FISCAL ACCOUNTABILITYFISCAL ACCOUNTABILITYOF STATE GOVERNMENTOF STATE GOVERNMENT

Presentation Prepared for the Appropriations Committee and

the Finance, Revenue, and Bonding Committeeby the Office of Policy and Management

December 4, 2007

2

INTRODUCTIONINTRODUCTION

3

FINANCIAL SUMMARY OF FUNDS

Note: 2008-09 Revised Enacted shows rollout of 2007-08 recognized deficiencies

Enacted Estimated Difference Enacted Rev. Enacted Difference

General Fund

Revenues 16,315.6$ 16,437.6$ 122.0$ 17,073.1$ 17,174.1$ 101.0$

Expenditures 16,314.9 16,339.9 25.0 17,073.0 17,101.3 28.3 Surplus Adjustment - (9.7) (9.7) - - -

Surplus/ (Deficit) 0.7$ 88.0$ 87.3$ 0.1$ 72.8$ 72.7$

Special Transportation Fund

Revenues 1,126.9$ 1,126.9$ -$ 1,157.0$ 1,157.0$ -$ Expenditures 1,098.8 1,098.8 - 1,154.2 1,154.2 -

Surplus/ (Deficit) 28.1$ 28.1$ -$ 2.8$ 2.8$ -$

Other Funds

Revenues 184.6$ 184.7$ 0.1$ 184.8$ 184.9$ 0.1$ Expenditures 184.2 184.2 - 184.5 184.5 -

Surplus/ (Deficit) 0.4$ 0.5$ 0.1$ 0.3$ 0.4$ 0.1$

Total All Appropriated Funds

Revenues 17,627.1$ 17,749.2$ 122.1$ 18,414.9$ 18,516.0$ 101.1$

Expenditures 17,597.9 17,622.9 25.0 18,411.7 18,440.0 28.3 Surplus Adjustment - (9.7) (9.7) - - -

Surplus/ (Deficit) 29.2$ 116.7$ 87.5$ 3.2$ 76.0$ 72.8$

Expenditure Cap Results

Total All Appropriated Funds 17,597.9$ 17,622.9$ 25.0$ 18,411.7$ 18,440.0$ 28.3$ Allowed Appropriations per Cap 17,597.9 17,597.9 - 18,439.9 18,440.0 0.1

Over/ (Under) the Cap -$ 25.0$ 25.0$ (28.2)$ (0.0)$ 28.2$

Revenues and the Expenditure Cap

Revenues - All Funds 17,627.1$ 17,749.2$ 122.1$ 18,414.9$ 18,516.0$ 101.1$ Allowed Appropriations per Cap 17,597.9 17,597.9 - 18,439.9 18,440.0 0.1

Revenues Less Allowed Approps. 29.2$ 151.3$ 122.1$ (25.0)$ 76.0$ 101.0$

2007- 08 2008- 09

(in millions)

4

FINANCIAL SUMMARY OF FUNDS

General Fund 2009- 10 2010- 11 2011- 12

Revenues 17,874.3$ 18,673.8$ 19,542.6$

Expenditures 18,325.0 19,248.6 19,843.1 Surplus Adjustment - - -

Surplus/ (Deficit) (450.7)$ (574.8)$ (300.5)$

Special Transportation Fund

Revenues 1,165.3$ 1,196.2$ 1,205.8$ Expenditures 1,210.7 1,271.1 1,312.5

Surplus/ (Deficit) (45.4)$ (74.9)$ (106.7)$

Other Funds

Revenues 188.2$ 193.7$ 195.6$ Expenditures 187.8 193.2 195.1

Surplus/ (Deficit) 0.4$ 0.5$ 0.5$

Total All Appropriated Funds

Revenues 19,227.8$ 20,063.7$ 20,944.0$

Expenditures 19,723.6 20,712.9 21,350.7 Surplus Adjustment - - -

Surplus/ (Deficit) (495.8)$ (649.2)$ (406.7)$

Expenditure Cap Results

Total All Appropriated Funds 19,723.6$ 20,712.9$ 21,350.7$ Allowed Appropriations per Cap 19,532.9 20,563.9 21,571.9

Over/ (Under) the Cap 190.7$ 149.0$ (221.2)$

Revenues and the Expenditure Cap

Revenues - All Funds 19,227.8$ 20,063.7$ 20,944.0$ Allowed Appropriations per Cap 19,532.9 20,563.9 21,571.9

Revenues Less Allowed Approps. (305.1)$ (500.2)$ (627.9)$

Projected

(in millions)

5

PROJECTED BALANCE OF THE GENERAL FUND

Note: Fiscal years 2010-2012 assume appropriations prior to reductions required by the Constitutional expenditure cap.

