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Impact of the FY 2009 Budget Rescissions

Presentation Prepared for the Appropriations Committee

by the Office of Policy and Management

July 9, 2008

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INTRODUCTION

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INTRODUCTION The FY 2009 budget that was adopted during the June 2007

Special Session was based on revenue projections that exceeded expenditures by less than $100,000

In the past six months, the State has experienced a significant decline in revenue in both the General Fund and Special Transportation Fund, resulting in a current FY 2008 General Fund estimated deficit of $19.7 million

Calculation of the projected $150.0 million General Fund FY 2009 deficit: $170.4 million in revenue deterioration $10.0 million in additional expenditures with the passage of

PA 08-51- Criminal Justice Reform Bill Offset by $30.0 million increase in projected lapses-including

debt service and fringe benefit savings

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INTRODUCTION Per C.G.S. 4-85-The Governor may modify allotments if

estimated budget resources are determined to be insufficient to finance all appropriations

Allotment modifications Cannot exceed 5.0% in any one account Cannot exceed 3.0% of any one fund Cannot reduce funds appropriated for Grants to Towns

Rescissions Amount % of Fund General Fund $139.1 million 0.82% Transportation Fund $ 18.8 million 1.63% All Other Funds $ 1.8 million 0.98% Total $159.7 million 0.87%

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RESCISSIONS ARE ESSENTIAL AT THIS TIME DUE TO: Deteriorating economic conditions

Significant declines in the State’s projected collection of revenues

The lack of mid-term adjustments to address the expenditure deficiencies projected in FY 2009

The lead-time agencies need to adjust expenditures to achieve the required savings

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DETERIORATING ECONOMIC CONDITIONS

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STATES FACING BUDGET SHORTFALLS IN FY 2009

29 States have identified budget shortfalls in FY 2009 of at least $48 billion

All 6 New England states as well as New York and New Jersey have identified a FY 2009 budget gap

California has the largest projected gap at $22.2 billion or 21.3% of its FY 2008 General Fund

Source: Center on Budget and Policy Priorities, as of June 30, 2008

Amount

Percent of FY2008

General Fund

Connecticut $150 million 0.90%Maine $124 million 4.00%Massachusetts $1.2 billion 4.20%New Hampshire $200 million 6.40%New Jersey $2.5 - $3.5 billion 7.6 - 10.6%New York $4.9 billion 9.10%Rhode Island $430 million 12.60%Vermont $59 million 5.10%

Neighboring States with a FY 2009 Budget Gap

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PERSONAL INCOME GROWTH IS SLOWING

CT’s expected personal income growth is down from last year’s forecast, especially in 2008-09

Personal income growth in CT expected to lag the nation

Source: Moody’s Economy.com as of June 25, 2007 and June 30, 2008

Connecticut Personal Income Growth (Year- Over- Year Changes)

4.5%

5.6%

4.6%

6.0%

4.8%4.3%

2.7%

5.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2006- 07 2007- 08 2008- 09 2009- 10

As of June 25, 2007 As of June 30, 2008

Personal Income GrowthAs of June 30, 2008

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2006- 07 2007- 08 2008- 09 2009- 10

US CT

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THE HOUSING MARKET CONTINUES TO SLOW

Housing starts in CT have changed dramatically from last year, including a negative swing of 38.3 percentage points for 2007-08

According to the Warren Group: Median sale price

of a single family home in CT fell nearly 10% in April compared to April 2007

The number of home sales in CT declined 27% from April 2006

Source: Moody’s Economy.com as of June 25, 2007 and June 30, 2008

2006- 07 2007- 08 2008- 09 2009- 10

As of June 25, 2007 US - 24.1% - 8.6% 14.7% 3.7%

CT - 24.4% 17.2% 16.3% - 0.6%

As of June 30, 2008 US - 24.2% - 30.1% - 1.6% 51.0%CT - 23.7% - 21.1% 11.1% 30.9%

Housing Starts(Year- Over- Year Changes)

Connecticut Housing Starts

4

6

8

10

12

14

2006 2007 2008 2009 2010

Fiscal Year

Star

ts (

in t

ho

usa

nd

s)

