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

Monthly Letter to the Governor

April 1, 2002

The Honorable John G. Rowland
Governor of the State of Connecticut
State Capitol
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 February 28, 2002.

The Office of Policy and Management (OPM), pursuant to Section 4-66 of the Connecticut General Statutes, has submitted budget estimates for Fiscal Year 2002 that project a General Fund deficit of $244,198,000 and a Transportation Fund surplus of $170,334,000. The OPM General Fund projection incorporates the following spending reductions, transfers and revenue enhancements: $171,116,371 in appropriation and carryforward reductions accruing to the resources of the General Fund as specified in Special Act 01-1 of the November Special Session; $57,400,000 in appropriation and carryforward reductions accruing to the resources of the General Fund as specified in Substitute HB 5022; $101,830,000 in appropriation transfers to cover deficiencies; $51,150,000 in additional appropriation lapses; and $40,500,000 in higher revenue resulting from the increase in the cigarette tax.

The $228,516,371 ($171,116,371 plus $57,400,000) in additional General Fund resources is shown as a budgetary decrease on the budgeted appropriations line of Exhibit B. The $101,830,000 in planned transfers to cover deficiencies is shown as an unallocated reduction under estimated additional requirements on Exhibit D. The $51,150,000 in additional lapses is shown on the estimated lapse line of Exhibit B. The $40,500,000 in higher cigarette tax revenues is shown on the appropriate tax line of Exhibit C.

My General Fund deficit projection for Fiscal Year 2002 is $242,898,000, close to OPM's figure and fully incorporating the proposals outlined above. I am in agreement with OPM's Transportation Fund projection.

The OPM General Fund Deficit projection has grown $72.1 million since last month. My deficit estimate is up $85.1 million from last month. The deficit projection results from lower than expected February tax receipts and higher spending. Reductions to last month's revenue projections are as follows: income tax $39 million, sales tax $15 million, oil company net revenues $8.9 million, and the credit exchange program $2 million. These revenue losses increase the deficit projection for the month by $64.9 million. Higher deficiencies add another $20 million to this month's deficit. Miscellaneous adjustments account for the remaining $200,000 change for the month.

Despite efforts to reduce total General Fund spending, a number of agencies are expected to exceed budget expectations by a total of $101,830,000 as follows: Department of Social Services $66,900,000, Department of Corrections $3,493,189, Department of Administrative Services-Workers' Compensation $2,046,170, Department of Mental Health and Addiction Services $3,100,000, Reserve for Salary Adjustments $4,000,000, Department of Public Safety $681,222, Military Department $400,000, Department of Public Health $500,000, State Employees Health Services $10,000,000, Department of Education $6,500,000, Department of Information and Technology $2,550,000, Department of Environmental Protection $800,000, and Department of Mental Retardation $859,419. The bulk of the deficiencies result from rising medical costs, the implementation of wage settlements, overtime pay, higher costs incurred to serve special needs clients, and a delay in the sale of workers' compensation claims. These deficiencies will be covered through transfers rather than additional appropriations.

General Fund revenues are projected to fall short of the budget plan by $511.7 million. The income tax is projected to end the year $225.4 million under budget. The income tax was targeted to grow 2 percent over last fiscal year; I am now projecting a 2.7 percent decline in this tax. A precipitous drop in January capital gains payments and a decline in withholding receipts since the beginning of the year explain the drop. The sales tax, targeted for growth of 2.2 percent, is now expected to decline 2.2 percent, resulting in a $123.7 million shortfall. The sales tax, after showing a modest upward trend toward positive growth dropped sharply in February. Declining corporate profits are expected to cut $81.2 million from corporation tax receipts, declining estate values are expected to bring the inheritance and estate tax $45 million under the budget target, and falling interest rates and declining cash balances are expected to reduce General Fund interest earnings by $28.6 million. Complete revenue estimates can be found on Exhibit J.

In the midst of this projected increase in the deficit, we continue to see data showing improvement in both the state and national economy. Most significantly, the state's employment outlook has improved. Through the end of 2001 the rate of job loss slowed appreciably and preliminary data for the first two months of 2002 show Connecticut added 3,900 new jobs.

Overall, while an economic recovery may be underway its impact on state revenues has been muted to date. It is likely that even as economic activity improves, state revenue in the coming fiscal years will not attain the 5.7 percent annualized growth of the past three years. The adjustment to slower growth will require greater fiscal discipline with respect to both expenditures and revenues.

The Transportation Fund budget as passed by the legislature anticipated a Fiscal Year 2002 surplus of $138,053,000. It is projected that slightly higher revenues of $16,600,000 offset by $3,640,000 in higher spending and an upward adjustment of $19,321,000 in Fiscal Year 2001 surplus will leave a Fiscal Year 2002 year-end balance of $170,334,000. A Fiscal Year 2002 operating surplus of $33,469,000 is projected for the Transportation Fund.

The General Fund projection contained in this report is prepared on a modified cash accounting basis. My office also prepares an annual financial report in accordance with Generally Accepted Accounting Principles (GAAP). The cumulative GAAP General Fund deficit as of June 30, 2001 was $781.8 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.

Sincerely,

Nancy Wyman
State Comptroller

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