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

May 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 March 31, 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 $666,528,000 and a Transportation Fund surplus of $172,535,000. 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; $15,900,000 in appropriation and carryforward reductions accruing to the resources of the General Fund as specified in Substitute HB 5022; $109,530,000 in appropriation transfers to cover deficiencies; $43,757,000 in additional net appropriation lapses; and $40,500,000 in higher revenue resulting from the increase in the cigarette tax.

The $187,016,371 ($171,116,371 plus $15,900,000) in additional General Fund resources is shown as a budgetary decrease on the budgeted appropriations line of Exhibit B. The $109,530,000 in planned transfers to cover deficiencies is shown as an unallocated reduction under estimated additional requirements on Exhibit D. The $43,757,000 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 $643,228,000 when fully incorporating the proposals outlined above. I am in agreement with OPM's Transportation Fund projection.

The OPM General Fund Deficit projection has grown $422.3 million since last month. My deficit estimate is up $400.3 million from last month. The large increase in the deficit results from further declines in tax revenue. My tax revenue projection is down $314 million from last month, and total revenues are $349.4 million below last month's projection. Over 80 percent of the revenue decline is in the income tax alone. Historically, over one third of all quarterly and final income tax payments are deposited in April. Originally, April receipts were expected to fall 10 percent below last year's level. It now appears the decline will approach 30 percent, a drop of $200 million from last year's level. This large April reduction combined with erratic performance in the withholding portion of the income tax has produced a $285 million downward adjustment in my income tax estimate this month. Continued weakness in corporate profits has also created a $30 million downward revision this month in the corporation tax estimate.

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.

In addition to these agency operating deficiencies, Substitute HB 5022 contains $7.7 million in Fiscal Year 2002 spending for hospitals and nursing homes. This unanticipated spending will also be accommodated through transfers, which have been incorporated within this deficit estimate.

Overall General Fund revenues are projected to fall short of the budget plan by $861 million. The income tax is projected to end the year $510.4 million under budget. The income tax was targeted to grow 2 percent over last fiscal year; I am now projecting a 8.7 percent decline in this tax. A precipitous drop in January and April capital gains payments and sluggish withholding receipts explain the drop. The sales tax, targeted for growth of 2.2 percent, is now expected to decline 2.2 percent, resulting in a $133.7 million shortfall. Sales tax receipts have not shown positive growth since August and have weakened since the beginning of the year. Declining corporate profits and tax reductions are expected to cut $111.2 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.

The balance in the State's Budget Reserve Fund is $594,697,530. This amount is $48.5 million less than my current deficit estimate.

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 a combination of spending restraint and revenue enhancements.

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 $18,800,000 offset by $3,640,000 in higher spending and an upward adjustment of $19,322,000 in Fiscal Year 2001 surplus will leave a Fiscal Year 2002 year-end balance of $172,535,000. A Fiscal Year 2002 operating surplus of $33,442,000 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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