As of 6/ 25/ 2007

As of 6/ 30/ 2008

8.5

8.5

6.7

11.6

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NEGATIVE REVENUE TRENDS

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DECLINING REVENUE RESULTS IN PROJECTED FY 2008 DEFICIT

FY 2008 revenue projections have been revised downward by $289.9 million since February

As of June 20, 2008 OPM is projecting the general fund to have a deficit of $19.7 million, down from a surplus estimate of $263.2 million in January

As of July 1, 2008 the State Comptroller has projected an even larger deficit of $42.9 million

Estimated FY 2008 General Fund Surplus/(Deficit)

(In Millions)$263.2 $259.8

$174.8

$15.8

$(19.7)

$(52.9)

-$100.0

-$50.0

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

Feb. 08 Mar. 08 Apr. 08

May 08 June 08

Jan. 08

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NEGATIVE REVENUE TRENDS SEEN

Since the beginning of FY 2008, in eleven revenue streams, projected revenue has fallen by $277.3 million

Refunds of Taxes are also $50.2 million higher than originally projected in FY 2008

Declining FY 2008 collections will translate into lower FY 2009 revenue

FY 2008 General Fund Revenue(In Millions)

OPM2008 6/ 20/ 2008 %

Budget Letter Diff. Decline

Corporation 870.0$ 747.0$ (123.0)$ - 14.1%Public Service 253.1 239.6 (13.5)$ - 5.3%Inheritance & Estate 185.4 169.5 (15.9)$ - 8.6%Insurance Companies 258.1 243.0 (15.1)$ - 5.9%Cigarettes 351.5 346.5 (5.0)$ - 1.4%Real Estate Conveyance 200.0 157.0 (43.0)$ - 21.5%Miscellaneous Taxes 145.0 142.0 (3.0)$ - 2.1%Indian Gaming Payments 437.5 411.5 (26.0)$ - 5.9%Sales of Commodities 38.0 30.5 (7.5)$ - 19.7%Investment Income 85.0 68.0 (17.0)$ - 20.0%Miscellaneous 148.1 139.8 (8.3)$ - 5.6%

2,971.7$ 2,694.4$ (277.3)$ - 9.3%

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REVENUE PROJECTIONS LOWERED

Most revenue items are projected to bring in less than the originally adopted revenue forecast Two of the significant positive revenue items are one-time in nature- a timing change in the

claiming of Federal Revenue and an anticipated sale of unclaimed property The only other significantly positive revenue trend is the oil companies tax and while it brings in

additional revenue, higher oil prices also mean higher state energy costs and higher demand for energy assistance programs in the Dept. of Social Services

FY 2009 General Fund Revenue(In Millions)2009 OPM %

Budget Estimate Diff. Decline

Personal Income Tax 7,676.4$ 7,580.0$ (96.4)$ - 1.3%Sales & Use Tax 3,747.7 3,700.8 (46.9) - 1.3%Corporation 791.5 718.2 (73.3) - 9.3%Public Service 257.8 248.8 (9.0) - 3.5%Inheritance & Estate 191.0 169.5 (21.5) - 11.3%Insurance Companies 263.0 243.0 (20.0) - 7.6%Cigarettes 348.1 341.3 (6.8) - 2.0%Real Estate Conveyance 204.0 149.0 (55.0) - 27.0%Oil Companies 144.3 260.4 116.1 80.5%Miscellaneous Taxes 145.0 143.0 (2.0) - 1.4%Refund of Taxes (874.1) (900.0) (25.9) - 3.0%Indian Gaming Payments 449.0 417.7 (31.3) - 7.0%Sales of Commodities 38.0 31.2 (6.8) - 17.9%Rents, Fines, Escheats 52.9 101.8 48.9 92.4%Investment Income 85.0 65.0 (20.0) - 23.5%Miscellaneous Revenue 148.1 139.5 (8.6) - 5.8%Federal Grants 2,768.1 2,851.7 83.6 3.0%All Other 637.3 641.8 4.5 0.7%

17,073.1$ 16,902.7$ (170.4)$ - 1.0%

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FY 2009 BUDGET AREAS OF CONCERN

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Traditionally, through the first year of the enacted biennial budget, funding deficiencies and revenue changes become evident which require adjustments during the midterm legislative session

No agreement was reached this year on necessary revisions due to declining revenue trends and larger deficiencies

The result of no midterm adjustments is that budgeted amounts in most instances do not reflect the rising caseload projections and other expenditure increases which will most likely lead to deficiencies in many accounts