$363.9$446.2

$269.7

$88.0 $72.8

($450.7)

($574.8)

($300.5)

$302.2

- $800

- $600

- $400

- $200

$0

$200

$400

$600

Fiscal Year

Millions

2009Fcst.

2010Fcst.

2011Fcst.

2012Fcst.

2007 2008Fcst.

2005 20062004

6

MAJOR COST DRIVERSMAJOR COST DRIVERS~~

LONG TERM OBLIGATIONSLONG TERM OBLIGATIONS~~

REVENUE & EXPENDITURE REVENUE & EXPENDITURE TRENDSTRENDS

7

WATCH LISTAGENCY SUBMITTED TECHNICAL ADJUSTMENTS TO ENACTED FY09 BUDGET

General Fund

Special Transportation Fund

Agency

Requested

Adjustments

Department of Transportation $ 1,250,212

Department of Motor Vehicles 96,618

Total $ 1,346,830

Agency

Requested Adjustments

Department of Social Services $ 139,919,108

Department of Higher Education 26,038,862

Department of Mental Health and Addiction Services 19,487,985

State Treasurer - Debt Service 16,071,807

Department of Correction 15,165,305

Department of Children and Families 3,893,993

Department of Education 3,290,000

Reserve for Salary Adjustments 9,800,000

Total $ 233,667,060

8

STRUCTURAL HOLES CREATED BY FUNDING ONGOING EXPENDITURES WITH PRIOR YEAR SURPLUSES

IMPACT ON FISCAL 2010 - GENERAL FUND(In Millions)

From the FY 2007 Surplus Amount

1. Teachers' Retirement Contributions 210.0$

2. Payment in Lieu of Taxes- State Property 7.0

3. Payment in Lieu of Taxes- Private Property 7.0

4. Debt Service- Supportive Housing 3.0

5. DOT- Town Aid Road 8.0

6. DOT- Enhanced Transit 5.0

7. DOT- Section 16 Projects 2.3

8. Comptroller- Health Coverage up to age 26 8.0

9. Revenue Transferred from FY 2008 to FY 2009 16.0

10. Revenue Transfer- Used to Balance FY 2009 80.0

From the Tobacco and Health Trust Fund

1. DSS- Charter Oak Health Plan 25.5

Total 371.8$

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.

LONG- TERM OBLIGATIONS(In Billions)

Bonded Indebtedness - As of 8/ 31/ 07 14.4$

State Employee Pensions - Unfunded 6/ 30/ 06 7.9

Teachers' Pension - Unfunded 6/ 30/ 06 6.9

State Employee Post Retirement Health and Life - Unfunded 21.7

Teachers' Post Retirement Health and Life - Unfunded 2.2 GAAP Deficit 1.1

Total 54.2$

10

LONG-TERM OBLIGATIONS DWARF THE BUDGET RESERVE FUND

(In Millions)

$(21,700)

$(14,400)

$(7,900)$(6,900)

$(2,200)$(1,100)

$1,382

$(26,000)

$(21,000)

$(16,000)

$(11,000)

$(6,000)

$(1,000)

$4,000

Budget

Reserve

Fund

GAAP

Deficit

Teachers'

Pension

Teachers'

OPEB

State

Employees'

Pension

Bonded

Indebtedness

State

Employees'

OPEB

11

DEBT BURDEN COMPARISONRanked by Per Capita State Debt Ranked by State Debt as a % of PI

