1. FISCAL ACCOUNTABILITY OF STATE GOVERNMENT Presentation Prepared for the Appropriations Committee and the Finance, Revenue, and Bonding Committee by the Office of Policy and Management December 4, 2007

2. 2 INTRODUCTION

3. 3 FINANCIAL SUMMARY OF FUNDS Note: 2008-09 Revised Enacted shows rollout of 2007-08 recognized deficiencies

4. 4 FINANCIAL SUMMARY OF FUNDS

5. 5 PROJECTED BALANCE OF THE GENERAL FUND Note: Fiscal years 2010-2012 assume appropriations prior to reductions required by the Constitutional expenditure cap.

6. 6 MAJOR COST DRIVERS ~ LONG TERM OBLIGATIONS ~ REVENUE & EXPENDITURE TRENDS

7. 7 WATCH LIST AGENCY SUBMITTED TECHNICAL ADJUSTMENTS TO ENACTED FY09 BUDGET General Fund Special Transportation Fund

8. 8 STRUCTURAL HOLES CREATED BY FUNDING ONGOING EXPENDITURES WITH PRIOR YEAR SURPLUSES IMPACT ON FISCAL 2010 - GENERAL FUND (In Millions)

9. 9 LONG-TERM OBLIGATIONS The state’s long-term obligations total $54.2 billion. This equates to approximately $15,500 for every man, woman and child in Connecticut. In comparison, total Personal Income Tax collections in FY08 will only be $ 7.345 billion.

10. 10 LONG-TERM OBLIGATIONS DWARF THE BUDGET RESERVE FUND (In Millions)

11. 11 DEBT BURDEN COMPARISON

12. 12 IMPACT OF DEBT EXPENSES GENERAL AND TRANSPORTATION FUND DEBT SERVICE EXPENDITURES

13. 13 CONNECTICUT’S BOND RATING CURRENT GENERAL OBLIGATION BOND RATING

14. 14 MOODY’S INVESTORS SERVICE U.S. CREDIT SCORECARD

15. 15 DEBT AS A PERCENTAGE OF PERSONAL INCOME

16. 16 TAX-SUPPORTED DEBT PER CAPITA

17. 17 UNFUNDED PENSIONS TEACHERS’ RETIREMENT SYSTEM CONTRIBUTIONS

18. 18 UNFUNDED PENSIONS CONNECTICUT TEACHERS’ RETIREMENT SYSTEM AS OF 6/30

19. 19 STATE EMPLOYEES RETIREMENT SYSTEM CONTRIBUTIONS CONTRIBUTIONS TO THE STATE EMPLOYEES RETIREMENT SYSTEM (In Millions)

20. 20 UNFUNDED PENSIONS STATE EMPLOYEES RETIREMENT SYSTEM AS OF 6/30

21. 21 2006 STATE RETIREMENT SYSTEM STATISTICS STATE EMPLOYEE AND TEACHERS’ SYSTEM COMBINED Source: National Association of State Retirement Administrators Public Fund Survey for FY 2006

22. 22 STATE EMPLOYEES PENSION & HEALTH INSURANCE – ALL FUNDS SERS & HEALTH INSURANCE EXPENDITURES As Of 6/30 ⇝⇝

23. 23 GROWTH IN SIGNIFICANT STATE EXPENDITURES

24. 24 OTHER POST EMPLOYMENT BENEFITS

25. 25 DEPARTMENTAL EXPENDITURES (In Millions)

26. 26 DEPARTMENT OF SOCIAL SERVICES MEDICAID MEDICAID EXPENDITURES (In Millions)

27. 27 DEPARTMENT OF EDUCATION EDUCATION COST SHARING GRANT (In Millions)

28. 28 EDUCATION GRANTS SCHOOL READINESS GRANT TO PRIORITY SCHOOL DISTRICTS (In Millions) GRANTS FOR MAGNET SCHOOLS AND SPECIAL EDUCATION (In Millions)

29. 29 EARLY CHILDHOOD PROGRAM DEPARTMENT OF EDUCATION – COMPETITIVE GRANT (In Millions) DEPARTMENT OF SOCIAL SERVICES – CHILD DAY CARE PROGRAM (In Millions)

30. 30 SUMMARY OF LOCAL AID ESTIMATED FORMULA GRANTS TO MUNICIPALITIES (In Millions)

31. 31 COST DRIVERS – FUTURE CONSIDERATIONS Health Care Access Expansions DOC/Parole Changes Age of Jurisdiction for 16 and 17 Year Olds (annualized in excess of $100M/year; not including capital expenditures )

32. 32 PERSONAL INCOME TAX

33. 33 SALES AND USE TAX

34. 34 THE BUDGET RESERVE FUND ~ USE OF SURPLUS

35. 35 STATES WITH BUDGET RESERVE FUNDS General Reserve Funds Fiscal Year Ending June, 2007

36. 36 BUDGET RESERVE FUND BALANCE

37. 37 CONSEQUENCES OF AN INSUFFICIENT BUDGET RESERVE FUND Since the $594.7 million Budget Reserve Fund Balance in FY2001 was insufficient the state had to undertake numerous draconian measures to balance the budget such as: –Deficit financing of $319 million –Implementation of an Early Retirement Program –Lay-offs of over 2,500 employees –Increase the Personal Income Tax rate by 11% from 4.5% to 5.0% –Increase the Cigarette Tax by 200% from $0.50 to $1.51 per pack –Lower the clothing exemption on the sales tax from $75 to $50 per item –Securitized the Energy Conservation and Load Management and Clean Energy Funds to raise a one-time $194 million –Closed intake to the Child Care Program –Limited the continued coverage under Temporary Family Assistance –Reduced reimbursement levels to medical providers

38. 38 BUDGET RESERVE FUND SHORTFALL

39. 39 USE OF GENERAL FUND SURPLUSES FY1992 to FY2003 FY2004 to FY2007

40. 40 ECONOMIC AND DEMOGRAPHIC TRENDS

41. 41 SIGNIFICANT DEMOGRAPHIC TRENDS Projections of The Population in Connecticut (Mid-Year Resident Population In Thousands)

42. 42 DEMOGRAPHIC TRENDS

43. 43 HOUSING, MORTGAGES AND CREDIT QUALITY

44. 44 ECONOMIC INDICATORS ASSUMPTIONS USED TO DEVELOP REVENUE ESTIMATES

45. 45 FIVE YEAR BOND PROJECTIONS

46. 46 PROJECTED GENERAL OBLIGATION BOND ALLOCATIONS

47. 47 DISTRIBUTION OF GO BOND FUND ALLOCATIONS ACTUAL FY2003 - FY2007 PROJECTED FY2008 - FY2012

48. 48 SUMMARY

49. 49 SUMMARY The state is projected to experience a surplus at the end of FY2007-08 and 2008-09, if expenditures are controlled consistent with the spending cap. The state is projected to experience deficits at the end of FY2009-10, 2010-11 and 2011-12 based on current services projections. Projections indicate that spending will exceed available room under the expenditure cap in fiscal years 2009-10 and 2010-11. Projections also indicate that while spending will not exceed available expenditure cap room in fiscal year 2011-12, it will exceed available revenue. The budget reserve fund fails to reach the statutorily required 10% over the 2007-08 through 2011-12 projection period, putting the state at risk in the event of a recession. Without further action, expenditures are expected to outpace the growth in revenues. Debt service will continue to grow and consume a significant portion of the budget despite efforts to maintain general obligation allocations and issuances at the current level. The state faces significant long-term obligations including debt, unfunded pension liabilities and unfunded post-employment retirement benefits which are estimated to exceed $54 billion in total.