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

January, 2006

To the Citizens of the State of Connecticut

It is our privilege to present this Comprehensive Annual Financial Report (CAFR) of the State of Connecticut for the fiscal year ended June 30, 2004. This report was prepared in its entirety by the Office of the State Comptroller. The Comptroller is responsible for state accounting practices and is committed to sound financial management and governmental accountability.

We believe that the financial statements are fairly presented in all material aspects. They are designed to set forth the financial position of the state, its operating results and the changes in net assets or fund balances of the major funds and non-major funds in the aggregate. All required disclosures have been included to assist the public, state policy makers, and the financial community in understanding the state's financial affairs.

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 as well as the reporting requirements prescribed by the Government Finance Officers Association. The Management's Discussion and Analysis (MDA) contains information that prior to 2002 was found within the letter of transmittal. In addition to the basic financial statements, the CAFR includes: combining financial statements that present information by fund category, certain narrative information that describes the individual fund categories, supporting schedules, and statistical tables.

The Fiscal Year 2004 CAFR was published late due to reporting delays caused by the implementation of a new financial and human resources management system concurrent with a major downsizing in the state's workforce. These factors are discussed in more detail below.

PROFILE OF THE STATE OF CONNECTICUT

Connecticut became the fifth state of the United States on January 9, 1788. Its borders encompass 5,009 square miles. Within its compact borders, Connecticut has forested hills, new urban skylines, shoreline beaches, and historic village greens. There are classic Ivy League schools, modern expressways, corporate offices, and small farms. Connecticut is a thriving center of business as well as a vacation location. It is both a New England State, and suburban to New York City. The population of Connecticut was 3,498,966 according to the July 1, 2004 U.S. Census estimates. Five large cities, Bridgeport, New Haven, Hartford (the State Capitol since 1875), Stamford and Waterbury, have populations in excess of 100,000 residents.

State Government in Connecticut has three branches: executive, legislative and judicial. Voters elect six state officers: Governor, Lieutenant Governor, Treasurer, Comptroller, Secretary of State and Attorney General. All have four-year terms. Connecticut also elects two U.S. Senators and five U.S. Representatives. Connecticut's General Assembly or legislature has a Senate and a House of Representatives.

The regular sessions of the General Assembly are held every year. These sessions run from January through June in odd-number years and from February through May in even-number years. The General Assembly reconvenes in special session to deal with emergencies or bills or appropriations vetoed by the Governor. Members of both houses represent districts based on population. There are currently 36 State Senators and 151 State Representatives. Members of the General Assembly are elected to two-year terms. The Judicial Department is composed of the Superior, Appellate and Supreme courts. Except for judges of the probate court, who are elected by the voters of the town or district that they serve, all judges are nominated by the Governor and appointed by the General Assembly.

Connecticut has no system of county government. Below the state level, governing units consist of 169 municipalities. The General Statutes of Connecticut provide procedures for the creation of many types of local special purpose authorities, districts and similar bodies. Under Connecticut law, all municipal governmental bodies have only the powers specifically granted to them by the state and the ancillary powers that are necessarily implied by the powers explicitly granted.

ECONOMIC CONDITION AND OUTLOOK

After almost eight years of solid economic growth, Connecticut began to experience payroll job losses in Fiscal Year 2001. In Fiscal Years 2001, 2002 and 2003 the state's payroll job losses totaled 13,800, 12,600 and 27,200 respectively. After three successive years of job losses, in Fiscal Year 2004, the state again experienced gains in payroll employment. In Fiscal Year 2004, Connecticut added 6,800 payroll jobs.

Connecticut's payroll employment totaled 1,648,600 at the end on Fiscal Year 2004. The Fiscal Year 2004 job gain represented a 0.4 percent rise in employment as compared to a 1.2 percent job increase nationally during the same period.

Over the past ten years, Connecticut has experienced a shift in the industrial make-up of its workers with manufacturing jobs being replaced by service sector jobs. This is a trend that began several decades ago. In the last ten years, manufacturing employment in Connecticut has declined by just over 20 percent while during the same period employment in professional and business services grew by 11.5 percent and financial services saw growth in excess of 7 percent. Despite these shifts, manufacturing continues to play an important role in Connecticut's economic life contributing approximately 12 percent of Gross State Product. Between 2003 and 2004 real Gross State Product in Connecticut grew at a 4.5 percent rate as compared to a national growth rate of 4.3 percent.

Connecticut's unemployment rate was 4.8 percent at the end of Fiscal Year 2004 compared to a national rate of 5.6 percent. One reason for the state's relatively low unemployment rate is stagnation in its labor force growth. Between Fiscal Years 1994 and 2004, Connecticut's labor force grew just 2.3 percent. Nationally during this period the labor force grew 12.9 percent. Reversing the trend of a declining state labor force will prove important to Connecticut's long-term economic growth potential. A slight acceleration in the state's population growth has been observed since 1996. A continuation of this trend should also contribute to labor force growth.