Among the 50 States in 2005 Among the 50 States in 2005

Rank State PC debt Rank State Debt/ PI

1 Massachusetts $ 8,704 1 Alaska 24.4%

2 Alaska 8,695 2 Massachusetts 20.0%

3 Connecticut 6,584 3 Rhode Island 18.0%

4 Rhode Island 6,361 4 Delaware 13.9%

5 New York 5,280 5 New Hampshire 13.9%

6 New Hampshire 5,253 6 Connecticut 13.9%

7 Delaware 5,169 7 Vermont 13.8%

8 New Jersey 4,862 8 Montana 13.6%

9 Hawaii 4,590 9 Hawaii 13.3%

10 Vermont 4,499 10 New York 13.2%

13 Maine 3,510 11 Maine 11.4%

13 New Jersey 11.1%

United States $ 2,693 United States 7.8%

Source: US Bureau of Census and Bureau of Economic Analysis

12

IMPACT OF DEBT EXPENSESGENERAL AND TRANSPORTATION FUND

DEBT SERVICE EXPENDITURES

$2.17 $2.20

$1.09

$1.23

$1.37 $1.39 $1.40

$1.54

$1.68$1.73

$1.89$1.84

$1.99$2.13

10.4%10.6%

10.8%

11.1% 10.8%

10.6% 10.7%

11.5%11.7%

11.2%

11.5%

10.5%

10.9% 10.9%

$0.8

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

$2.2

$2.4

$2.6

$2.8

$3.0

'97 '99 '01 '02 '03 '04 '05 '06 '07 '08 Est. '09Fcst.

'10Fcst.

'11Fcst.

'12Fcst.

Fiscal Year

Deb

t Ser

vice

(B

illion

s)

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

Deb

t Ser

vice

As

% O

f Bud

get

13

CONNECTICUT’S BOND RATINGCURRENT GENERAL OBLIGATION BOND RATING

CONNECTICUT’S BOND RATING CURRENT GENERAL OBLIGATION BOND RATING

Moody’s Standard & Poor’s Fitch

Aa3 AA AA

• Prior to 1975, Connecticut’s General Obligation (GO) bonds had the highest rating possible: Aaa by Moody’s and AAA by

Standard & Poor’s (S&P)

• The most recent change in Connecticut’s bond rating was a downgrade by Moody’s in July 2003

Number of States Rated

Rating Moody's S&P Fitch

Better than CT 26 16 15

Equal to CT 10 16 13

Lower than CT 2 6 8

Total* 38 38 36

* 39 states issue GO bonds. All 39 states are rated by Moody’s and Standard and Poor’s. Fitch does not rate Arkansas

and New Mexico

Neighboring States’ Ratings

• Currently, neighboring states that are rated better or lower than Connecticut’s Aa3 Moody’s rating are:

o Better than CT: Vermont (Aaa), Massachusetts (Aa2), and New Hampshire (Aa2)

o Lower than CT: None

• Currently, neighboring states that are rated better or lower than Connecticut’s AA Standard and Poor’s rating are:

o Better than CT: Vermont (AA+)

o Lower than CT: None

• Currently, neighboring states that are rated better or lower than Connecticut’s AA Fitch rating are:

o Better than CT: Vermont (AA+)

o Lower than CT: New Jersey (AA- ) and New York (AA- )

Importance of Bond Ratings

• The rating process informs investors about risk

• The rating process shows how we compare relative to other investments

• Connecticut is a high- debt state

• Low ratings will result in higher borrowing costs

14

MOODY’S INVESTORS SERVICE U.S. CREDIT SCORECARD

Category Weight CT Tier Why CT Did Not Rank Higher (September 2007 Edition)

Economy 20% 4 - Weak job growth

- Net negative population migration out of state

Debt Management 20% 4 - High debt as a percentage of revenue

- High unfunded pension liabilities (low funding ratio)

Management/ Governance 30% 3 Institutional Financial Flexibility:

- All measures were satisfactory.

Fiscal Best Practices:

- Governor's allotment rescission authority is limited

- No routinely- published analysis of debt affordability

- GAAP- based financial reports published late due to

CORE- CT implementation

Financial Management 30% 2 High/ Negative Unrestricted Undesignated Fund Balance

(UUFB) relative to revenue

- High non- state asset- backed bonding

- School construction

- Operating grants and loans

- Unfunded GAAP Deficit

- Unfunded Accrued Medicaid liabilities

- Unfunded 27- pay- period years

- Unfunded pension liabilities

- Unfunded workers’ compensation liabilities

- Unfunded compensated absences liabilities

- Unfunded OPEB not included but will be added in future

15

DEBT AS A PERCENTAGE OF PERSONAL INCOME

Connecticut vs. AAA Rated States Net Tax- Supported Debt as a Percentage of Personal

Income

2.8

7.8

1.82.12.2 1.9

5.5

3.1 3.02.4 2.3 2.3

0

1

2

3

4

5

6

7

8

9

CT DE FL GA MD NC SC UT MN VT MO VA

State

Perc

enta

ge

(%)