FY 2009-AREAS OF CONCERN

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FY 2009-AREAS OF CONCERN Department of Social Services

The $150 million shortfall projection for FY 2009 assumes the enacted budget is correct, yet the Governor’s mid-term budget adjustments anticipated that the Medicaid budget would be short by $62 million in FY 2009 Major drivers behind the $62 million are cost and caseload

related, including HUSKY A, where caseload is expected to grow from 296,484 in July 2007 to 344,000 by the end of FY 2009. HUSKY costs are expected to increase $31 million beyond the enacted budget

Costs in long-term care could escalate as DSS continues to assess nursing homes in financial distress due to court ordered receivership or pending bankruptcies

Preliminary cost to bring in new providers under the HUSKY managed care re-bid will likely be higher

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FY 2009-AREAS OF CONCERN Department of Social Services-continued

Reporting continues to be problematic as a result of DSS’s transition to a new claims payment system in February 2008, impacting the ability of both OPM and OFA to accurately project expenditures

Carry forward of $85 million for FY 2008 Medicaid obligations that did not get paid, including: $36.7 million for provider rates; $25 million in one-time payments to MCO providers due to

payment delays as certain plans transitioned out of the HUSKY program; and

$18.9 million to cover obligations associated with the Carr dental litigation settlement.

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FY 2009-AREAS OF CONCERN

Department of Education Section 17 of PA 08-170, will result in $7.0 million of

unfunded costs to the Magnet School account

Special Education Funding had an FY 2008 deficiency of $5.4 million because the grant was uncapped; a potential FY 2009 deficiency of $6.5 million will exist assuming the 8% growth in eligible expenditures that occurred between FY 2007 and FY 2008 reimbursements

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FY 2009-AREAS OF CONCERN University of Connecticut-Health Center

The UCONN Board approved a FY 2009 budget for the Health Center that forecasts an $11.5 million deficit involving the John Dempsey Hospital, the University Medical Group and Research programs

The deficit is primarily due to projected losses in the Neonatal Intensive Care Unit (NICU), Psychiatry, High Risk Maternity and OB/Gynecology and Research Programs. For example, the average loss per case in the NICU was about $34,000 in FY 2008

Rescissions were not ordered for the UCHC due to the financial challenges that it is facing this year and would only exacerbate the projected deficit

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FY 2009-AREAS OF CONCERN

Juvenile Jurisdiction Implementation Details of modifications to the system including placing staff,

expanding courtrooms, and developing community programs specific to the juvenile population, and the associated costs, have not been finalized

Criminal Justice Reforms PA 08-1 – An Act Concerning Criminal Justice Reform – funding

for this PA was provided through the use of available carry forward funds. The additional costs for changes resulting from increased penalties for those incarcerated have not been quantified

PA 08-51 - An Act Concerning Persistent Dangerous Felony Offenders and Providing Additional Resources to the Criminal Justice System – The FY 2009 funding of $10 million was provided outside of the enacted budget and the annualized costs are estimated to be $18.4 million

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IMPACT OF FY 2009 RESCISSIONS

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IMPACT OF FY 2009 RESCISSIONS Actions taken by the Governor to mitigate the FY 2009

deficit Issued orders to implement the following:

Hiring Freeze Out of State Travel Ban Limited Purchases to Items/Services Critical to Agency

Missions

Implemented a Rescission Plan which globally reduces General Fund allotments by $139.1 million; $26.9 million or 19% is in Personal Services line items

Planned PS savings that do not require layoffs, instead relying upon attrition to achieve savings

Planned OE savings that do not target those agencies facing current service level deficiencies

Planned other savings in a manner that does not reduce payments to private providers serving vulnerable clients

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IMPACT OF FY 2009 RESCISSIONS The Enacted Budget is based upon certain assumptions including

the following lapses:

Legislative Unallocated Lapse $ 2,700,000 Other Unallocated Lapses 87,780,000

General Personal Services Reduction 14,000,000 General Other Expenses Reduction 11,000,000

DoIT Consultant Lapse 2,000,000 Total Budgeted Lapse $117,480,000

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IMPACT OF FY 2009 RESCISSIONS The Governor’s actions are timely for the following

reasons:

Reductions are more achievable if full year savings can be counted upon to offset projected shortfalls

