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Connecticut’s Crisis 3

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GASB – policy setting org that sets GAAP for state & local govt June 2012 – GASB imposed reforms to take effect in Require all pension and OPEBs to be reported fully on F/S. Estimated T’s of unreported liabilities. How will States handle this? How will Towns handle this? 5

Moody’s 6

Accounting Principles Core – Matching Concept 7

C = comprehensive A = annual F = financial R = reports 8 Where is the data? CAFR’s

9 Full Accrual=Long-Term Health Modified Accrual=Short-Term Health Budget Basis can be anything! “Modified Cash” for the State Either of the above are GAAP

10 Budget Reporting Basis – not GAAP (reporting revenue as fast as possible reporting expense as slow as possible) Revenue – as earned and available Expense – as paid Debt - income

State of CT - Balance Sheet Working Capital Method Modified Accrual 11 Total June 30, 2012 (expressed in thousands)Governmental Funds Assets Cash and Cash Equivalents412,647 Investments and Securities129,385 Receivables:3,880,909 Other short-term assets747,668 Total Assets5,170,609 Liabilities and Fund Balances Liabilities Accounts Payable and Accrued Liabilities505,556 Other short-term liabilities2,974,164 Total Liabilities3,479,720 Fund Balances Nonspendable:171,576 Restricted2,454,652 Committed For: Other99,931 "Rainy Day Fund"93,454 Assigned22,770 Unassigned-1,151,494 Total Fund Balances1,690,889 Total Liabilities and Fund Balances5,170,609 Summarized for discussion purposes from the YE June 30, 2012 Consolidated Annual Financial Report (CAFR)

State of CT – Balance Sheet Full Accrual – Almost…….Sort of……. 12 June 30, 2012 (expressed in thousands) Governmental Activities AssetsAs Reported Current Assets2,774,150 Noncurrent Assets1,170,411 Capital Assets10,965,884 Total Assets14,910,445 Liabilities Current Liabilities3,498,709 Noncurrent Liabilities Bonds16,559,594 Long-term Notes573,365 Net Pension Obligation2,496,190 * Net Other Post Employment Obligation (OPEB)5,755,731 * Compensated Absences503,954 Workers' Compensation456,702 Capital Leases36,162 Claims and Judgements35,241 Other25,661 Total Liabilities29,941,309 Deficit15,030,864 Summarized for discussion purposes from the YE June 30, 2012 Consolidated Annual Financial Report (CAFR) Pages 29 and footnote 17

Pension & OPEB Obligations Being “amortized” onto the books starting in 08 On these 6/30/12 statements only 5/30 th included That means 25/30 th are not included 83% of this debt - NOT on the books 13

State of Connecticut Balance Sheet – Long-term 14 State of Connecticut Balance Sheet - Including Long-term Debts June 30, 2012 (expressed in thousands) GovernmentalUnrecorded DebtGovernmental AssetsActivities as ReportedActivities in Total Current Assets2,774,150 Noncurrent Assets1,170,411 Capital Assets10,965,884 Total Assets14,910,445 Liabilities and Fund Balances Current Liabilities3,498,709 Noncurrent Liabilities Bonds16,559,594 Long-term Notes573,365 Net Pension Obligation2,496,19022,049,82124,546,011 Net Other Post Employment Obligation (OPEB)5,755,73115,197,20320,952,934 Compensated Absences503,954 Workers' Compensation456,702 Capital Leases36,162 Claims and Judgements35,241 Other25,661 Total Liabilities29,941,30937,247,02467,188,333 Summarized for discussion purposes from page 29 of the YE 6/30/2012 Consolidated Annual Financial Report (CAFR), Page 29 and *June 30, 2012 Actuarial reports **June 30, 2011 Actuarial report - most recent

State of Connecticut Balance Sheet – Long-term – Continued 15 State of Connecticut Balance Sheet - Including Long-term Debts June 30, 2012 (expressed in thousands) GovernmentalUnrecorded DebtGovernmental Activities as ReportedActivities in Total Assets Total Assets - From previous slide14,910,445 Liabilities and Net Assets (Equity) Total Liabilities - From previous slide29,941,30937,247,02467,188,333 Net Assets Invested in Capital Assets, net of related debt5,305,440 Restricted, but expendable1,429,076 Restricted, not expendable (endowed)212,897 Unrestricted($21,978,277)($37,247,024)($59,225,301) Total Net Assets($15,030,864)($52,277,888) Summarized for discussion purposes from page 29 of the YE 6/30/2012 Consolidated Annual Financial Report (CAFR), Page 29

16 Avail AssetsAs Reported Assets315 Liab67 Avail Per taxpayer~50,000

Lessons from Detroit….. 17 DetroitCT Debt3,99021,690 Off B/S Debt Pensions B*24,546 OPEBs5,72720,953 Total Debt10,36067,189 Avail Assets1,8303,000 Debt to Asset Ratio

Lessons from Detroit….. At.16 $30,000 pension $ 4,800 18

Revenue has not grown as fast as commitments State employee benefits increased significantly, with little contribution to funding Unfunded pensions – close only to MA OPEBs – highest in country CT & RI only 2 states with no county gov’t – Inefficiencies in running 169 towns, 195 school districts? 19

CT problems – exacerbated by reliance of fed funding (37% of our revenue) 32% economy on FIRE (nat’l average is 21%) Less people employed than in 1990 Not recovering as quickly as expected/hoped 5,000 fewer small business than in previous decade 20

Co’s downsizing/leaving CT Loosing highly educated workforce Major investments in higher education – students move to other states Tax incentives do not constitute an economic strategy Our reputation is unfriendly to business – High taxes, over regulated 21

Healthcare costs rising Population – shrinking 22

Many One-Time Fixes to Balance the Budget 23

What lies ahead? $1B 1 year deficit awaits the “winner” tax increases? drastic cuts in spending? more borrowing? 24

As services are cut………. As taxes increase………. What happens to our population? 25

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$875 M $560 M * $314 M refi *GAAP Conversion Bonds 27

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A small sampling of idea’s from the CPAs…. 29

What do we do now? Address the problem – report truthfully & completely Improve economic growth – Improve infrastructure (roads, bridges, mass transit) – Update, coordinate, rationalize regulations – Tax code reforms to encourage small business and private sector growth – Strengthen education-workforce pipeline 30

31 Enhance CT competitiveness Create transparency, accountability, efficiency and transformation at all levels of gov’t Insist on 5 and 10 yr strategic plans Promote dialog for non-partisan solutions

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Thank you! Camille Murphy, CPA