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

December 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, 1996.

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
  
  Medicaid Managed Care (Connecticut Access). In July 1995, Connecticut's Department of Social Services implemented Connecticut Access, a plan to move a majority of the State s Medicaid population from a fee-for-service health care delivery system to managed care. The plan required a 1915 (b) waiver from the federal Health Care Financing Administration and called for the staggered enrollment of certain Medicaid beneficiaries - primarily recipients of Aid to Families with Dependent Children - into managed care plans. When fully implemented in January 1997, approximately 235,000 Medicaid eligible individuals will have been transitioned from fee-for-service into one of eleven managed care organizations. Connecticut Access was designed to achieve two main objectives: (1) improve the health status of Medicaid recipients through enhanced access to and coordination of health care; and (2) reduce Medicaid expenditures over the long term. At present, the State is developing the capability to evaluate the success of this initiative.
  Municipal Health Insurance. The Comptroller administers a health insurance program that covers approximately 166,000 Connecticut state employees, retirees and dependents. In recent years, the State plan has been successful in controlling health costs, while preserving benefit levels. In 1996, the Connecticut General Assembly approved a plan to allow the Comptroller to open the State health plan to Connecticut municipalities as a means of reducing their health insurance costs. The Comptroller s office is currently in the process of implementing the program. The target date for municipal enrollment is July 1997. Participation by municipalities will be strictly voluntary and there will be no cost increases to the State.
  
  The Work Group for Health Care Access for the Uninsured. In recent years, Connecticut's uninsured population has grown dramatically. In order to address this problem, the Work Group for Health Care Access was formed in May of 1996. The Work Group's diverse membership includes the Comptroller and State legislators, representatives of private sector businesses, labor, hospitals and physicians, insurance companies, HMOs and advocates for the uninsured. Work Group members have identified two promising reform concepts. The first involves expanding Medicaid to cover most or all of Connecticut's uninsured children. The second includes a package of tax incentives to encourage small businesses to provide coverage for their employees. The Work Group will recommend that the Connecticut General Assembly give priority consideration to these two reform concepts in the upcoming legislative session.
  
  Long-Term Health Care Insurance. In 1997, the State of Connecticut will begin offering long-term health care insurance to its employees through payroll deduction. The insurance plan will be available at group rates and employees will be responsible for the full cost. The insurance will cover a full range of long-term care services, including both nursing home and in-home care. The policies are designed to protect the subscriber s assets and therefore insure the family against the impoverishment that can result from a long-term illness. An additional objective of the plan is to reduce State Medicaid expenditures for long-term care.
  
• WELFARE REFORM
  Connecticut's Jobs First Program. In January 1996, Connecticut's Department of Social Services implemented a welfare reform program known as Jobs First. The program includes a 21 month cash benefit limit for employable recipients and has earning incentives to encourage individuals to seek employment while on welfare. Jobs First also includes some job training and placement services and an allowance for child care costs. In addition, Medicaid eligibility can be extended up to two years for those leaving welfare for work. The first group of individuals is scheduled to reach the 21 month limit and lose benefits in November 1997. During the 1996 fiscal year, the Department of Social Services reported a 5.7 percent reduction in its Aid to Families with Dependent Children (AFDC) caseload. At present, it is unclear whether the caseload reduction can be attributed to the Jobs First program, a generally improving state economy or a combination of both factors.
  
  Federal Reform and Reimbursement Changes. Due to the passage of federal welfare reform legislation, Connecticut has the option of continuing to operate under the provisions of its Jobs First program or converting to the provisions of the new federal Temporary Assistance to Needy Families (TANF) program. This issue will be addressed by the 1997 General Assembly. For program funding purposes, the State converted from a 50 percent federal reimbursement to a federal block grant on October 1, 1996. Over the next several years, the block grant will yield higher federal payments to the State. Afterwards, however, it appears that block grant payments will not keep pace with what federal reimbursements would have been under the old formula.
  
• FINANCIAL REPORTING
  Conversion to Generally Accepted Accounting Principles. In 1993, the Connecticut General Assembly enacted Public Act 93-402, which authorized the use of generally accepted accounting principles (GAAP) for the preparation and maintenance of the State s annual financial statements and the preparation of the State s biennial budget. Originally, conversion to GAAP from the modified cash basis of accounting was scheduled for the 1995-96 fiscal year. However, implementation was postponed for two years - largely due to the cost of amortizing the accumulated GAAP deficit, which was approximately $33 million a year for 15 years. Since then the accumulated GAAP deficit has grown. The conversion to GAAP is currently scheduled for the 1997-98 fiscal year and the Comptroller is recommending that implementation proceed on schedule.
  

OPERATING RESULTS

The fiscal year 1995-96 saw the deterioration of the State s financial condition slowed substantially, but we have not yet reached the point of turnaround.

