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

December 30, 1999

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, 1999.

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 as well as all of is component units. Component units are legally separate entities for which the primary government is financially accountable. Blended component units, although legally separate entities, are, in substance, part of the primary government's operations and are included as part of the primary government. Accordingly, the Connecticut Lottery Corporation is reported as an enterprise fund of the primary government. Discretely presented component units are reported in a separate column in the combined financial statements to emphasize that they are legally separate from the primary government. These would include the Connecticut Development Authority, Connecticut Housing Finance Authority, Connecticut Resources Recovery Authority, Connecticut Higher Education Supplemental Loan Authority, Connecticut Health and Educational Facilities Authority, and Connecticut Innovations, Incorporated.

STATE INITIATIVES

Sales Tax Rebate and Other Tax Reductions

During the first half of this decade, state taxes were increased sharply in response to four consecutive years (fiscal years 1988-91) of General Fund budget deficits that totaled to over one billion dollars -- about 10 percent of General Fund spending. A recession that began in the winter of 1989 and officially ended in December of 1992 was a major contributor to the state's deficit problems. Connecticut was slow to emerge from the recession. By 1996, the state had finally regained much of its economic strength and sizable budget surpluses were building. With revenues outpacing spending requirements, tax cuts became a priority for both the Governor and the Legislature.

Recognizing the emphasis that had been placed on tax reductions, in 1997 State Comptroller Nancy Wyman proposed the first tax rebate in Connecticut history. Comptroller Wyman favored the rebate approach because it offered an opportunity to provide meaningful tax relief without permanently weakening the state's tax structure. Rebates would be paid for with the excess revenues generated by the strong economy; if the economy softened, the revenue raising potential of the existing tax structure would remain intact. The state's first tax rebate was enacted in 1998 (Public Act 98-110). The Legislature set aside $115 million of the Fiscal Year 1998 General Fund surplus for the income tax rebate. The rebate was $75 for single filers, $120 for those filing as head of household, and $150 for joint filers. Qualified income tax filers received the lesser of their final income tax liability or the rebate amount; however, a minimum of $50 was granted to all qualified taxpayers. A second rebate program was enacted in 1999 (Public Act 99-173). This rebate program was not tied to the state's income tax, making individuals who did not pay income tax eligible for this new sales tax rebate. The Legislature provided $109.5 million for the 1999 sales tax rebate program. Of this total, $96.2 million was appropriated from the Fiscal Year 1999 General Fund surplus and $13.3 million came from the first rebate program's unexpended balance. The 1999 sales tax rebate provided $50 to eligible individuals.

In addition to tax rebates, the state phased-in approximately $300 million in base and rate tax reductions during Fiscal Year 1999. Some notable examples of phased-in reductions are as follows: the corporate tax rate on net income has phased down from a nation leading 11.5 percent to 7.5 percent for Fiscal Year 2000; the state income tax has been reduced from 4.5 percent to 3 percent at various income levels, and the property tax credit on the income tax will increase from $350 to $500 by January of 2000; items such as computer and data processing services, newspapers, and replacement parts have been exempted from the sales tax and, by 2005, the inheritance tax will be completely eliminated. These and other reductions will accumulate to over one billion dollars in tax relief by Fiscal Year 2002. A decade that began with tax raising initiatives is ending with substantial tax relief.

Tobacco Settlement Fund

In accordance with the provisions of a court approved master settlement agreement between participating states and the tobacco industry, Connecticut will receive a stream of payments. A Tobacco Settlement Fund was created (Public Act 99-2, JSS) to receive and account for these payments. For Fiscal Year 2000, the Legislature anticipated tobacco receipts of $165.8 million. Of this total, $78 million will be transferred to the General Fund, $20 million will be placed in trust, and $5 million will be transferred to a new Tobacco Grant account within the Office of Policy and Management. The remaining balance of $62.8 million will carry-forward to Fiscal Year 2001.

From the total $78 million transferred to the General Fund in Fiscal Year 2000, $13.7 million will be used for various public health initiatives; $7.8 million will be used for education programs including a higher education tuition freeze; and, $50 million will go to general purpose municipal grants. The remaining $6.5 million that is undesignated will become general revenue.

