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

January 31, 1996

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, 1995.

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 and individual fund and account group financial statements.

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 3.3 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 plus related public authorities, the Teachers' Retirement System and Bradley International Airport.

STATE INITIATIVES

• Health Care Reform

The Office of Health Care Access (OHCA) was created with the objective of expanding the number of Connecticut residents who are covered by a standard health insurance benefit package. In addition, OHCA assumed responsibility for the coordination of overall state health policy planning, data collection, and various regulatory and administrative functions. On January 3, 1995, OHCA released a comprehensive report on health care reform in Connecticut. The report detailed four major approaches to expand access to health insurance coverage to the uninsured. None of the reform proposals advanced past the conceptual stage. Today, it is estimated that about 12 percent of state residents under age sixty-five lack basic health insurance coverage. The Comptroller is responsible for procuring health insurance coverage for 166,000 state employees, state retirees and their dependents and is examining the possibility of utilizing this purchasing pool to expand access to affordable health insurance in the state. The Comptroller's Office is also examining additional methods of providing coverage to the uninsured and will report on the results of this study in 1996.

• Medicaid Eligibility and Federal Matching Funds

Medicaid eligibility was expanded to 185 percent of the federal poverty level for children up to age nineteen who were born on or after September 30, 1993 (age eleven as of 10/1/94). The Comptroller's Office is carefully monitoring federal changes to the Medicaid program that are being debated in Washington, but have not been resolved, at the writing of this report. Of particular concern are changes that would replace the present federal Medicaid match with a federal block grant. It is estimated that under the congressional proposal currently before the president, Connecticut could lose up to $1.8 billion in Medicaid funding over the next seven years. Further expansions in coverage of covered groups through the Medicaid program will be drastically curtailed if the proposed funding reductions become reality.

• Consolidation of Various Funds

A number of special funds were consolidated into the General Fund or merged into other special funds thus reducing the total number of state funds. This effort improved overall state financial reporting and reduced the related administrative costs associated with maintaining numerous special funds. The Comptroller's Office was instrumental in guiding this effort.

OPERATING RESULTS

The fiscal year 1994-95 saw the State's financial condition continue to deteriorate as we have not yet reached the point of turnaround.

• Although the deficit had been shrinking in both absolute terms and as a percent of tax revenue through 1993, this trend was reversed in 1994 and this reversal has continued in 1995 with the State incurring a deficit in governmental operations of $623 million -- the eighth year in a row of operating deficits.
• Long-term obligations increased $38 million, which will have to be financed by future generations.
• Debt service, excluding the debt service on the State's Economic Recovery Notes, was 8.4% of governmental operating expenditures, up from 7.3% in the prior year. In absolute terms, such expenditures increased by 26%.
• Net debt per capita, also exclusive of the Economic Recovery Notes, rose to $2,473, double that of fiscal 1990.
• Government expenditures continued to rise to 12.3% from 11.7% of total personal income in the State when compared to the prior fiscal year.

TOTAL GOVERNMENTAL REVENUE
(millions)

Fiscal year 1995 saw governmental expenditures grow at a 9% rate while the growth in personal income was less than 4%. In the ten years since 1986, governmental expenditures have increased 131% while personal income increased only 60%.

Uncontrollable and fixed costs continued to consume increasing shares of the State's spending. Debt service, exclusive of the Economic Recovery Notes, increased to 8.4% of total governmental expenditures. Total debt service, including the Economic Recovery Notes, increased to 10.6% of governmental expenditures, two times the ratio of fiscal year 1990. Medicaid also continued its rise. It increased in fiscal year 1995 to over $1.9 billion or almost one-fifth of total General Fund spending. The net state share of Medicaid, after adjusting for the 50% share of federal reimbursements, was $292 for every man, woman, and child in Connecticut.

Deficit financing for operating purposes continued in fiscal year 1995. Deficits of $339 million were incurred in the Grant and Loan Programs and the Housing Programs special revenue funds in fiscal year 1995. This represents 19% of total special revenue funds spending. Debt financing for these and other special revenue programs was $481 million, which is four-fifths of our spending on legitimate capital needs for State facilities and infrastructure.