• While the operating deficit is the lowest in both absolute terms and as a percent of tax revenue in the last five years at $191 million, this is the ninth year in a row of operating deficits highlighting the State's continual reliance on debt-financing.
• Long-term obligations increased $827 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% of governmental operating expenditures, a decrease from 8.4% in the prior year. In absolute terms, such expenditures decreased 3%.
• Net debt per capita, also exclusive of the Economic Recovery Notes, rose to $2,670, double that of fiscal 1990.
• Government expenditures showed a slight decrease from 11.5% to 11.3% of total personal income in the State when compared to the prior fiscal year, however, in absolute terms, expenditures increased 2.5%.

 TOTAL GOVERNMENTAL REVENUE
(millions)

Fiscal year 1996 saw governmental expenditures grow at less than a 3% rate while the growth in personal income was 4%. In the ten years since 1987, governmental expenditures have increased 108% while personal income increased only 55%.

Uncontrollable and fixed costs continued to consume a large share of the State's spending. Debt service, exclusive of the Economic Recovery Notes, decreased to 8% of total governmental expenditures. Total debt service, including the Economic Recovery Notes, increased to 10.7% of governmental expenditures, two times the ratio of fiscal year 1990. Medicaid spending leveled off in fiscal year 1996 at $1.9 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% share of federal reimbursements, was $291 for every man, woman, and child in Connecticut.

Deficit financing for operating purposes continued in fiscal year 1996. Deficits of $337 million were incurred in the Grant and Loan Programs and the Housing Programs special revenue funds in fiscal year 1996. This represents 19% of total special revenue funds spending. Debt financing for these and other special revenue programs was $405 million, which is almost three-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 $2,670 over twice what it was in fiscal year 1990. The remaining Economic Recovery Notes constitute an additional $72 of debt per capita.

General Fund

Fiscal year 1996 saw the State end the year with a general fund operating surplus for the first time since the 1994 fiscal year, with revenues growing faster than expenditures.

Tax revenues increased almost 8% 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 higher education, debt service and other. The main reason for the decrease in debt service expenditures was the refinancing of $241 million of Economic Recovery Notes which were due to be paid in the 1996 fiscal year from General Fund revenues.

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 personal income tax and the sales and use tax, tax revenues have been fairly stagnant, increasing marginally or even decreasing. Revenue from the personal income tax increased by $300 million, an increase of approximately 13% while the sales and use tax increased $89 million or an increase of 3.8%.

The largest increases in General Fund expenditures were Education, Human Services and Corrections, two 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 sparingly and in unusual circumstances.

SPECIAL REVENUE FUND OPERATING RESULTS
(millions)

The deficits primarily arose in the Grant and Loan Program Fund and the Housing Programs Fund. The Grant and Loan Fund expended $311 million in fiscal year 1996 supported by revenues of only $9 million. Bond proceeds of $289 million and fund balance resources financed the balance. The Housing Programs Fund expended $45 million in fiscal year 1996. Like the Grant and Loan Programs Fund, the balance was financed by $31 million of bond proceeds, and $8 million of revenues and additional fund balance resources.

Other major special revenue funds include the Transportation Fund, which is generally self-supporting. Expenditures and transfers of $879 million were supported by revenues and transfers of $893 million in fiscal year 1996. The fund balance of the Transportation Fund was $92 million or 10% of expenditures and transfers.

The Lottery Fund continued to provide substantial support to the General Fund. Revenues of $707 million provided $262 million to the General Fund after prizes and expenses of $436 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 $77 million were supported by $27 million of revenues and transfers, along with bond proceeds of $64 million.

Capital Projects Funds

Capital spending has shown a decrease from the almost $1 billion annual rate of past years with most of that spending directed toward 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 showed slow growth for 1996. 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 remains fairly flat at 52.5% as of fiscal year 1996 as compared to 52.3% as of fiscal year 1992. The Teachers Retirement System (TRS) funded status increased from 62.4% to 79.2%, and the Judicial Retirement System (JRS) from 37% to 43.2%, respectively.

PENSION FUNDED STATUS

Enterprise Funds

The State enterprise funds collectively incurred a gain from operations of $3 million in fiscal year 1996 with the largest fund, Bradley International Airport, earning all of this amount in fiscal year 1996 compared to a gain of $7 million in fiscal year 1995.

ENTERPRISE FUNDS
(millions)

Higher Education

Expenditures showed a modest growth of less than 2% in fiscal year 1996, while State support decreased slightly. Total revenues increased just 1% over fiscal year 1995.

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

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 over $1 billion of bonds in fiscal year 1996, more than equal to fiscal year 1995. 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)

Debt service as a percent of government operations, excluding debt service on the Economic Recovery Notes, has decreased slightly to 8% from a high of 8.4% a year ago although it is still up from 7.2% only five years ago.