The flow of tobacco money until 2025 creates a substantial new revenue source. Based on the Fiscal Year 2000 appropriations of tobacco money, it is clear that the state does not intend to limit fund usage to public health initiatives.

Economic Development Initiatives

The State of Connecticut has several entities that are used to provide business assistance to employers in the state. The three principle public and quasi-public agencies are the Department of Economic and Community Development, the Connecticut Development Authority and the technology oriented Connecticut Innovations Incorporated. During Fiscal Year 1998, these three agencies approved loans and grants to Connecticut businesses totaling nearly $400 million.

In addition to these three agencies, the state has undertaken independent initiatives in order to spur economic growth. The most visible and promising of these to date is the ambitious Adriaen's Landing project in downtown Hartford. By the end of the 1999 legislative session, the state had committed a total of $455 million to the revitalization of the area. The plan calls for a sports stadium in East Hartford for University of Connecticut football. The western side of the river will feature restaurants and 400,000 square feet of retail space in addition to a convention center and hotel.

It is expected that the Legislature will be presented with the final master plan for Adriaen's Landing during the 2000 legislative session. State funds for the project cannot be released until private investors make commitments of $210 million for the hotel, restaurant and entertainment complex. In November 1999, President Clinton visited Hartford with the news that private investors - mostly the region's insurance and financial giants - had committed nearly $200 million towards that goal. At the end of 1999, site work has been limited to environmental testing and planning for the removal of soil that has been found to contain low levels of hazardous chemicals. In September, the Capital City Economic Development Authority selected the firm of Thompson, Ventulett, Stainback & Associates of Atlanta to be the architects for the project's convention center.

The state's largest city, Bridgeport, has also been the recipient of state money to spur economic growth. In August 1997, the state Bond Commission allocated $7 million toward the construction of the Bridgeport Bluefish baseball stadium. In June 1998, the Commission granted $20 million toward the Harbor Place waterfront redevelopment project. At the end of 1999, ground was broken for the construction of a 10,000-seat sports arena near Harbor Place. This project was also funded through an initial $5 million bond allocation, with a state commitment of more funds for the rest of the $35 million project. Unsuccessful efforts have been made in prior years to secure legislative approval to allow a casino for the city.

Also of interest to the State of Connecticut is the formation of "economic clusters." These occur when industries that produce similar products locate in one geographical area to promote growth and success in their fields. Probably the most famous example of this is "Silicon Valley" in California, a cluster of high technology companies.

The Governor's Council on Economic Competitiveness and Technology, which met for the first time in December 1998, is interested in this concept. Examples of industry clusters that the Council wishes to create include: manufacturing, bioscience, aerospace, optics technology, software and information technology, marine and aqua-agriculture. The Council plans to secure state financial assistance as well as tax incentives to spur the growth of these clusters.

In April 1999, an organization representing bioscience industries named Connecticut United for Research Excellence Incorporated (CURE) reported that the state's bioscience cluster, located in the southern and southwestern part of the state, invested more than $2.2 billion in research and development and employed nearly 11,000 people. The companies and institutions included in the report were: Alexion Pharmaceuticals, Bayer Corporation, Boehringer Ingelheim, Bristol-Meyers Squibb, CuraGen, Genaissance Pharmaceuticals, Institutes for Pharmaceutical Discovery, Neurogen, Pfizer, Protein Sciences, The University of Connecticut Health Center, Vion Pharmaceuticals and Yale University.

The state's second cluster, composed of information technology companies, was launched in October 1999 with $150,000 in seed money from the state. This sector of the state's economy employs over 70,000 workers in more than 4,400 businesses. This cluster is located primarily in the western and southwestern parts of the state.

OPERATING RESULTS

• The 1998-99 fiscal year operating deficit of $380 million once again highlights the state's continual reliance on debt-financing.

• Long-term obligations increased $553 million, which will have to be financed by future generations.

• Debt service, excluding the debt service on the state's Economic Recovery Notes, was 9.8 percent of governmental operating expenditures, a decrease from 10 percent in the prior year. In absolute terms, such expenditures increased 3.6 percent.

• Net debt per capita, also exclusive of the Economic Recovery Notes, rose to $2,857 more than double that of fiscal 1990.