As a result, debt per capita, exclusive of the Economic Recovery Notes, increased to $2,473 - twice what it was in fiscal year 1990. The remaining Economic Recovery Notes constitute an additional $97 of debt per capita.

General Fund

Fiscal year 1995 saw the state end the year with a general fund operating deficit for the first time since the 1992 fiscal year, with expenditures growing faster than revenues.

*Primarily expenditures under grant programs.

Tax revenues increased almost 6% while intergovernmental revenues (grants, etc.) increased 3%. The increases in the intergovernmental revenues are largely offset and in some cases more than offset by the increase in the related expenditures in the programs funded by those intergovernmental revenues. All expenditure categories increased except for education, libraries and museums, and other.

GENERAL FUND REVENUES
(millions)

As shown above, except for taxes, 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 sales and use tax, and the hospital gross receipts tax, tax revenues have been fairly stagnant, increasing marginally or even decreasing. Revenue from the Sales and Use Tax increased by $188 million, an increase of approximately 8.7%, while the hospital gross receipts tax, in its first full year, increased $168 million or a three hundred percent increase.

The largest increases in general fund expenditures, other than debt service, were Human Services and Corrections, both of which are being driven by outside factors such as mandated Medicaid expenditures and rising prison populations.

As previously discussed, Corrections and Judicial expenditures have continued to expand in step with crime and the increasing correction facility population.

TOTAL CORRECTION FACILITY POPULATION

GENERAL FUND EXPENDITURES
(millions)

*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 only sparingly and in unusual circumstances.

SPECIAL REVENUE FUND OPERATING RESULTS
(millions)

The deficits primarily arose in the Grant and Loan Programs Fund and the Housing Programs Fund. The Grant and Loan Fund expended $320 million in fiscal year 1995 supported by revenues of only $12 million. Bond proceeds of $370 million and certain other transfers financed the balance. The Housing Programs Fund expended $40 million in fiscal year 1995. Like the Grant and Loan Programs Fund, the balance was financed by $23 million of bond proceeds and $10 million of revenues.

Other major special revenue funds include the Transportation Fund, which is generally self-supporting. Expenditures and transfers of $834 million were supported by revenues and transfers of $851 million in fiscal year 1995. The fund balance of the Transportation Fund was $78 million or 9% of expenditures and transfers.

The Lottery Fund continued to provide substantial support to the General Fund. Revenues and fund balance resources of $672 million provided $250 million to the General Fund after prizes and expenses of $422 million.

The Employment Security Administration Fund expended $118 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 $97 million were supported by $33 million of revenues and transfers, along with bond proceeds of $60 million.

Capital Projects Funds

Capital spending continued at almost a $1 billion annual rate as in past years. Most of that spending was on infrastructure projects. Approximately 60% 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.

TREND IN CAPITAL PROJECTS EXPENDITURES
(millions)

Expendable Trust Funds

The Employment Security Fund showed a small surplus with expenditures (unemployment compensation claims) the lowest in five years.

EMPLOYMENT SECURITY FUND
(millions)

Pension Trust Funds

The operations of the pension trust funds continued steady growth for 1995. The State Employee Retirement System (SERS), by far the largest pension fund for state employees (the Teachers' Retirement System primarily serves municipal employees), had increased its funded status steadily from 50.3% as of fiscal year 1990 to 54.8% as of fiscal year 1995. The Teachers?Retirement System (TRS) funded status increased from 52.8% to 77.5%, and the Judicial Retirement System (JRS) from 24.8% to 37.5%, respectively.

PENSION FUNDED STATUS

Enterprise Funds

The State Enterprise Funds collectively incurred a gain from operations of $98 million in fiscal year 1995 with the Bradley International Airport incurring a gain of $7 million in fiscal year 1994 compared to a gain of $1 million in fiscal year 1994. Of the $97 million of non-operating income, $88 million was from the forgiveness of an advance in the Rental Housing Fund.

