FISCAL ACCOUNTABILITY REPORT FISCAL YEARS 2014 – 2018

OFFICE OF POLICY AND MANAGEMENTBENJAMIN BARNES, SECRETARY

NOVEMBER 25, 2013

Presentation Overview

• Summary of OPM projections

• Spending cap calculation

• Budget Reserve Fund status

• Economic factors and revenue trends

• Expenditures, major cost drivers and long-term obligations

• Five year bond projections

• Summary and conclusion

2

Financial Summary of Funds

3

in millions

(1) Revenues reflect the November 8, 2013 consensus revenue forecast.

(2)

(3) Reflects OPM Nov. 20, 2013 letter to Comptrol ler.

(4) FY 2015 reflects enacted budget.

Other funds include the: a) Mashantucket Pequot and Mohegan Fund, b) Soldiers , Sa i lors and Marines ' Fund, c)

Regional Market Operating Fund, d) Banking Fund, e) Insurance Fund, f) Consumer Counsel and Publ ic Uti l i ty

Control Fund, g) Workers ' Compensation Fund, h) Criminal Injuries Compensation Fund.

Estimated(3) Enacted(4)

General Fund FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Revenues (1) 17,249.6$ 17,532.7$ 17,687.2$ 18,406.6$ 19,195.1$ Expenditures 17,113.6$ 17,497.6 18,299.6 18,839.1 19,571.4

Balance 136.0$ 35.1$ (612.4)$ (432.5)$ (376.3)$

Special Transportation Fund

Revenues (1) 1,244.5$ 1,321.8$ 1,486.1$ 1,496.8$ 1,497.5$ Expenditures 1,243.2 1,322.3 1,389.4 1,448.8 1,509.4

Balance 1.3$ (0.5)$ 96.7$ 48.0$ (11.9)$

Other Funds (2)

Revenues 174.9$ 175.7$ 252.8$ 256.7$ 260.9$ Expenditures 174.5 175.5 252.6 256.4 260.4

Balance 0.4$ 0.2$ 0.2$ 0.3$ 0.5$

Total All Appropriated Funds

Revenues 18,669.0$ 19,030.2$ 19,426.1$ 20,160.1$ 20,953.5$ Expenditures 18,531.3 18,995.4 19,941.6 20,544.4 21,341.2

Balance 137.7$ 34.8$ (515.5)$ (384.3)$ (387.7)$

Projected

Spending Cap

• The adopted FY 2014 budget is $9.4 million below the cap.

• At adoption, the FY 2015 budget was $166.3 million below the cap.

• Recent revisions to personal income growth have reduced the available room under the cap in FY 2015 to $56.9 million.

• Personal income growth serves as the cap’s proxy for the economy’s ability to pay for government services.

• The most recent recession has resulted in the lowest allowable expenditure cap growth rates since its inception.

4

* Inflation was the limiting factor

-0.7%

5.1%

2.6%

3.6% 3.4%

6.7% 6.5%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2010 2011 2012 2013 2014Proj.

2015Proj.

2016Proj.

Pe

rce

nta

ge G

row

th

Fiscal Year

CT Personal Income Growth

3.4%3.0%

1.8% 1.7%

2.8%

4.3%4.6%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2012 2013* 2014 2015 Est. 2016Proj.

2017Proj.

2018Proj.

Perc

enta

ge G

row

th

Fiscal Year

CT Spending Cap Growth Rate

Spending Cap

5

Enacted

FY 2015 FY 2016 FY 2017 FY 2018

Expenditure Cap Results

Total All Appropriated Funds 18,995.4$ 19,941.6$ 20,544.4$ 21,341.2$ Allowed Appropriations per Cap 19,052.3 19,845.8 20,643.0 21,448.0

Over/(Under) the Cap (56.9)$ 95.8$ (98.6)$ (106.8)$

Revenues and the Expenditure Cap

Revenues - All Funds 19,426.1$ 20,160.1$ 20,953.5$ Allowed Appropriations per Cap 19,845.8 20,643.0 21,448.0

Revenues Less Allowed Approps. (419.7)$ (482.9)$ (494.5)$

Projected

$21,448.0

$21,341.2

$20,953.5

$18,500.0

$19,000.0

$19,500.0

$20,000.0

$20,500.0

$21,000.0

$21,500.0

2014 2015 2016 2017 2018

Fiscal Year

Expenditure Cap

Expenditures

Revenue

Outyear Cap and Balance

• Over the next three years revenues are projected to grow by $2.3 billion.

• The state’s constitutional spending cap will permit growth of $2.8 billion.