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

Net State debt increased almost 7% to $9 billion from $8.4 billion in fiscal year 1995. Net State debt has more than doubled since fiscal year 1990.

Debt per capita has more than doubled to $2,670 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 $827 million in fiscal year 1996.

NET DEBT PER CAPITA*

*Exclusive of Economic Recovery Notes.

TRENDS IN SELECTED 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 1995-96 for these funds were approximately $116 million and 5.89%, respectively. By comparison, 90-day Treasury Bills and 90-day Certificates of Deposit earned 5.29% and 5.55%, respectively, during the same time period.

Bank balances at June 30, 1996, were $37 million of which about four-fifths 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

Employment

Connecticut's economy has been slow to emerge from a recession that began in early 1989 and ended in late 1992. The recession cost Connecticut 158,000 jobs. The State's manufacturing industry lost about 20 percent of its employment base during this period and job losses in this sector persist to date. The only other industrial sector that continues to lose jobs during the recovery is Finance, Insurance and Real Estate (FIRE); however, the FIRE losses have slowed dramatically in 1996. Most of the losses in the FIRE sector are the result of downsizing and mergers. The largest share of the manufacturing job losses is attributable to cuts in federal defense spending.

Between 1985 and 1995, Connecticut's defense procurement receipts dropped from $7.1 billion to $2.5 billion (in 1992 dollars) - a 65 percent reduction. The loss of these relatively high paying defense jobs had a secondary impact on the State's overall economic performance. According to the U.S. Department of Commerce, the transportation component of the State's manufacturing industry, which is largely defense-related, has a 2.5 employment multiplier. This means each transportation job supports an additional 1.5 jobs in the general economy. With the loss of defense dollars and the related jobs, Connecticut has increasingly relied on other business sectors for employment growth.

At present, Connecticut has recovered almost 40 percent of its recessionary employment loss. The fastest growing private industries are services, and wholesale and retail trade. Small business is fueling much of the growth in these industries. Businesses with 100 or fewer employees accounted for about 65 percent of all net new jobs created in the State between 1975 and 1993 - compared with about 50 percent nationally. Establishments employing 20 or fewer workers accounted for about one-third of these new jobs.

During the first ten months of 1996, Connecticut added a net total of 20,500 non-farm jobs. This is the strongest job growth performance since the end of the recession. The Connecticut Labor Department projects that the State will add a total of 181,500 jobs between the years 1994 and 2005, representing a 10.8 percent increase in total employment. Most of these jobs will be in health care services, business services, general services and retail trade. The State Occupational Information Coordinating Council estimates that some of the fastest growing occupations in Connecticut will be: computer engineers and systems analysts (growing 74 and 52 percent respectively); blackjack dealers and recreation workers (increasing 74 percent); and, physical therapists, medical assistants, and home health aides (up 44, 42 and 40 percent respectively).

Income

It is estimated that the jobs being created in Connecticut pay 30 to 50 percent less than the jobs that have been lost. The State's nominal median household income fell by 2.1 percent between 1994 and 1995. The results suggest that despite the employment gains of the recovery, many Connecticut families have not experienced improved economic well-being. Further evidence of wage erosion can be seen in hourly manufacturing pay, which has advanced just under 2 percent on average over the last three years. This rate of increase has not kept pace with inflation, resulting in a wage decline in real terms.

Despite the poor showing of median income and hourly wages, per capita income in Connecticut increased 5.7 percent between 1994 and 1995, the strongest gain since 1992. The contradictory movement in these income indicators may point to increasing income stratification in Connecticut with the largest gains being realized by those at upper income levels. This type of income distribution pattern is consistent with national results that point to increasing income inequality. It should be noted that Connecticut's per capita income is the highest in the nation - 33 percent above the national average for 1995.

Examining the changing sources of personal income in Connecticut between 1969 and 1994 shows less income being derived from wages and salaries and more income coming from dividends, interest and rent, and government transfer payments. Between 1969 and 1994, wages and salaries fell from 62.7 to 56.7 percent of total personal income. At the same time, dividends, interest and rent increased from 16.7 to 17.1 percent of total personal income. The transfer payment share of personal income increased from 7.2 to 14.1 percent over the period.

Other Economic Indicators

Although all societal sectors are not benefiting equally, Connecticut is in the midst of a solid, sustained economic recovery. In addition to general employment and personal income growth, new business starts are up roughly 10 percent over last year. New auto registrations posted a 15 percent gain in the third quarter of 1996, and major state tax receipts are running well ahead of budget expectations for the current fiscal year.

Most forecasts show Connecticut posting moderate but consistent economic gains into the next century.

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, 1995. 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 seven consecutive years (fiscal years ended 1989-1995.) 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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