Percent of Personal IncomeNational Median

16

TAX-SUPPORTED DEBT PER CAPITA

Connecticut vs. AAA Rated States Net Tax- Supported Debt Per Capita

$1,998

$1,171$1,020

$3,713

$613$621$630$827$916

$728 $706 $692

$0

$1,000

$2,000

$3,000

$4,000

CT DE MD FL GA MN NC VT VA SC UT MO

State

Per Capita Debt

National Median

17

UNFUNDED PENSIONS TEACHERS’ RETIREMENT SYSTEM CONTRIBUTIONS

$170 $176

$90$210

$204 $215 $205$180 $185 $185

$396 $412

$519$539

$699$727

$756

$329

$429

$237$226

$0

$100

$200

$300

$400

$500

$600

$700

$800

'00 '01 '02 '03 '04 '05 '06 '07 '08

Est.

'09

Fcst.

'10

Fcst.

'11

Fcst.

'12

Fcst.Fiscal Year

Mill

ion

s

Surplus Funds

18

UNFUNDED PENSIONS CONNECTICUT TEACHERS’ RETIREMENT SYSTEM

AS OF 6/30

$5.2

$6.9

$2.4$2.6

$3.0$3.2

$2.2

$3.360%

81%

67%

76%

70%68% 69%

65%

50%

55%

60%

65%

70%

75%

80%

85%

1992 1994 1996 1998 2000 2002 2004 2006

Unfunded Actuarial Accrued Liabilities

Fun

ded

Rat

io

$1.5

$2.5

$3.5

$4.5

$5.5

$6.5

$7.5

Bill

ions

Unfunded Pensions

Funded Ratio

19

STATE EMPLOYEES RETIREMENT SYSTEM CONTRIBUTIONS

CONTRIBUTIONS TO THE STATE EMPLOYEES RETIREMENT SYSTEM

(In Millions)

$376$416 $426

$474$516

$664$717

$754$791

$830$872

$343

$623

$200

$400

$600

$800

$1,000

'00 '01 '02 '03 '04 '05 '06 '07 '08Est.

'09Fcst.

'10Fcst.

'11Fcst.

'12Fcst.

Fiscal Year

20

UNFUNDED PENSIONSSTATE EMPLOYEES RETIREMENT SYSTEM

AS OF 6/30

$6.9

$7.9

$3.2$3.4 $3.5

$3.9$4.3

$4.9

53%

63%

51%

62%

59%

54%

57%

54%

50%

52%

54%

56%

58%

60%

62%

64%

1992 1994 1996 1998 2000 2002 2004 2006

Unfunded Actuarial Accrued Liabilities

Fun

ded

Rat

io

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

Bill

ions

Unfunded Pensions

Funded Ratio

21

2006 STATE RETIREMENT SYSTEM STATISTICS

STATE EMPLOYEE AND TEACHERS’ SYSTEM COMBINEDState

Actuarial Funding

Ratio

Unfunded Liability

($ thousands) State

Actuarial Funding

Ratio

Unfunded Liability

($ thousands)

1 North Carolina * 106.5% (3,045,514)$ 26 Virginia* 81.3% 9,256,000$ 2 Florida * 105.6% (6,181,784)$ 27 Arkansas 81.3% 3,278,000$ 3 Oregon 104.2% (2,088,600)$ 28 Missouri* 81.2% 8,135,660$ 4 Delaware* 101.7% (97,574)$ 29 North Dakota 81.0% 675,900$ 5 Tennessee 99.8% 39,807$ 30 Ohio 80.7% 31,328,562$ 6 New York 99.6% 886,800$ 31 Michigan 79.4% 12,498,000$ 7 Wisconsin 99.4% 412,900$ 32 New Jersey 78.1% 23,345,123$ 8 Georgia* 97.8% 1,352,620$ 33 Massachusetts 75.5% 10,809,357$ 9 South Dakota 96.7% 191,400$ 34 Nevada 74.9% 6,457,118$