ENTERPRISE FUNDS* (millions)

Higher Education

The state support of higher education was increased in fiscal year 1995 and tuition and fees, both in total and as a percent of expenditures and transfers showed small growth. On the expenditure side, a 9.1% growth was seen in fiscal year 1995.

TRENDS IN HIGHER EDUCATION
CURRENT AND HOSPITAL FUNDS FINANCES
(millions)

*Excluding one-time fringe benefit funding.

Debt Administration

State general obligation bonds are rated Aa, AA-, and AA by Moody's, Standard and Poor's, and Fitch Investors Service, respectively, while transportation-related special tax obligation bonds are currently rated A1, AA-, and AA-, respectively.

The state issued $1 billion of bonds in fiscal year 1995, equal to fiscal year 1994. 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.

DEBT ISSUANCES
(millions)

Indeed, debt service as a percent of government operations, excluding debt service on the Economic Recovery Notes, has already increased to 8.4% up from 6.1% only five years ago.

DEBT SERVICE AS A PERCENT OF
GOVERNMENTAL OPERATING EXPENDITURES
(millions)

Net State debt increased 5% to a little over $8.4 billion from $8 billion in fiscal year 1994. Net State debt has more than doubled since fiscal year 1990.

Debt per capita has doubled to $2,473 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 that 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 pension benefit obligation, which represents the value of pension benefits earned by employees but which is not funded currently. The total of these obligations increased $38 million in fiscal year 1995.

NET DEBT PER CAPITA*

*Exclusive of Economic Recovery Notes.

TRENDS IN LONG TERM DEBT
(millions)

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 policies and 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 the activity or program to be carried out, the amount 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. Control over the obligation is exercised by the allotment process. Funds, both for budgeted and non-budgeted funds, are allotted by the Governor through the Office of Policy and Management. The Governor is further allowed to modify the allotments up to 3% of the fund or 5% of the appropriation amount. Modifications beyond those limits, but not in excess of 5% 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 short-term investment funds, combined investment pools consisting of various certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements, and student loans with various ranges of maturities. The investment income and average yield rate for the fiscal year 1994-95 for these funds were approximately $101 million and 5.75%, respectively. By comparison, 90-day Treasury Bills and 90-day Certificates of Deposit earned 5.41% and 5.72%, respectively, during the same time period.

Bank balances at June 30, 1995, were $38 million of which about three-quarters was not insured or protected by collateral.

Risk Management

The State retains risk for certain property and liability claims, including workers' compensation claims. The State Insurance Purchasing 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 entered into recession in early 1989 after a period of remarkable economic growth. The state's recession officially ended in the fourth quarter of 1992, but its impact has lingered and can still be felt in certain sectors of the economy.

Employment

The recession cost the state approximately 162,000 jobs on a seasonally adjusted quarterly basis. By the second quarter of 1995, Connecticut managed to recover only about 14% of the recession-based job losses. Throughout 1995, the state experienced little in the way of sustained job growth; the employment pattern has been mixed--a month of job gains followed by a month of job losses. Projected cuts in defense, banking, insurance and general manufacturing are expected to leave net 1995 employment close to its 1994 level.

CONNECTICUT TOTAL NON-FARM EMPLOYMENT

Job losses have been especially severe in the state's manufacturing sector. Over 40% of the total recession-based job losses came from this one employment sector. While total seasonally adjusted nonfarm employment in the state is up from its fourth-quarter 1992 low, manufacturing employment has continued to slide. Manufacturing job losses are expected to continue until the year 2000. It is significant to note that in 1950 over 50% of the state's labor force worked in manufacturing. Today manufacturing employs less than 18% of the work force.

CONNECTICUT MANUFACTURING EMPLOYMENT

The loss of manufacturing jobs is significant for a number of reasons. Historically, Connecticut's manufacturing sector, with its high productivity rates (higher than both New England and the U.S.), fueled much of the state's wage growth. With the decline in manufacturing employment, Connecticut has also seen a decline in average weekly wage growth. In Fiscal Year 1994-95 wage growth in the state was less than 1%--a relatively dismal performance.

