FISCAL ACCOUNTABILITY OF STATE GOVERNMENT

1. FISCAL ACCOUNTABILITYOF STATE GOVERNMENT Presentation Prepared for the Appropriations Committee and the Finance, Revenue, and Bonding Committeeby the Office of Policy and Management November 18, 2008

2. INTRODUCTION

3. FINANCIAL SUMMARY OF FUNDS (in Millions)

4. PROJECTED BALANCE OF THE GENERAL FUND

5. DETERIORATING ECONOMIC CONDITIONS

6. CONNECTICUT EMPLOYMENT IS FALLING Cumulative CT Jobs Lost Since December 2007 Source: Moody’s Economy.com as of October 27, 2008 and CT Dept. of Labor

7. UNEMPLOYMENT RATE IS RISING Source: Moody’s Economy.com as of June 25, 2007 and October 27, 2008

8. THE HOUSING MARKET CONTINUES TO SLOW • According to the Warren Group: • Median sale price of a single family home in CT is down 7.7% to $277,000 in August 2008 compared to August 2007 • Home sales in CT have declined 26.4% during the first 8 months of 2008 compared to the same period in 2007 Source: Moody’s Economy.com as of June 25, 2007 and October 27, 2008

9. A SERIES OF UNFORTUNATE ECONOMIC EVENTS

10. STOCK MARKET DECLINES • The stock market has fallen further than in 2000 • S&P Peak Dates: March 24, 2000 and October 9, 2007

11. CAPITAL GAINS WILL DROP Capital Gains Realizations Reported by CT Residents and Return on the S&P (In Millions) Note: YTD Through 10/24/08 Sources: Department of Revenue Services and Internal Revenue Service various years

12. INCOME TAX GROWTH WILL SLOW

13. CT WILL BE HIT HARDER BY A CONTRACTION IN THE FINANCIAL SECTOR • Whether measured by employment, output, or income, CT is overly dependent on the financial sector compared to the nation Source: Bureau of Economic Analysis and Internal Revenue Service

14. PERSONAL INCOME TAX TRENDS

15. SALES AND USE TAX

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

17. WATCH LISTFY2009 AREAS OF CONCERN(In Millions) General Fund Special Transportation Fund

18. STRUCTURAL HOLES IMPACT ON FISCAL 2010 - GENERAL FUND (In Millions) * no statutory mandate to fund in FY2010

19. LONG-TERM OBLIGATIONS • The state’s long-term obligations total $57.6 billion, up 6.2% from last year’s reported amount of $54.2 billion • This equates to approximately $16,626 for every man, woman and child inConnecticut, up $1,126 from last year’s reported amount of $15,500 • In comparison, total Personal Income Tax collections in FY 2009 will only be $7.435 billion

20. DEBT BURDEN COMPARISON

21. DEBT SERVICE % OF SALES TAX GENERAL AND TRANSPORTATION FUND DEBT SERVICE EXPENDITURES

22. CONNECTICUT’S BOND RATINGCURRENT GENERAL OBLIGATION BOND RATING

23. UNFUNDED PENSIONSTEACHERS’ RETIREMENT SYSTEM CONTRIBUTIONS Millions

24. UNFUNDED PENSIONSCONNECTICUT TEACHERS’ RETIREMENT SYSTEM AS OF 6/30

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

26. UNFUNDED PENSIONS STATE EMPLOYEES RETIREMENT SYSTEM AS OF 6/30 Note: the 2008 certified valuation has not been issued

27. 2007 STATE RETIREMENT SYSTEM STATISTICS STATE EMPLOYEE AND TEACHERS’ SYSTEM COMBINED

28. STATE EMPLOYEES PENSION &HEALTH INSURANCE – ALL FUNDS SERS & HEALTH INSURANCE EXPENDITURES As Of 6/30 ⇝ Note: Retiree Health includes offsets for the Medicare Part D Employer Subsidy starting in FY2007

29. GROWTH IN SIGNIFICANT STATE EXPENDITURES

30. OTHER POST EMPLOYMENT BENEFITS

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

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

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

34. COST DRIVERS • OTHER FY2010 & FY2011 -BIENNIAL BUDGET ISSUES • Age of Jurisdiction • Medicaid Funding • Pension Issues – Revaluation, Pension Obligation Bond Requirements • UConn Health Center • Health Care Worker Contracts expiration – Nursing Homes – Spring 2009 • Private Provider Increases • Energy • State Agency Costs • Recent Legislation and Block Grant action • Department of Education- • Implementation of “Sheff v. O’Neill” incentive programs • Sunset of biennial caps on major education grants, like Adult Education and Transportation • Special Transportation Fund • Construction Cost Escalation • Unknown Federal Commitments

35. THE BUDGET RESERVE FUND~USE OF SURPLUS

36. BUDGET RESERVE FUND BALANCE

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. USE OF GENERAL FUND SURPLUSES FY1992 to FY2003 $3,392.0M FY2004 to FY2008 $3,716.3M

39. ECONOMIC AND DEMOGRAPHIC TRENDS

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

41. DEMOGRAPHIC TRENDS

42. HOUSING, MORTGAGES AND CREDIT QUALITY

43. ECONOMIC INDICATORS ASSUMPTIONS USED TO DEVELOP REVENUE ESTIMATES

44. FIVE YEAR BOND PROJECTIONS

45. PROJECTED GENERAL OBLIGATION BOND ALLOCATIONS

46. DISTRIBUTION OF GO BOND FUND ALLOCATIONS ACTUAL FY2004 – FY2008 PROJECTED FY2009 – FY2013

47. SUMMARY

48. SUMMARY • The state is projected to experience unprecedented deficits at the end of 2009-10, 2010-11 and 2011-12 based on current services requests • The use of one-time revenues to support on-going programs and projects adds nearly $500 million to these projected deficits. • The performance of the income tax is significantly influenced by events in the financial markets which have shown themselves to be extremely volatile, thereby increasing the uncertainty of this revenue source • Projections indicate that spending will exceed available room under the expenditure cap in fiscal years 2009-10, 2010-11 and 2011-12 • Current Services requests for FY2009-10 and FY2010-11, and FY2012 Projections indicate that spending will exceed available revenue without further action • The budget reserve fund balance is below the statutorily required 10% for 2007-08, putting the state at risk in the current economic climate • 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 • Estimated State grants to local governments increase significantly from FY 2008-09 through FY 2011-12 • Other significant cost drivers which include: costs of personnel benefits including post-employment benefits, funding required for unfunded pension liabilities, and expenditures related to the Department of Social Services and the Department of Education • The state faces significant long-term obligations including debt, unfunded pension liabilities and unfunded post-employment retirement benefits which are estimated to exceed $57 billion in total