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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. November 27, 2006. ECONOMIC AND DEMOGRAPHIC TRENDS.

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fiscal accountability of state government

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

economic and demographic trends
ECONOMIC AND DEMOGRAPHIC TRENDS

“One of the greatest pieces of economic wisdom is to know what you do not know.”

- John Kenneth Galbraith

economic indicators
ECONOMIC INDICATORS

ASSUMPTIONS USED TO DEVELOP REVENUE ESTIMATES

slide4

SIGNIFICANT DEMOGRAPHIC TRENDS

Projections of The Population in Connecticut

(Mid-Year Resident Population In Thousands)

budget projections

BUDGET PROJECTIONS

“Beware of little expenses; a small leak will sink a great ship.”    - Benjamin Franklin

budget projections7
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)
budget growth rates
BUDGET GROWTH RATES

GENERAL FUND

BUDGET GROWTH RATES

projected balance of the general fund
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.

connecticut revenues
CONNECTICUT REVENUES

“In the end it's a revenue stream. And all revenue streams eventually reach the sea.” - Paul Schrader

personal income tax
PERSONAL INCOME TAX

Economic Growth Rates of the Personal Income Tax

slide12

Estimates and Finals Component

of the Personal Income Tax

(in millions)

estimates and final payments p i tax growth rates for selected months fiscal years 2005 2007
ESTIMATES AND FINAL PAYMENTS P.I. Tax Growth Rates For Selected MonthsFiscal Years 2005-2007

ESTIMATED PAYMENTS

FINAL PAYMENTS

sales and use tax

SALES AND USE TAX

ECONOMIC GROWTH RATES OF THE SALES AND USE TAX

budget reserve fund
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

budget reserve fund balance
BUDGET RESERVE FUND BALANCE

BUDGET RESERVE FUND

slide18

Balancing the State Budget During the FY02 & FY03 Economic Downturn Required the Following Actions

budget reserve fund shortfall
BUDGET RESERVE FUND SHORTFALL

BUDGET RESERVE FUND AMOUNT BELOW TARGET

the expenditure cap
THE EXPENDITURE CAP

“Always do right. This will gratify some and astonish the rest.”

-Mark Twain

origin of the expenditure cap
ORIGIN OF THE EXPENDITURE CAP

GROWTH IN STATE SPENDING

the expenditure cap an effective tool
THE EXPENDITURE CAP – AN EFFECTIVE TOOL

USE OF GENERAL FUND SURPLUSES

FY1996 to FY 2006

expanding commitments
EXPANDING COMMITMENTS

“A billion here, a billion there, pretty soon it adds up to real money.”

- Senator Everett Dirksen

structural holes
STRUCTURAL HOLES

CREATED BY FUNDING ONGOING EXPENDITURES WITH PRIOR YEAR SURPLUSES

IMPACT ON FISCAL 2008 - GENERAL FUND

(IN MILLIONS)

department of children and families
DEPARTMENT OF CHILDREN AND FAMILIES

DCF EXPENDITURES

(In Millions)

department of education
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.

department of mental retardation
DEPARTMENT OF MENTAL RETARDATION

DMR EXPENDITURES

(IN MILLIONS)

medicare part d
MEDICARE PART D
  • Medicaid

Clawback

Eligibility

Manufacturers Rebate

  • ConnPACE
  • Medicare Part D Supplemental Needs Fund
  • State Employee Subsidy
summary of local aid
SUMMARY OF LOCAL AID

ESTIMATED FORMULA GRANTS TO MUNICIPALITIES

(IN MILLIONS)

debt levels
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

impact of debt expenses
IMPACT OF DEBT EXPENSES

GENERAL FUND DEBT SERVICE EXPENDITURES

slide37

DISTRIBUTION OF GO BOND FUND ALLOCATIONS

ACTUAL FY2002 - FY2006

PROJECTED FY2007 - FY2011

long term liabilities
LONG TERM LIABILITIES

"Zeroes are important.“

- Denis Hayes,author and contributor to Starbucks ‘the way I see it”

slide39

LONG-TERM OBLIGATIONS

  • The state’s 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.

unfunded pensions
UNFUNDED PENSIONS

STATE EMPLOYEES RETIREMENT SYSTEM AS OF 6/30

state employees retirement system contributions
STATE EMPLOYEES RETIREMENT SYSTEM CONTRIBUTIONS

CONTRIBUTIONS TO THE STATE EMPLOYEES RETIREMENT SYSTEM

Millions

state employees pension health insurance all funds
STATE EMPLOYEES PENSION &HEALTH INSURANCE – ALL FUNDS

SERS & HEALTH INSURANCE EXPENDITURES As Of 6/30

unfunded pensions connecticut teachers retirement system
UNFUNDED PENSIONSCONNECTICUT TEACHERS RETIREMENT SYSTEM

TEACHERS RETIREMENT SYSTEM AS OF 6/30

slide46

2005 STATE RETIREMENT SYSTEM STATISTICS

STATE EMPLOYEE AND TEACHERS’ SYSTEM COMBINED

other post employment benefits
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
  • Connecticut’s 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
  • Connecticut’s 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
rising energy costs
RISING ENERGY COSTS

GENERAL & SPECIAL TRANSPORTATION FUNDS

(IN MILLIONS)

summary
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 state’s 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” – CT’s median age increases 10% through 2030, with significant growth in age groups over 65.