Office of the State Comptroller - Nancy Wyman

2001 Comptroller's Report on  Connecticut's Economic Health

The State's Financial Position

REPORTING FORMAT

The financial data presented below was developed in accordance with Generally Accepted Accounting Principles (GAAP). GAAP is the standard for financial reporting in both the public and private sectors. To date, Connecticut has not adopted GAAP for budgetary appropriation and control purposes. The state uses a modified cash accounting system as its legal budget basis. However, due to volatility in the timing of payments and posting of revenues, the modified cash system can distort the state's true financial picture. GAAP reporting eliminates the distortions and, therefore, provides a more accurate financial overview of the state's fiscal position.

In Fiscal Year 2000, the state posted a net General Fund budget surplus of $300.4 million on a modified cash basis; however, on a GAAP basis the state recorded a General Fund deficit of $77 million. Two factors explain the large difference in the Fiscal Year 2000 General Fund modified cash basis and GAAP numbers. First, $86.1 million in state financed Medicaid expenditures incurred in Fiscal Year 2000 were not included in the calculation of the Fiscal Year 2000 modified cash basis surplus. Because these Medicaid payments were not processed until Fiscal Year 2001, they were not counted as expenditures under modified cash accounting. Thus, the surplus was artificially inflated.

On a GAAP basis, the date on which the liability is incurred is used without regard to when the actual payments are processed. Therefore, Fiscal Year 2000 Medicaid expenditures were $86.1 million higher on a GAAP basis. Second, on a modified cash basis, surplus revenues from prior years can be brought forward to finance current spending. On a GAAP basis, only revenues actually earned during the year can be used to finance that year's spending.

In Fiscal Year 2000, $290 million in spending was financed from prior year revenues. Under GAAP, these expenditures must be charged against revenue actually earned in Fiscal Year 2000, thus reducing the surplus. A majority of the spending financed from prior year revenues has been for one-time items. To the extent that the expenditures financed from prior year revenues are not recurring, a permanent GAAP imbalance between revenues and expenditures is not created.

FISCAL YEAR 2000 GENERAL FUND PERFORMANCE - OPERATING RESULTS FOR ONE STATE FUND IN A SINGLE FISCAL YEAR

• The General Fund is the state's largest single operating fund. Over 85 percent of all state operating expenses are accounted for within the General Fund.
• In Fiscal Year 2000, the state recorded a General Fund deficit of $77 million with revenues totaling $12.336 billion and expenditures of $12.413 billion. The deficit is equal to 0.6 percent of General Fund expenditures.
• Since the introduction of the income tax in 1991, the state's cumulative General Fund surpluses total to $756 million.
• The sum of $34,960,241 was placed in the state's Rainy Day Fund in Fiscal Year 2000 bringing the balance to $564,037,776. In addition, $265,474,330 was made available for school construction and rewiring to support information technology in classrooms.

GENERAL FUND REVENUES:

• In Fiscal Year 2000, total General Fund revenue increased 7.7 percent over the prior year. The income tax and the sales tax, which combine to produce 55.6 percent of the total revenue, increased by 12.1 percent and 5.5 percent respectively from the previous year. Sizable revenue growth occurred despite tax reductions approximating $300 million that were implemented in Fiscal Year 2000.
• Taxes accounted for 67.1 percent of all General Fund revenue. Federal payments to the state contributed 24.4 percent to total revenue. The remaining 8.5 percent of General Fund revenues consisted of gaming payments, interest earnings, licenses, fees, investment earnings, fines and forfeitures, charges and other miscellaneous payments.
• Of the major General Fund revenue sources, the income tax has experienced the highest rate of increase with five-year average annual compounded growth of 10.4 percent. Strong employment gains coupled with booming financial markets explain the increase.

GENERAL FUND EXPENDITURES:

• In Fiscal Year 2000, General Fund spending increased by 10 percent, almost triple the general rate of inflation. This approximates the historically high spending levels of the early part of the last decade.
• For the third straight year the state's constitutional cap on spending was exceeded. The additional appropriations required a declaration of extraordinary circumstances by the Governor. The cap was exceeded by $232.8 million in Fiscal Year 2000. Over the last three years, the spending cap has been lifted to permit additional spending totaling $952.5 million.
• The Fiscal Year 2000 expenditure growth rate is more than five percentage points higher than the average annual compounded growth over the past five years. The spending trend is moving in the wrong direction.

BEYOND THE GENERAL FUND - TOTAL GOVERNMENTAL OPERATIONS

The state undertakes various activities that do not appear in the General Fund. These activities include transportation and housing programs, grants to municipalities, loan programs and other services. When these activities are combined with those of the General Fund, a true picture of state governmental operations emerges.

• Combined governmental operating results for Fiscal Year 2000 show a deficit of $615 million.
• Operating deficits of $593 million were incurred in the grants and loan programs and housing programs. The shortfalls must be covered through debt financing. Issuing bonds to cover annual grants, loans and housing programs that have become a part of ongoing state operations is a dubious financial practice.

CUMULATIVE FINANCIAL POSITION OF THE STATE- THE BALANCE SHEET

• In evaluating the state's fiscal health, there is a tendency to focus exclusively on a single year of state operations. This approach fails to provide an overall, long-term view of the state's financial position. The balance sheet provides this overall perspective. The balance sheet shows state assets, liabilities, and fund balances at the close of each fiscal year.
• At the end of Fiscal Year 2000, the General Fund balance sheet displayed a cumulative GAAP deficit of $675 million. This represents a 12 percent increase over the previous year.
• The main reason for the balance sheet deficit is the state's continued reliance on an unusual system of budgeting. The state's modified cash accounting system that is used for budgeting purposes allows some revenues to be counted before they are earned while some expenditures are not counted for months after the liability arises. When GAAP corrections are made a deficit results.
• The GAAP deficit is an important number because those who invest in Connecticut's bonds and notes review it. If the state's GAAP deficit is perceived to present investment risk, the interest payments on the debt will rise costing state taxpayers millions of dollars more.
• The way to improve the state's balance sheet position is clear: adopt GAAP as the legal basis for state budgeting.

DEBT POSITION

• Connecticut continues to lead the nation in state tax supported debt per capita. Bonded debt per capita has more than doubled over the past decade growing to $2,863 by the end of Fiscal Year 2000.
• In Fiscal Year 2000, the state added an additional $397 million to its net outstanding bonded debt total. To see growing debt burdens in these prosperous times is of great concern.
• In Fiscal Year 2000, the state issued $1.126 billion in new debt. Of this total $489 million was for infrastructure or other assets benefiting future generations of taxpayers. The remaining $637 million was used to fund on-going state operating expenses. Bonding used to provide tangible benefits to future generations is justifiable; bonding for ongoing programs that could be considered part of normal government operating expenses is not sound fiscal policy.
• Large amounts of debt require high annual debt service (principal and interest) payments. In Fiscal Year 2000, debt service payments consumed about nine cents of every dollar spent by the state.
• Debt service is a fixed cost that cannot be quickly adjusted when state revenue growth slows and budget deficits areprojected. In difficult economic times a high debt load can cripple a state's ability to respond effectively to the fiscal challenges it faces.
• Bonded debt represents about half of the state's total long-term obligations. In Fiscal Year 2000, state long-term debt obligations totaled $18.002 billion, an increase of $798 million or 4.6 percent over the previous year. Bond debt and unfunded pension liabilities account for 96.5 percent of the total long-term obligations.

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