While total nonfarm employment remains stagnant in the state, new jobs are being created in various other fields. The service sector has experienced sustained job growth, now employing approximately 30% of the total state work force. Much of the job growth comes from small businesses. Between 1982 and 1992 firms employing fewer than 50 workers experienced a 19% rate of job growth, while the overall economy saw 12% job growth. Unfortunately, this sector-specific job creation has been offset by job cuts in key industries across the state. However, it is important to recognize that Connecticut's economy is experiencing some job creation.

At 5.1%, Connecticut's unemployment rate is relatively low. However, this statistic is somewhat deceptive because it does not account for people who have been forced out of the state's labor market. It also does not account for individuals who are under-employed (individuals who have been forced to accept part-time employment, or employment outside of their area of training). For these reasons, this report does not include comparative unemployment rates. Rather, it focuses on job creation statistics, which provide a truer measure of economic health.

Other Economic Indicators

Housing permit activity serves as a reliable indicator of emerging demographic trends and of overall state economic activity. A comparison of the third quarter of 1994 to the third quarter of 1995 shows a 22% decline in housing permits. A total of 2,294 permits were issued in the third quarter of 1995, compared to 2,954 in the third quarter of 1994. However, two factors may help to moderate this decline. Continued low interest rates for mortgages and lower prices in the housing market may help end 1995 with a total housing permit decline of about 10%.

New car registrations plunged 32% in the third quarter of 1995 from the same period last year. In addition, total retail sales fell 3.4%. Connecticut's retail sales were $7.28 billion in the third quarter of 1995 compared to $7.54 billion for the same quarter in 1994. By comparison, third quarter national retail sales rose by 5.6%. Overall, Connecticut's Gross State Product will show a modest increase for 1995, about 2% above the 1994 level. Despite this gain, the Connecticut Consumer Confidence Index hit a twelve-month low in September of 1995.

Although the overall economic picture is not good, there are positive notes. As detailed above, the state has experienced sector-specific job creation in 1995, which has kept the unemployment rate from climbing. Travel and tourism grew by 5.8% from the 1994 pace, and hotel and motel receipts increased 6% in the third quarter of 1995 from the same period a year earlier.

Economic Projections

Every five years, the U.S. Bureau of Economic Analysis (BEA) projects state and regional economic activity. These projections are mainly used to: (1) assess future demands for goods and services, (2) analyze economic trends and anticipate future economic problems, and (3) provide baselines to assist in evaluating the effects of policies. BEA's projections rely on historic patterns of economic activity and data that resides in the Bureau's Regional Economic Information System (REIS). The projections also incorporate recent economic and demographic trends. The latest set of BEA projections provide forecasts to the year 2005.

The BEA projections do not show much economic improvement for Connecticut as we enter the next century. Connecticut's annual rate of growth in personal income between 1993 and 2005 is expected to be 1.9%, which is below the projected national average of 2.2%. Gross State Product is also expected to grow slower than the national average between 1993 and 2005, increasing at an annual rate of about 2%.

In addition, BEA expects an economic slowdown to occur between the years 2000 and 2005. During this period, job growth in Connecticut is expected to be weak. Total employment in the state between 1993 and 2005 is projected to grow at an annual rate of 1.4 %, with the service sector continuing to increase its share of total state employment. However, this sector provides the smallest increase in productivity per employee over the period.

Personal Income

Connecticut continues to rank first in the nation in per capita income ($29,044 in 1994), although over the past several years state residents have been losing ground. Connecticut experienced the slowest rate of personal income growth in the nation between 1989 and 1994. During this period, our state lagged behind the United States in personal income growth every year except 1992. Connecticut's growth was slower than the New England region in three of those five years. In Fiscal Year 1995, Connecticut personal income grew by only 3.5%, while New England's growth rate was 4.7% and the U.S. rate was 6%. It is also important to note that prices in Connecticut are about 20% above the national average. So part of the income advantage is offset by the higher cost of goods and services in the state.

PER CAPITA PERSONAL INCOME COMPARISON

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, 1994. 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 six consecutive years (fiscal years ended 1989-1994.) 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 Central Accounting Division deserve special acknowledgment.

Sincerely,

Nancy Wyman
State Comptroller

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