent, and the Judicial Retirement System (JRS) from 52.4 percent to 67.9 percent respectively.

Enterprise Funds

The largest fund, the Connecticut Lottery Corporation, continues to provide substantial support to the General Fund with revenues of $840 million providing $252 million to the General Fund after prizes and expenses of $590 million.

Higher Education

Expenditures grew at a rate of 5.2 percent in fiscal year 2001 while State support decreased by 2.9 percent. Total revenues increased 9.4 percent over fiscal year 2000 with patient services, sales and services and federal and state grants showing the biggest increases.

Debt Administration

State general obligation bonds are rated Aa2, AA, and AA by Moody's, Standard and Poor's, and Fitch IBCA, respectively, while transportation-related special tax obligation bonds are currently rated Aa3, AA-, and AA-, respectively.

The state issued approximately $1.3 billion of bonds in fiscal year 2001, a 17.9 percent increase from last fiscal year. To the extent this bonding is for infrastructure or other assets benefiting future taxpayers, the debt is fully justifiable. The continued increase in the debt burden, however, particularly that portion that is used to finance current programs, bodes ill for the future. It means that future generations will pay for the sins of the past. And it means that the state will have reduced flexibility in future budgets, which will now be burdened by higher fixed costs for debt service.

Net state debt increased 5.2 percent to $10.3 billion from $9.8 billion in fiscal year 2000. Net State debt has more than doubled since fiscal year 1990.

Debt per capita has more than doubled to $2,994 from $1,204 in fiscal year 1990. Bonded debt is the primary focus of most analyses but it is only half the amount of incurred long-term obligations that will need to be paid by future generations of taxpayers. Long-term obligations also include capital leases; compensated absences which were earned by employees in past periods but which will be paid by future generations. Workers' compensation claims, which arose from past events but will be settled in future periods; and the unfunded actuarial accrued liability, which represents the value of pension benefits earned by employees but which is not funded currently are also included in long-term obligations. The total of these obligations decreased $482 million in fiscal year 2001.

* Exclusive of Economic Recovery Notes.

Internal Controls

Elected officials, agency commissioners, directors of public benefit corporations and agency managers are responsible for establishing internal control structures. Good internal controls are essential to achieving the proper conduct of government business with full accountability. This means that:

• resource use is consistent with laws, regulations and policies;
• resources are safeguarded against waste, loss and misuse; and
• reliable data are obtained, maintained and fairly disclosed in reports.

Good internal controls also facilitate the achievement of management objectives. In achieving these goals, good internal controls must strike a balance, providing reasonable, not absolute assurance. This recognizes that costs should not exceed benefits, nor should controls negatively impact operations.

• Good internal control is comprised of the following elements:
• Control Environment - which reflects the overall attitude, awareness, and actions of elected officials or agency managers concerning the importance of control and its emphasis in state government (i.e. What is the tone at the top?)
• Accounting System - which consists of the methods and records established to identify, assemble, analyze, classify, record, and report transactions and to maintain accountability over state resources.
• Control Procedures - which includes those procedures that elected officials and management have established to provide reasonable assurance that specific objectives are being achieved.

This office has been making consistent efforts to improve the overall internal control in state government and simultaneously to give managers authority commensurate with their responsibilities.

Budgetary Controls

The key control mechanism of government finance is the budget. The Government Accounting Standards Board (GASB) has concluded that, "The budgetary process, including comparison of the approved budget with actual experience, is... a major aspect of accountability." The budget is more than just an aspect of accountability, however, it is also:

• An expression of public policy that identifies that activity or program to be carried out, the amounts that may be expended for these purposes, and the time period in which these are to occur.

• A financial plan, or expression of financial intent. For example, what are the expected sources of financing for these programs - who bears the burden of paying for them?

• A form of control usually having the force of law.

Budget control is maintained at the individual appropriation account level by agency as established in authorized bills. The allotment process exercises control over the obligation. The Governor through the Office of Policy and Management allots funds, both for budgeted and non-budgeted funds. The Governor is further allowed to modify the allotments up to three percent of the fund or five percent of the appropriation amount. Modifications beyond those limits, but not in excess of five percent of the total funds, require the approval of the Finance Advisory committee, which is comprised of the Governor, the Lieutenant Governor, the Treasurer, the Comptroller, two senate members, not of the same party, and three house members, not more than two of the same political party.

Cash and Investments Management

The State Treasurer continually monitors cash flow to maximize the utilization of cash resources. During the year, temporary balances are invested in the State's short-term investment fund, a money market investment pool whose investments consist of certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements, federal agency securities, and other investments with various ranges of maturities. The investment income and average yield rate for the fiscal year 2000-2001 for this fund was approximately $255 million and 6.11 percent, respectively. By comparison, the IBC First Tier Institutions-Only Rated Money Fund Report Index had a 5.74 percent rate of return, during the same time period.

Bank balances at June 30, 2001 were $126 million of which about seventy-eight percent was not insured or protected by collateral.