• Government expenditures showed a slight increase from 10 percent to 10.2 percent of total personal income in the state when compared to the prior fiscal year, however, in absolute terms, expenditures increased 6 percent.

* Surplus (Deficit) includes transfers and excludes proceeds from the sale of bonds and notes and capital lease obligations.

In the ten years since 1990, governmental expenditures have increased 53 percent while personal income increased only 48 percent.

* Includes general, special revenue and debt service funds. Operating expenditures also include higher education expenditures that are treated as an operating transfer out in the general fund.

Uncontrollable and fixed costs continued to consume a large share of the state's spending. Debt service, exclusive of the Economic Recovery Notes, decreased slightly to 9.8 percent of total government expenditures. Total debt service, including the Economic Recovery Notes, decreased to 10.4 percent of governmental expenditures, still almost two times the ratio of fiscal year 1990. Medicaid spending leveled off in fiscal year 1999 at approximately $2 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 percent share of federal reimbursements, was $305 for every man, woman, and child in Connecticut.

Deficit financing for operating purposes continued in fiscal year 1999. Operating deficits of $483 million were incurred in the Grant and Loan Programs and the Housing Programs special revenue funds in fiscal year 1999. This represents 32 percent of total special revenue funds spending. Debt financing for these and other special revenue programs was $556 million, which is greater than 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 $2,857 - over twice what it was in fiscal year 1990.

General Fund

Fiscal year 1999 saw the state again end the year with a general fund operating surplus, the fourth year in a row.

Revenues increased 3.1 percent in total with tax revenues increasing 2.8 percent and intergovernmental revenues (grants, etc.) increasing 2.4 percent. Expenditures increased 5.3 percent with all expenditure categories increasing except for human services and other. 

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 continue to be fairly stagnant, increasing marginally or even decreasing. Revenue from the personal income tax increased by $171 million, an increase of approximately 5.3 percent while the sales and use tax increased $163 million or an increase of 5.9 percent. 

Except for human services and grants, all functions of government showed increases in expenditures over the prior year. Medicaid expenditures actually showed a small decrease over the prior year.

*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.

The operating deficits primarily arose in the Grant and Loan Programs Fund and the Housing Programs Fund. The Grant and Loan Fund expended $469 million in fiscal year 1999 supported by revenues of only $12 million. Bond proceeds of $479 million financed the balance. The Housing Programs Fund expended $30 million in fiscal year 1999 supported by $4 million of revenues and additional fund balance resources.

Other major special revenue funds include the Transportation Fund, which is generally self-supporting. Revenues of $987 million in fiscal year 1999 supported expenditures and transfers of $939 million. The fund balance of the Transportation Fund was $162 million or 17 percent of expenditures and transfers.

The Employment Security Administration Fund expended $103 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 $90 million were supported by $45 million of revenues and transfers, along with bond proceeds of $58 million.

Capital Projects Funds

Capital spending has averaged almost $800 million for the past five years with most of that spending directed toward infrastructure projects. Approximately 60 percent 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.

Expendable Trust Funds

The Employment Security Fund continues to have a growing fund balance although expenditures (unemployment compensation claims) were higher than the previous year.

Pension Trust Funds

Net assets of the pension trust funds increased 8 percent for 1999. 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 increased to 59.1 percent as of fiscal year 1999 as compared to 53.8 percent as of fiscal year 1995. The Teachers' Retirement System (TRS) funded status increased from 68.1 percent to 70.4 percent, and the Judicial Retirement System (JRS) from 42.7 percent to 58.4 percent respectively. 

Enterprise Funds

Two major changes to the enterprise funds combined financial statements occurred in fiscal year 1997. The Connecticut Lottery Corporation was created by the legislature as a public instrumentality and political subdivision of the state and was, accordingly, added to the enterprise fund category. Secondly, the John Dempsey Hospital Fund was reclassified out of the higher education funds group after it was determined that the fund was better suited to enterprise fund type accounting. The largest fund, the Connecticut Lottery Corporation, continues to provide substantial support to the General Fund with revenues of $871 million providing $274 million to the General Fund after prizes and expenses of $597 million.

Higher Education

Expenditures grew at a rate of 13 percent in fiscal year 1999, with State support keeping pace. Total revenues increased 8.2 percent over fiscal year 1998 with Sales and Services and Patient Services showing the biggest increases.