Reductions implemented later in the year multiply the impact on the affected programs. Planning for a 5% reduction at the start of the year is preferable to what would amount to a comparable 10% impact if implemented in mid-year

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IMPACT OF FY 2009 RESCISSIONSSummary of Rescissions- All Funds

$26.9 million in Personal Services which will be achieved through attrition, not layoffs

$14.2 million in Other Expenses which will be difficult in the face of rising energy costs

$29.1 million in Debt Service which is achievable as the state is projected to receive premium payments and a reduction in the size of bond issues in FY 2008

$36.4 million in State Comptroller-Fringe Benefits which is achievable due to net savings from the recent RFP negotiations

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IMPACT OF FY 2009 RESCISSIONS Private Providers

No cuts to providers in DDS, DMHAS, DCF or DOC

Rescission to OPM Private Providers account achievable due to over-appropriation for FY 2008 3.0% private provider COLA

$39.0 million appropriated; $35.7 million needed to fund 3.0% COLA

$3.28 million lapsed in this account in FY 2008 and a like amount will remain unallocated in FY 2009

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IMPACT OF FY 2009 RESCISSIONS Human Services

Many of the rescissions are technical in nature, reflecting caseload or cost re-estimates proposed in the Governor’s FY 2009 adjustments and adopted by the Appropriations Committee’s recommended budget in April

Technical: SAGA – $5.8 million reduction – pharmacy carve-out savings ConnPACE – $2.8 million reduction – lower Medicare Part D coverage

gap (i.e., donut hole) costs TFA – $1.9 million reduction – lower caseloads DCF Board & Care – $967,000 – cost and caseload re-estimate

The $2.1 million reduction in the DSS Housing/Homeless Services account is achievable due to delays in spending new Rental Assistance Program funds as units are leased up incrementally over the course of the year

A reduction of $2.6 million is also made in DSS related to new initiatives added by the legislature for this biennium.  Due to delayed starts, funds budgeted for FY 2008 will be carried forward into FY 2009 to cover needs for certain programs over the two year period

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IMPACT OF FY 2009 RESCISSIONS Department of Public Health

Anticipated minor impact: Needle and Syringe Exchange Program ($24,545). Average

impact is less than $5,000 for each of the five programs supported by these funds (Bridgeport, Danbury, Hartford, New Haven and Stamford).

Community Services Support for Persons with AIDS ($9,959) Emergency Medical Services Regional Offices ($33,874).

Average impact is less than $6,800 for each of the five regional EMS offices

Loan Repayment Program ($6,253). May result in a slightly reduced level of support for new loan repayment grants in FY09

Start up delays in FY 2008 expected to carry over into FY09, resulting in minimal impact: Fetal and Infant Mortality Review ($15,000) Nursing Student Loan Forgiveness Program ($6,250)

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IMPACT OF FY 2009 RESCISSIONS Department of Public Health - continued

AIDS Services ($395,328). State and federal funds for DPH’s efforts to treat and reduce the incidence of HIV/AIDS in Connecticut total nearly $50 million. The state picked up a federal funding reduction in FY 2008 by adding $2.5 million, increasing to $3.1 million in FY 2009. The rescission should not result in a significant impact to DPH’s efforts

Community Health Services ($464,238). Contract delays in FY 2008 resulted in a lapse, and a continuing appropriation of $2.5 million is available for FY 2009, making this rescission achievable

X-Ray Screening and Tuberculosis Care ($41,038). Expenses in this program fluctuate based on the number of indigent individuals requiring tuberculosis related treatment and care. DPH will monitor expenses in this area and will ensure close coordination with public assistance programs to minimize any impact from this rescission

Genetic Diseases Programs ($44,766). DPH retained $800,000 from the fees charged for the Newborn Screening Program in FY08 to offset program expenses and pay for technology upgrades. Federal block grant funds also support this program. No significant impact is expected to result from the rescission

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IMPACT OF FY 2009 RESCISSIONS Department of Labor – Workforce Investment Act (WIA)

Federal rules require that states appropriate WIA funds provided by the U.S. DOL. Connecticut’s WIA appropriation is based upon an estimate of the federal award

As in past years, the FY 2009 WIA allocation from the federal government is less than the appropriated level Appropriation = $25,895,848 Anticipated WIA allocation = $22,957,988 The difference of $2,937,860 will lapse in FY 2009, so