10 Utah* 96.4% 542,549$ 35 Mississippi 73.5% 6,607,401$ 11 Idaho 95.2% 461,700$ 36 Colorado 73.3% 23,876,244$ 12 Wyoming 94.4% 307,627$ 37 South Carolina* 73.1% 8,991,285$ 13 Vermont* 90.8% 268,153$ 38 Maine 69.7% 3,034,653$ 14 Texas 88.8% 14,785,610$ 39 Kentucky 69.3% 9,148,511$ 15 Iowa 88.4% 2,507,085$ 40 Kansas 68.8% 5,152,469$ 16 Washington 88.4% 6,041,000$ 41 Louisiana 66.3% 10,420,319$ 17 California 87.2% 46,265,000$ 42 Hawaii 65.0% 5,132,028$ 18 Nebraska 87.2% 845,226$ 43 Indiana 64.3% 9,585,979$ 19 Pennsylvania 86.6% 7,244,500$ 44 Alaska 63.9% 4,122,721$ 20 Minnesota* 86.6% 6,218,454$ 45 New Hampshire 61.4% 2,474,605$ 21 Alabama 83.7% 5,478,749$ 46 Illinois 60.7% 39,900,512$ 22 Arizona 83.4% 3,342,101$ 47 Connecticut 58.3% 14,801,411$ 23 Maryland* 82.8% 7,045,182$ 48 Oklahoma 56.9% 9,933,382$ 24 Montana 82.4% 1,323,329$ 49 Rhode Island 55.8% 4,318,307$ 25 New Mexico 81.8% 4,071,266$ 50 West Virginia 52.7% 5,267,922$

* States with a AAA credit rating

Mean 81.2%Median 81.6%

Source: National Association of State Retirement Administrators Public Fund Survey for FY 2006

22

STATE EMPLOYEES PENSION &HEALTH INSURANCE – ALL FUNDS

SERS & HEALTH INSURANCE EXPENDITURESAs Of 6/30

$415 $426 $474 $516 $623 $664 $717 $754 $791 $830 $872$1,278

$2,061

$368 $394 $430 $486 $508 $603 $621 $669 $709 $752 $797

$1,542

$3,519

$203 $240 $318 $374$394

$436 $443 $484 $513 $544 $577

$1,116

$2,547

$986 $1,060$1,222 $1,376

$1,525$1,703 $1,781 $1,907 $2,013 $2,126 $2,246

$3,936

$8,127

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

'02 '03 '04 '05 '06 '07 '08 Est.

'09Fcst.

'10Fcst.

'11Fcst.

'12Fcst.

'20Fcst.

'30Fcst.

SERS Active Health Ins. Retiree Health Ins. Series4

Note: Starting in FY 07, Retiree Health includes offsets for the Medicare Part D Employer Subsidy.

⇝ ⇝

23

GROWTH IN SIGNIFICANT STATE EXPENDITURES

0%

20%

40%

60%

80%

100%

120%

'03 '04 '05 '06 '07 '08 Est.

'09 Fcst.

'10 Fcst.

'11 Fcst.

'12 Fcst.

Cum

ula

tive

Gro

wth

ove

r FY

'02

State Employees Pension & Health Benefits: 127%

Medicaid: 71%

ECS Grant: 39%

Consumer Price Index: 28%

All Funds Budgeted

Expenditures 61%

CT Personal

Income: 56%

24

OTHER POST EMPLOYMENT BENEFITS

State Amount State Amount

California 70,000$ Alaska 7,047$

New Jersey 60,000 New Jersey 6,877

New York 54,000 Connecticut 6,020

Texas 26,817 Hawaii 4,398

North Carolina 23,786 Alabama 4,349

Maryland 22,903 West Virginia 4,279

Michigan 22,745 Maryland 4,078

Connecticut 21,100 Delaware 3,720

Alabama 20,000 Maine 3,599

Georgia 20,000 Kentucky 3,192

Source: Credit Suisse Source: Credit Suisse

States With Highest

Unfunded OPEB Liabilities

(Millions of Dollars)

States With Highest

Per- Capita Unfunded

OPEB Liabilities (Dollars)

Highest Ten States Highest Ten States

25

DEPARTMENTAL EXPENDITURES(In Millions)

$400

$500

$600

$700

$800

$900

$1,000

$1,100

'02 '03 '04 '05 '06 '07 '08 Est.

'09 Fcst.

'10 Fcst.

'11 Fcst.

'12 Fcst.

Fiscal Year

Department of

Developmental Services

Department

of Children

and Families

Department of

Mental Health

and Addiction Services

Department of

Correction

26

DEPARTMENT OF SOCIAL SERVICESMEDICAID

MEDICAID EXPENDITURES(In Millions)

$2,922

$3,560

$3,724

$3,947

$4,144

$4,351

$2,785$2,703

$3,141$3,152

$2,547

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

'02 '03 '04 '05 '06 '07 '08 Est.

'09Fcst.

'10Fcst.

'11Fcst.

'12Fcst.