Debt Administration

State general obligation bonds are rated Aa3, AA, and AA by Moody's, Standard and Poor's, and Fitch IBCA, respectively, while transportation-related special tax obligation bonds are currently rated A1, AA-, and AA-, respectively.

The state issued approximately $1 billion of bonds in fiscal year 1999, an increase from the past two fiscal years. 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 service as a percent of government operations, excluding debt service on the Economic Recovery Notes, has decreased slightly to 9.8 percent from a high of 10 percent.

Net state debt slowly increased .6 percent to $9.4 billion from $9.3 billion in fiscal year 1998. Net State debt has more than doubled since fiscal year 1990.

Debt per capita has more than doubled to $2,857 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 which 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 actuarial accrued liability, which represents the value of pension benefits earned by employees but which is not funded currently are also included in long-term obligations. The total of these obligations increased $553 million in fiscal year 1999.

* Exclusive of Economic Recovery Notes.

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 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 that activity or program to be carried out, the amounts 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. The allotment process exercises control over the obligation. The Governor through the Office of Policy and Management allots funds, both for budgeted and non-budgeted funds. The Governor is further allowed to modify the allotments up to three percent of the fund or five percent of the appropriation amount. Modifications beyond those limits, but not in excess of five percent 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 the State's short-term investment fund, a money market investment pool whose investments consist of certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements, federal agency securities, and other investments with various ranges of maturities. The investment income and average yield rate for the fiscal year 1998-99 for this fund was approximately $197 million and 5.37 percent, respectively. By comparison, the IBC First Tier Institutions-Only Rated Money Fund Report Index had a 5.04 percent rate of return, during the same time period.

Bank balances at June 30, 1999 were $186 million of which about seventy-four percent was not insured or protected by collateral.

Risk Management

The state retains risk for certain property and liability claims, including workers' compensation. The State Insurance and Risk Management 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

The United States is in the midst of the longest economic expansion in its history, and Connecticut's economic performance over the last several years reflects this extraordinary national growth. Connecticut was slow to recover from the 1989-92 recession. For the first three years of the recovery, the state lagged far behind the nation in economic growth. From 1993 through 1995, Connecticut realized little net job growth, experienced declining real family income, and saw rising rates of poverty. By 1996, the state economy began to gather strength. Over the past two years, Connecticut has actually outpaced national growth rates in several key areas. Strong employment gains, rising income, low inflation, and strong financial market performance have characterized the state's economy for the last several years.

Between 1996 and 1998, Connecticut's job gains have averaged just over 31,000 per year - an annual growth rate of approximately 2 percent. Projections for 1999 show the addition of better than 20,000 jobs. By November 1999, the state had reclaimed all of the jobs lost during the recession. As of August 1999, Connecticut's unemployment rate stood at just 2.1 percent. The strongest employment gains have occurred in the service sector, continuing a trend that has seen service industry jobs more than compensate for employment losses in manufacturing.

In 1998, Connecticut continued to lead the nation in per capita income. State per capita income for 1998 was $37,700, which was 17.8 percent above the New England region and 42.4 percent higher than the nation as a whole. Over the last four years, average annual state per capita income has grown at a rate of just over 5.5 percent. While state per capita income has exhibited steady growth, real (inflation adjusted) median household income experienced seven consecutive years of decline before rebounding in 1997 and 1998. Based on a two year moving average, state real median household income grew 1.9 percent in 1997 and 3.1 percent in 1998. Connecticut's two-year average poverty rate reported in 1998 was 9 percent, fifth lowest in the nation; however, child poverty was almost double the overall rate giving the state a ranking of twenty-third in the nation.

Projections for the coming years show Connecticut continuing to grow, but at a more moderate rate. Connecticut's labor force has not been growing since the recession ended, which helps explain the low state unemployment rate. This inhibits the potential for growth based on increases in the labor force. A tighter monetary policy, the potential for an overdue correction in the stock market, and global economic instability are other factors that may serve to slow future economic growth. However, with the dramatic expansion of the past several years, and projections for moderate future growth, Connecticut's overall economic outlook remains good.

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, 1998. 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 ten consecutive years (fiscal years ended 1989-1998). 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

Back to Table of Contents
Back to Comptroller's Home Page