Connecticut continues to be a national leader in income measurements. Connecticut's 2004 per capita income of $45,506 was 37.7 percent above the national average of $33,041. Connecticut's inflation adjusted median household income for 2004 of $73,458 was second only to New Jersey.

Connecticut's housing market remained strong throughout the recent recession. Historically low interest rates contributed to the strong real estate activity. Home sales advanced at double-digit growth rates as did home prices.

MAJOR GOVERNMENT INITIATIVES

Technology Initiative

In July 2003, the state implemented the first phase of a new fully integrated, Internet based financial management and human resources system called Core-CT. The system provides a single point of entry for all state financial, human resources and payroll data. Core-CT contains central and agency accounting, purchasing, accounts payable, assets, inventory, payroll, time and attendance, worker's compensation, personnel and other business systems. The human resources/ payroll component of Core-CT came on-line in October 2003.

The implementation of Core-CT is the product of several years of work to improve the state's financial reporting and management information systems. This work continued in Fiscal Year 2004 with the development of additional system modules. Core-CT will ultimately allow the state to gather more detailed financial and personnel data than had been available in the past, and to better analyze the effectiveness and efficiency of governmental programs. Over the next decade it is anticipated that Core-CT will help the state to improve its delivery of services to the people of Connecticut and to reduce program costs through efficiencies.

This historic upgrade to the state's financial system occurred coincident with a significant downsizing of the state's workforce, which took place through a combination of layoffs and early retirements. Hundreds of employees that had been trained in the new technology and had decades of experience in state finance were suddenly gone. This sudden downsizing and start-up issues with software explain the delay in this report.

Use of Fiscal Year 2004 Surplus

Section 48 of Public Act 04-216 increased General Fund appropriations by $112.4 million (beyond the amount required to cover normal operating deficiencies) to fund education grants, Husky health coverage, contract settlements, and other miscellaneous items. Section 10 of Public Act 04-216 reserved $125.3 million of Fiscal Year 2004 revenue to cover Fiscal Year 2005 spending. Absent this legislation, these amounts would have become Fiscal Year 2004 surplus and subject to transfer to the Budget Reserve Fund.

A remaining surplus of $302.2 million as calculated on the modified cash basis of accounting was transferred to the Budget Reserve Fund. Prior to this transfers reserves in the fund had been completely depleted. The statutory target for reserves is 10 percent of net General Fund appropriations. At the end of Fiscal Year 2004, reserves totaled just 2.3 percent of such appropriations.

BUDGETARY AND OTHER CONTROL SYSTEMS

In November 1992, electors approved an amendment to the State Constitution providing that the amount of general budget expenditures authorized for any fiscal year shall not exceed the estimated amount of revenue for such fiscal year.

This amendment also provided a framework for placing a cap on budgeted appropriations. Annual budgeted appropriations are capped at a percentage increase that is based on either the five-year average annual growth in the state's personal income or inflation, whichever is higher. Debt service payments, certain statutory grants to distressed municipalities, and appropriations required by federal mandate or court order are excluded from the limits of the cap.

The spending cap can be lifted if the Governor declares the existence of extraordinary circumstances and the General Assembly by a three-fifths vote approves appropriations in excess of the cap. This has occurred in several fiscal years to allow direct appropriations of surplus to be substituted for debt financing, and other permit other spending initiatives from surplus funds.

Budget control is maintained at the individual appropriation account level by agency as established in authorized appropriation bills. The allotment process exercises control over obligations or commitments. The Governor, through his budget office, allots funds for both budgeted and non-budgeted accounts and funds. The Governor is permitted to modify appropriations through the allotment process under certain circumstances and within percentage limitations specified by the General Assembly.

Elected officials, agency commissioners, directors of public benefit corporations and agency managers are responsible for establishing internal control structures. Good internal control systems ensure that: resource use is consistent with laws, regulations and polices; resources are safeguarded against waste, loss and misuse; and reliable data are obtained, maintained and fairly disclosed in reports. The Office of the State Comptroller has worked to improve the overall internal control environment in state government. This work has included improvements to the central state accounting system that advance internal control efforts.

ACKNOWLEDGEMENTS

I wish to express my personal thanks to the many individuals in various agencies and reporting units whose cooperation and assistance have made this report possible. In addition, I would like to thank the staff of my Budget and Financial Analysis Division for their diligent work on this report.

Sincerely,

Nancy Wyman
State Comptroller

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