Fiscal Year

27

DEPARTMENT OF EDUCATION

EDUCATION COST SHARING GRANT (In Millions)

$1,973$2,020

$1,521

$1,453

$1,563$1,515

$1,627$1,619

$1,929

$1,889

$1,809

$1,300

$1,500

$1,700

$1,900

$2,100

'02 '03 '04 '05 '06 '07 '08

Est.

'09

Fcst.

'10

Fcst.

'11

Fcst.

'12

Fcst.

Fiscal Year

28

EDUCATION GRANTS SCHOOL READINESS GRANT TO PRIORITY SCHOOL DISTRICTS(In Millions)

GRANTS FOR MAGNET SCHOOLS AND SPECIAL EDUCATION(In Millions)

$67 $63 $62 $67$89 $107

$125 $134 $137 $140 $143$33 $44 $56

$68

$84

$99$104

$122 $124 $127 $130

$0

$50

$100

$150

$200

$250

$300

'02 '03 '04 '05 '06 '07 '08Est.

'09Fcst.

'10Fcst.

'11Fcst.

'12Fcst.

Fiscal Year

Special Education Magnet Schools

$35 $36 $37 $44 $48 $54 $61$76 $78 $80 $82

$45 $42 $44$56 $61

$69$69 $48 $49 $50 $51

$0

$40

$80

$120

$160

$200

'02 '03 '04 '05 '06 '07 '08Est.

'09Fcst.

'10Fcst.

'11Fcst.

'12Fcst.

Fiscal Year

School Readiness Grant Remaining Priority School Districts Grant

29

EARLY CHILDHOOD PROGRAM DEPARTMENT OF EDUCATION –COMPETITIVE GRANT(In Millions)

DEPARTMENT OF SOCIAL SERVICES –CHILD DAY CARE PROGRAM(In Millions)

$7.1$6.7 $6.6 $6.6

$10.6

$12.8

$15.1 $15.4$15.8 $16.1

$10.4

$0

$4

$8

$12

$16

'02 '03 '04 '05 '06 '07 '08

Est.

'09

Fcst.

'10

Fcst.

'11

Fcst.

'12

Fcst.

Fiscal Year

$2.6 $2.5 $2.5

$4.3 $4.4$4.7 $4.9 $4.9 $5.0 $5.1 $5.2

$0

$1

$2

$3

$4

$5

$6

'02 '03 '04 '05 '06 '07 '08

Est.

'09

Fcst.

'10

Fcst.

'11

Fcst.

'12

Fcst.

Fiscal Year

30

SUMMARY OF LOCAL AIDESTIMATED FORMULA GRANTS TO MUNICIPALITIES

(In Millions)

Grant FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

State- Owned PILOT 81.2$ 82.9$ 82.9$ 75.9$ 75.9$ 75.9$

College & Hospital PILOT 120.7 122.4 122.4 115.4 115.4 115.4

Pequot Grant 91.1 93.0 93.0 86.3 86.3 86.3

Town Aid Road Grant 30.0 30.0 30.0 22.0 22.0 22.0

LoCIP 30.0 30.0 30.0 30.0 30.0 30.0

Miscellaneous General 20.0 20.9 21.6 22.1 22.7 23.4

Machinery & Equipment 50.2 75.6 104.9 139.6 172.3 208.2

Sub- total - General Government 423.2$ 454.8$ 484.8$ 491.3$ 524.6$ 561.2$

Public School Transportation 48.0$ 48.0$ 48.0$ 49.0$ 50.1$ 51.3$

Non- Public School Transportation 4.0 4.0 4.0 4.1 4.2 4.3

Adult Education 18.6 20.6 20.6 21.0 21.5 22.0

Education Cost Sharing 1,626.9 1,809.2 1,889.2 1,929.2 1,973.2 2,020.2

Magnet Schools 98.6 103.8 121.5 124.1 126.9 129.9

Special Education 106.6 124.6 133.9 136.7 139.8 143.2

Miscellaneous Education Grants 148.6 161.5 155.8 159.5 163.3 167.4

Sub- total - Education 2,051.3$ 2,271.7$ 2,373.0$ 2,423.6$ 2,479.0$ 2,538.3$

Total - Formula Grants 2,474.5$ 2,726.5$ 2,857.8$ 2,914.9$ 3,003.6$ 3,099.5$

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

PERSONAL INCOME TAX

8.7%

-1.5% -1.8%

6.0%7.8% 7.1% 7.8% 7.0%

14.9%

19.0%

-23.5%

-14.7%

21.9% 22.8%

19.4%

13.0%12.0%

5.6% 6.2% 5.6%

9.5%

6.5%7.5% 7.5% 7.5% 7.5%

-28%

-21%

-14%

-7%

0%

7%

14%

21%

28%

'00 '01 '02 '03 '04 '05 '06 '07 '08 Est.

