FISCAL ACCOUNTABILITY OF STATE GOVERNMENT

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FISCAL ACCOUNTABILITYOF STATE GOVERNMENT
Presentation Prepared for the Appropriations
Committee and the Finance, Revenue, and Bonding
Committeeby the Office of Policy and Management
November 27, 2006
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ECONOMIC AND DEMOGRAPHIC TRENDS
One of the greatest pieces of economic wisdom is
to know what you do not know. - John
Kenneth Galbraith
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ECONOMIC INDICATORS
ASSUMPTIONS USED TO DEVELOP REVENUE ESTIMATES
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SIGNIFICANT DEMOGRAPHIC TRENDS
Projections of The Population in
Connecticut (Mid-Year Resident Population In
Thousands)
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DEMOGRAPHIC TRENDS
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BUDGET PROJECTIONS

• Beware of little expenses a small leak will
  sink a great ship.
    
  - Benjamin Franklin

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BUDGET PROJECTIONS

• Expenditures grew dramatically in fiscal 2006 and
  are projected to rise significantly in fiscal
  2008
• The general fund is projected to register
  deficits beginning in FY 2008, if spending is
  left unchecked
• The income tax is projected to yield modest
  steady growth after a four fiscal year growth in
  estimates and final payments of over 97
• Sales tax collections are forecasted to remain
  relatively stable (11.7 over projection period)

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BUDGET GROWTH RATES
GENERAL FUND BUDGET GROWTH RATES
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PROJECTED BALANCE OF THE GENERAL FUND
STATE OF CONNECTICUT General Fund
Surplus/(Deficit)
Note Fiscal years 2008-2010 assume
appropriations prior to reductions required by
the Constitutional expenditure cap.
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CONNECTICUT REVENUES
In the end it's a revenue stream. And all
revenue streams eventually reach the sea. -
Paul Schrader
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PERSONAL INCOME TAX
Economic Growth Rates of the Personal Income Tax
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Estimates and Finals Component of the Personal
Income Tax (in millions)
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ESTIMATES AND FINAL PAYMENTS P.I. Tax Growth
Rates For Selected MonthsFiscal Years 2005-2007
ESTIMATED PAYMENTS
FINAL PAYMENTS
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SALES AND USE TAX
ECONOMIC GROWTH RATES OF THE SALES AND USE TAX
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BUDGET RESERVE FUND
Balancing the budget is like going to heaven.
Everybody wants to do it, but nobody wants to do
what you have to do to get there. - Phil
Gramm, Senator, TX
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STATES WITH BUDGET RESERVE FUNDS
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BUDGET RESERVE FUND BALANCE
BUDGET RESERVE FUND
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Balancing the State Budget During the FY02 FY03
Economic Downturn Required the Following Actions
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BUDGET RESERVE FUND SHORTFALL
BUDGET RESERVE FUND AMOUNT BELOW TARGET
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THE EXPENDITURE CAP
Always do right. This will gratify some and
astonish the rest. -Mark Twain
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ORIGIN OF THE EXPENDITURE CAP
GROWTH IN STATE SPENDING
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THE EXPENDITURE CAP AN EFFECTIVE TOOL
USE OF GENERAL FUND SURPLUSES FY1996 to FY 2006
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EXPANDING COMMITMENTS
A billion here, a billion there, pretty soon it
adds up to real money.
- Senator Everett Dirksen
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STRUCTURAL HOLES
CREATED BY FUNDING ONGOING EXPENDITURES WITH
PRIOR YEAR SURPLUSES IMPACT ON FISCAL 2008 -
GENERAL FUND (IN MILLIONS)
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DEPARTMENT OF CHILDREN AND FAMILIES
DCF EXPENDITURES (In Millions)
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DEPARTMENT OF EDUCATION
DEPARTMENT OF EDUCATION GRANTS (In Millions)
Note Figures provided for FY02 05 are
revenue based (not entitlement based) in that
they include prior year adjustments.
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DEPARTMENT OF MENTAL RETARDATION
DMR EXPENDITURES (IN MILLIONS)
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INCREASING PHARMACY EXPENDITURES (IN MILLIONS)
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MEDICARE PART D

• Medicaid
• Clawback
• Eligibility
• Manufacturers Rebate
• ConnPACE
• Medicare Part D Supplemental Needs Fund
• State Employee Subsidy