Risk Management

The state retains risk for certain property and liability claims, including workers' compensation. The State Insurance and Risk Management Board serves as the focal point of risk management and insurance matters, maintaining a balance of commercially placed coverage and risk retention to provide optimal coverage at minimal cost.

ECONOMIC CONDITION AND OUTLOOK

Connecticut's economy moves in the same general cycle as the national economy. At this writing, the state and nation are experiencing a recession. Real Gross Domestic Product (GDP), the broadest measure of the economy's general health, showed little growth in the second quarter of 2001 and declined in the third quarter. This follows ten years of sustained economic growth in the country. The National Bureau of Economic Research (NBER), a nonprofit, nonpartisan organization that analyzes peaks and troughs in the business cycle, announced on November 26, 2001 that the United States economy had slipped into recession in March 2001. At present, this recession appears less severe than that of the early 1990's. Connecticut was slow to recover from that recession, lagging behind the nation in most economic indicators through the first half of the 1990's. By the second half of the 1990's the state was again experiencing strong growth.

During the state's recession that began in February 1989 and ended in December 1992, Connecticut lost 158,200 jobs. From the beginning of the state's recovery in December 1992 through October 2001, the state added 163,100 jobs to payroll for a net gain of 4,900 jobs. These gains are being eroded by the current recession. From 1995 through 2000 the state added an average of 24,000 jobs a year. Through the first three-quarters of 2001 the state lost 10,800 jobs. Despite the present job losses, the state's unemployment rate was a low 3.2 percent in October 2001.

Connecticut continues to lead the nation in per capita income. In 2000, Connecticut's per capita income of $40,870 was 38.8 percent higher than that of the United States. The state's two-year average median household income of $51,432 for 1999-2000 was 22 percent higher than the national figure. However, the state is beginning to see signs of slower income growth. In the 2^nd quarter of 2001 state personal income advanced at its slowest pace since the 1^st quarter of 1999. Gains in other income measures are also showing slowing trends. The state's poverty rate average for the three years covering 1998 through 2000 was 7.6 percent, well below the national rate of 11.9 percent for the same period.

The slowing economy has taken its toll on the state's General Fund revenues. Current estimates show Fiscal Year 2001 revenues down $317 million or 2.6 percent from last year. Annualized revenue growth has been 5.7 percent for the past three fiscal years. At present the income tax and sales tax, the state's two largest tax categories, are projected to post no growth in Fiscal Year 2001. The corporation tax, the third largest tax, is expected to decline by over 10 percent from last year.

Despite the current downward economic trends, Connecticut is well positioned to resume a course of economic growth. The state is known for having one of the most productive workforces in the nation. Worker productivity in the state, as measured by output per worker, is 23 percent above the national average. The state's workforce is well educated. Connecticut ranks third nationally in the percent of population over age twenty-five with a bachelors degree or higher.

The state's industrial base has become more diversified over the past decade. While defense and insurance continue to be important industries, bioscience, software development, communications, pharmaceuticals and medical technology are playing an increasingly important part in the state's overall economic development. Connecticut ranks 5^th nationally in the percent of residents working in high technology occupations. The state also has an expanding export sector. This sector grew by 9.8 percent in 2000.

Connecticut benefits economically from its geography situated between the financial centers of Boston and New York. More than one quarter of the total population of the United States and 60 percent of the Canadian population live within 500 miles of Connecticut. Over 30 percent of the nations' effective buying income, retails sales and manufacturing firms are within a day's drive.

Connecticut has 1,385,975 housing units, an increase of 4.9 percent from ten years ago. During this same period, a growth of 3.6 percent was recorded in the state's population. The state's housing stock has a 93.9 percent occupancy rate. Owner occupied housing units comprise 66.8 percent of the state's housing stock. On average, Connecticut families had 138 percent of the income required to purchase the average priced single family home last year. This compares to a figure of 130 percent nationally. The data suggest that housing in the state is still a good long-term investment.

Certificate of Achievement

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the State of Connecticut for its comprehensive annual financial report for the fiscal year ended June 30, 2001. The Certificate of Achievement is a prestigious national award recognizing conformance with the highest standards for preparation of state and local government financial reports.

In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. This report must satisfy both generally accepted accounting principles and applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. The State of Connecticut has received a Certificate of Achievement for the last twelve consecutive years (fiscal years ended 1989-2000). We believe our current report continues to conform to the Certificate of Achievement program requirements, and we are submitting it to GFOA.

Independent Audit

The Auditors of Public Accounts, who report to the legislature and are independent of the executive Branch, have audited the accompanying financial statements in accordance with generally accepted auditing standards and their opinion has been included in this report.

ACKNOWLEDGMENTS

I wish to express my appreciation to the many individuals in all agencies whose cooperation and assistance has made this report possible. In addition, the efforts of the GAAP Reporting Unit and others in our Budget and Financial Analysis Division deserve special acknowledgment.

Sincerely,

Nancy Wyman
State Comptroller

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