'09 Fcst.

'10 Fcst.

'11 Fcst.

'12 Fcst.

Fiscal Year

Eco

no

mic

Gro

wth

Ra

te

Withholding TaxEstimates & Final

33

SALES AND USE TAX

3.0% 3.3% 3.6% 3.8%2.8%

3.9%5.1%

- 8.2%

1.3%

4.9%

7.1%

3.0% 2.9%

- 10%

- 8%

- 6%

- 4%

- 2%

0%

2%

4%

6%

8%

'00 '01 '02 '03 '04 '05 '06 '07 '08

Est.

'09

Fcst.

'10

Fcst.

'11

Fcst.

'12

Fcst.

Fiscal Year

Econ

omic

Gro

wth

Rat

e

34

THE BUDGET RESERVE FUNDTHE BUDGET RESERVE FUND~~

USE OF SURPLUSUSE OF SURPLUS

35

STATES WITH BUDGET RESERVE FUNDS General Reserve Funds

Fiscal Year Ending June, 2007 Reserve % Of

Rank State Millions Expenditures1 Alaska $3,813 90.2%2 North Dakota 200 19.5%3 Nebraska 504 15.9%4 South Dakota 139 12.9%5 West Virginia 500 12.4%6 Iowa 535 10.1%7 Maryland 1,415 10.0%8 Oklahoma 572 9.4%9 New Mexico 549 9.4%10 Louisiana 683 9.3%11 Connecticut 1,382 8.5%12 Massachusetts 2,254 8.5%22 Vermont 55 4.8%40 Rhode Island 35 1.1%

25 North Carolina 849 4.5%

National Average 4.1%

Source: Nat'l Association of State Budget OfficersJune, 2007

36

BUDGET RESERVE FUND BALANCE

$88.0

$363.9

$30.7$34.9$30.5

$302.2

- $594.7

$80.5$160.5

$95.9$161.7

$446.5

$269.7

$1,112.5

$1,470.2

$666.0$594.7

$564.0$529.1$498.6

$336.9

$241.0

$0.0

$302.2

$1,382.2

- $700

- $400

- $100

$200

$500

$800

$1,100

$1,400

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08Est.

Fiscal Year

Millions

Deposits/(Withdrawals)

Account 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

BUDGET RESERVE FUND SHORTFALL

($440.5)

($239.9) ($244.4)

($295.4)

($365.3)

($500)

($400)

($300)

($200)

($100)

$0

'08

Est.

'09

Fcst.

'10

Fcst.

'11

Fcst.

'12

Fcst.

Millions

39

USE OF GENERAL FUND SURPLUSES

Debt Avoidance45.1%

All Other37.4%

Budget Reserve17.5%

FY1992 to FY2003

Budget Reserve37.1%

Debt Avoidance8.7%

All Other54.2%

FY2004 to FY2007

40

ECONOMIC AND ECONOMIC AND DEMOGRAPHIC TRENDSDEMOGRAPHIC TRENDS

41

SIGNIFICANT DEMOGRAPHIC TRENDS Projections of The Population in Connecticut

(Mid-Year Resident Population In Thousands)

1990 2000 Projections % Change

Age Group Census Census 2010 2020 2030 2000- 2030

Total 3,287.1 3,405.6 3,577.5 3,675.7 3,688.6 8.3%

0- 17 737.6 841.7 814.0 816.3 823.4 (2.2%)

18- 64 2,103.6 2,093.7 2,247.9 2,216.7 2,070.8 (0.1%)

65 & Over 445.9 470.2 515.6 642.5 794.4 68.9%

85 & Over 47.1 64.3 93.7 105.6 132.4 105.9%

Median Age 34.4 37.4 39.6 39.7 41.1 9.9%

42

DEMOGRAPHIC TRENDS

Workers Per Person Over 64 Years of Age (Workers Aged 18 to 64 Years)