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SUMMARY OF LOCAL AID
ESTIMATED FORMULA GRANTS TO MUNICIPALITIES (IN
MILLIONS)
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DEBT LEVELS
A balanced budget takes us in the right
direction. Clearly, adding billions and
trillions of dollars to our debt takes us in the
wrong direction. - Tim Johnson,
Representative, IL
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DEBT BURDEN COMPARISON
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IMPACT OF DEBT EXPENSES
GENERAL FUND DEBT SERVICE EXPENDITURES
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FIVE YEAR BOND PROJECTIONS
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PROJECTED GENERAL OBLIGATION BOND ALLOCATIONS
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ACTUAL PROJECTED GENERAL OBLIGATION BOND
COMMISSION ALLOCATIONS
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DISTRIBUTION OF GO BOND FUND ALLOCATIONS
ACTUAL FY2002 - FY2006
PROJECTED FY2007 - FY2011
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LONG TERM LIABILITIES
"Zeroes are important.
- Denis Hayes, author and
contributor to Starbucks the way I see it
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LONG-TERM OBLIGATIONS

• The states long-term obligations total 50.0
  billion.
• This equates to approximately 14,280 for every
  man, woman and child in Connecticut
• In comparison, total Personal Income Tax
  collections in FY07 will only be 6.625 billion.

Actuarial valuation for fiscal year 2006
released on 11/16/2006.
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UNFUNDED PENSIONS
STATE EMPLOYEES RETIREMENT SYSTEM AS OF 6/30
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STATE EMPLOYEES RETIREMENT SYSTEM CONTRIBUTIONS
CONTRIBUTIONS TO THE STATE EMPLOYEES RETIREMENT
SYSTEM
Millions
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STATE EMPLOYEES PENSION HEALTH INSURANCE ALL
FUNDS
SERS HEALTH INSURANCE EXPENDITURES As Of 6/30
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UNFUNDED PENSIONS CONNECTICUT TEACHERS
RETIREMENT SYSTEM
TEACHERS RETIREMENT SYSTEM AS OF 6/30
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UNFUNDED PENSIONS TEACHERS RETIREMENT SYSTEM
CONTRIBUTIONS
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SCARCE DISCRETIONARY SPENDING ROOM
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2005 STATE RETIREMENT SYSTEM STATISTICS STATE
EMPLOYEE AND TEACHERS SYSTEM COMBINED
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OTHER POST EMPLOYMENT BENEFITS

• The Governmental Accounting Standards Board
  (GASB) requires large employers, such as the
  State of Connecticut, to quantify the amount of
  non-pension retirement benefits offered to
  employees beginning in fiscal year 2008
• Connecticuts substantial health benefit package
  results in a significant unfunded liability.
  Preliminary estimates of this unfunded liability
  are most likely to exceed the liabilities of the
  unfunded liabilities of SERS and TERS combined
• Connecticuts unfunded liability may place the
  state at a disadvantage relative to other states
  that have a much lower unfunded liability or have
  undertaken a plan to address such shortfalls
• Connecticut will also have to quantify the amount
  of non-pension retirement benefits offered for
  Teachers
• Estimated medical and dental actuarial accrued
  liability ranges from 8.4 billion
  (advance-funded basis) to 21.1 billion (unfunded
  basis)
• Other Post Employment Benefits for State
  employees are governed by an agreement with the
  State Employees Bargaining Agent Coalition
  (SEBAC) on pension and healthcare benefits that
  extends to 2017 changes can occur only if the
  State and SEBAC agree to reopen the agreement, or
  via arbitration

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RISING ENERGY COSTS
GENERAL SPECIAL TRANSPORTATION FUNDS (IN
MILLIONS)
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SUMMARY
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SUMMARY

• The state is projected to experience a surplus at
  the end of FY2006-07.
• Projected spending will exceed available room
  under the expenditure cap in fiscal years 2007-08
  and forward if spending is left unchecked.
• Beginning in fiscal year 2007-08 the state will
  experience significant deficits if spending
  remains unchecked.
• Debt service as a percent of budget expenditures
  will continue to grow despite maintaining general
  obligation allocations and issuances fixed at the
  current level.
• In order to achieve a significant reduction in
  debt service as a percent of budget expenditures,
  reductions in bond issuances would be required.
• Energy costs have risen almost 100 between FY
  2000 and FY2007.
• Major issues and trends impacting the states
  fiscal situation include Pharmacy costs,
  personnel costs, retirement benefits,
  expenditures related to the Department of
  Children and Families, the Department of
  Correction, Department of Education, and
  Department of Mental Retardation.
• The state faces significant long-term obligations
  including debt, unfunded pension liabilities and
  unfunded post-employment retirement benefits.
• The ability of the State to deal with unfunded
  liabilities will become increasingly difficult
  due to a demographic deficit CTs median age
  increases 10 through 2030, with significant
  growth in age groups over 65.