$1,294,792 of this amount was included in the rescissions. This leaves $1,643,068 in additional WIA lapsing funds

Federal WIA funding reductions for FY 2008 total $3,047,981. PA 08-1, JSS (the Deficiency Bill) utilized $2,668,505 to cover deficiencies in other agencies. Sec. 4-89(i), CGS, specifies that any remaining WIA funds will not lapse and will carry forward into FY 2009. These funds are also available to help address potential shortfalls or to mitigate the need for rescissions

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IMPACT OF FY 2009 RESCISSIONS Department of Higher Education

No Reductions were made to the major financial aid accounts (CT Independent College Student Grant and CT Aid for Public College Students) as per past rescission practice and in consideration that many awards have already been committed to students by now

A $100,000 reduction was made to the Capitol Scholarship Program because it experienced a nearly $300,000 unspent carry forward amount in FY 2008 which facilitates $100,000 savings in FY 2009

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IMPACT OF FY 2009 RESCISSIONS University of Connecticut, Charter Oak State College,

Community-Technical Colleges and Connecticut State University System

The Block Grants in each of these agencies were reduced by 3%

The 3% rescission essentially equates to the regular turnover and Personal Services reductions that other Executive and Judicial Branch agencies manage each year

Staff turnover occurs and will now be applied to meet the rescinded amount and the colleges should be able to manage these reductions similarly without raising tuition or fees, or causing layoffs

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IMPACT OF FY 2009 RESCISSIONS

$-

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

2002 2003 2004 2005 2006 2007

Fiscal Year

In M

illions UCONN

UCHC

CTC

CSU

These agencies have not been subject to the application of generic Personal Services and Other Expense account savings; as a result their fund balances have increased over time

All other Executive and Judicial Branch state agencies have managed these required savings in their budgets

Unrestricted Net Assets

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IMPACT OF FY 2009 RESCISSIONS Judicial Department

Rescissions were determined in collaboration with the Judicial Department

Rescission decisions carefully considered Judicial’s ability to roll out new programs and services including: Hiring requirements for current and expanded

programs Siting issues for new programs A realistic timeframe to expand current contracted

programs

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OUT-YEAR PROJECTIONS

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STRUCTURAL HOLES CREATED BY FUNDING EXPENDITURES WITH PRIOR YEAR SURPLUSES

Structural Holes in the Fiscal 2010 Budget – General Fund (In Millions)

Approximately $393.4 M of projected FY 2010 spending will be funded with surplus dollars in FY 2009

These spending commitments, without ongoing revenue sources to pay for them, are contributing to our large projected FY 2010 imbalance

From the FY 2007 Surplus Amount1. 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

Other1. Criminal Justice Reform 17.1 2. PA08- 176, Mortgage Assistance, ongoing

costs for Judicial and Debt Service 4.5

Total 393.4$

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GENERAL FUND According to the Office of Fiscal Analysis, preliminary General Fund

estimates indicate large current services budget gaps when compared to current projections of revenue in the out-years

These projections do not reflect costs related to other enacted legislation from the 2008 session

These projections do not reflect a potential recession, nor have they been adjusted for the slowdown in revenue growth

Source: OFA- February 26, 2008 Analysis of Governor’s Budget Report

($568.6)

($818.0)

($630.8)

- $1,000

- $800

- $600

- $400

- $200

$0

Fiscal Year

In M

illions

2011 Proj.2010 Proj. 2012 Proj.

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CONCLUSION

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CONCLUSION

Economic conditions have deteriorated both nationally and in CT

FY 2009 is currently forecasted to be out of balance by $150 million prompting the Governor to make rescissions before the estimated deficit reaches the 1% statutory trigger

The adopted budget lacks funding for many critical state funded programs

Both OPM and the State Comptroller are projecting deficits in FY 2008

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WHERE DO WE GO FROM HERE Further modifications may be made depending on:

Whether revenues decrease, increase, or remain as projected when the Budget was adopted

Whether problems identified prove to increase the deficit

Rescissions can be expanded within the powers granted to the Governor if revenues decline

Rescissions can be lifted if revenues rebound

Plans will be presented to the Legislature for approval should rescissions beyond the Governor’s statutory authority become necessary