4.5 4.4

3.5

2.6

0.0

1.0

2.0

3.0

4.0

5.0

2000

Census

2010 Proj. 2020 Proj. 2030 Proj.

Year

Wo

rker

s Su

pp

ort

ing

On

e El

der

Workers Per Person Under 18 Years of Age (Workers Aged 18 to 64 Years)

2.5

2.8

2.7

2.5

2.3

2.4

2.5

2.6

2.7

2.8

2.9

2000

Census

2010 Proj. 2020 Proj. 2030 Proj.

Year

Wo

rke

rs S

up

po

rtin

g O

ne

Ch

ild

43

HOUSING, MORTGAGES AND CREDIT QUALITY

Active SubPrime Home Loans in Connecticut And Timing of Resets

0

200

400

600

800

1,000

1,200

1,400

2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

Calendar Year of Reset Taking Effect

Calendar Year of Mortgage Origination

Num

ber

of

Acti

ve S

ubPri

me H

om

e L

oans

2004 2005 2006 2007

44

ECONOMIC INDICATORS

ASSUMPTIONS USED TO DEVELOP REVENUE ESTIMATES

Fiscal Fiscal Fiscal Fiscal Fiscal

2007- 08 2008- 09 2009- 10 2010- 11 2011- 12

UNITED STATES

Gross Domestic Product 4.5% 4.8% 5.3% 4.8% 4.7%

Real Gross Domestic Product 2.4% 2.6% 3.3% 2.8% 2.8%

G.D.P. Deflator 2.1% 2.1% 1.9% 1.9% 1.9%

Housing Starts (M) 1.17 1.34 1.74 1.72 1.70

Unemployment Rate 4.9% 5.0% 4.8% 4.7% 4.7%

New Vehicle Sales (M) 15.86 15.96 16.02 16.01 16.08

Consumer Price Index 2.7% 1.8% 2.0% 2.3% 2.4%

CONNECTICUT

Personal Income 5.4% 4.3% 4.6% 4.3% 4.0%

Nonagricultural Employment 0.9% 0.6% 0.8% 0.6% 0.6%

Unemployment Rate 4.5% 4.4% 4.3% 4.3% 4.3%

M denotes millions.

45

FIVE YEAR BOND FIVE YEAR BOND PROJECTIONSPROJECTIONS

46

PROJECTED GENERAL OBLIGATION BOND ALLOCATIONS

FY2008 FY2009 FY2010 FY2011 FY2012

School Construction Program 725,000,000$ 620,000,000$ 575,000,000$ 575,000,000$ 575,000,000$

UCONN 21st Century 115,000,000 140,000,000 140,500,000 146,500,000 123,100,000

State University System 80,000,000 95,000,000 95,000,000 95,000,000 95,000,000 Community College System 92,610,000 188,300,000 99,290,000 70,900,000 74,500,000

Sub- Total Education Allocations 1,012,610,000$ 1,043,300,000$ 909,790,000$ 887,400,000$ 867,600,000$

New Public Health Laboratory - 81,700,000 - - -

Urban Action Grants 27,000,000 - 45,000,000 45,000,000 45,000,000

Manufacturing Assistance Act 35,000,000 - 15,000,000 15,000,000 15,000,000

Local Capital Improvement Program 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000

Small Town Economic Assistance Program 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000

Housing Trust Fund 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000

Clean Water Grants 90,000,000 90,000,000 90,000,000 90,000,000 90,000,000 All other GO projects/ programs 25,390,000 50,000,000 130,210,000 152,600,000 147,400,000

Grand Total Bond Allocations 1,250,000,000$ 1,325,000,000$ 1,250,000,000$ 1,250,000,000$ 1,225,000,000$

47

DISTRIBUTION OF GO BOND FUND ALLOCATIONSACTUAL FY2003 - FY2007

PROJECTED FY2008 - FY2012

LOCIP

2.4%

Manufacturing

Assistance

1.3%

Housing Trust Fund

0.8%

Clean Water Grants

7.1%

Urban Act

2.6%

STEAP

1.6%

Community College

System

8.3% State University

System

7.3%UCONN 21st Century

10.6%

DPH Lab

1.3%

All other

projects/programs

8.0%

School Construction

48.7%

School Construction

48.9%

All other

projects/ programs

21.3%

UCONN 21st Century

7.9%

LOCIP

2.5%Manufacturing

Assistance

1.0%

State University

System

4.7%

Community College

System

5.0%

Clean Water Grants

1.8%

Urban Act

5.5%

STEAP

1.4%

48

SUMMARYSUMMARY

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.