• Expenditures and revenues will have to be aligned in order for the budget to remain in balance. 6

All Funds(in millions)

Economy and Revenue

7

General Fund Revenue Sources

8

November 8, 2013 Consensus Revenue Forecast

(In Millions)

FY 2014 % of Total FY 2015 % of Total FY 2016 % of Total FY 2017 % of Total FY 2018 % of Total

Personal Income Tax 8,808.8$ 51.1% 9,399.8$ 53.6% 9,959.5$ 56.3% 10,558.8$ 57.4% 11,171.4$ 58.2%

Sales & Use Tax 4,074.0 23.6% 4,197.9 23.9% 4,236.1 24.0% 4,408.7 24.0% 4,581.4 23.9%

Federal Grants 1,310.5 7.6% 1,211.5 6.9% 1,207.9 6.8% 1,224.4 6.7% 1,252.5 6.5%

Corporation Tax 753.5 4.4% 763.4 4.4% 686.1 3.9% 734.0 4.0% 716.5 3.7%

Health Provider Tax 512.0 3.0% 514.5 2.9% 516.9 2.9% 519.4 2.8% 521.9 2.7%

Cigarette Tax 390.4 2.3% 378.8 2.2% 368.1 2.1% 357.8 1.9% 347.8 1.8%

Special Revenue 313.9 1.8% 338.5 1.9% 344.1 1.9% 354.8 1.9% 365.7 1.9%

All Other 1,086.5 6.3% 728.3 4.2% 368.5 2.1% 248.7 1.4% 237.9 1.2%

Total 17,249.6$ 100.0% 17,532.7$ 100.0% 17,687.2$ 100.0% 18,406.6$ 100.0% 19,195.1$ 100.0%

Personal Income Tax TrendsEconomic Growth Rates

9

10.4%

15.1%

8.9%9.5%

8.7%

-1.5% -1.8%

6.0%

7.8%

7.1%

7.8%

4.5%

-3.7%

0.8%

5.2%

3.6%3.1% 3.2%

5.2%5.9% 5.7% 5.5%

-7%

-2%

3%

8%

13%

18%

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Est.

'15 Fcst.

'16 Fcst.

'17 Fcst.

'18 Fcst.

Econ

omic

Gro

wth

Rat

e

Fiscal Year

Withholding Tax

Income TaxHighly Dependent Upon Capital Gains

• Over the past 15 years Connecticut’s income tax revenue has fluctuated dramatically due to the performance of the stock market and two recessions.

• Unfortunately, a record high year for capital gains realizations can be immediately followed by a record low year, creating extreme volatility in state finances. 10

32.3%

14.2%

14.9%19.0%

-23.5%

-14.7%

21.9%22.8%

19.4%

13.0%

17.9%

-27.3%

-21.3%

27.7%

0.3%

21.9%

5.0%

8.1%6.0% 6.5% 6.5%

-16.0%

65.0%

-38.0%

93.0%

-10.0%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-30%

-20%

-10%

0%

10%

20%

30%

40%

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Est.

'15 Fcst.

'16 Fcst.

'17 Fcst.

'18 Fcst.

Cap

ital

Gai

ns

Gro

wth

Rat

e

E &

F E

con

om

ic G

row

th R

ate

Fiscal Year

Estimates & Finals vs. Capital Gains Realizations

Estimates & Final

CT Capital Gains

Note: Capital Gains are for the immediately preceding calendar year.

Sales Tax TrendsEconomic Growth Rates

11

7.1%

4.9%

1.2%

-1.9%

5.6%

3.9%2.8%3.0%

2.3%

-7.9%

-3.5%

4.9%

2.4%1.3%

2.5%

3.7%3.9%4.0%3.8%

-10%

-7%

-4%

-1%

2%

5%

8%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Est.

'15 Fcst.

'16 Fcst.

'17 Fcst.

'18 Fcst.

Eco

no

mic

Gro

wth

Rat

e

Fiscal Year

Declining Motor Fuels Consumption

• Consumers began to curtail consumption as prices began to rise.

• From FY 2006 through FY 2013, the cumulative decline in Motor Fuels tax revenue is 10.3%.

• For this revenue source this is not just a cyclical change, but a major structural change on the part of consumers.

• In FY 2013, Motor Fuels tax revenue equaled 40.7% of the total revenue of the Special Transportation Fund which is down from 55.4% in FY 2003. Declining growth in motor fuels revenue has led to an increasing reliance on other revenue sources to support the fund, including transfers from the General Fund.

12

Economic Growth Rates of the Motor Fuels Tax

-0.6% -0.5%

-3.7%-3.2%

0.9%

-1.1%

-1.9%

-1.2%

-1.9%

-1.0%

-0.4% -0.4% -0.4%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

'06 '07 '08 '09 '10 '11 '12 '13 '14 Est.

'15 Fcst.

'16 Fcst.

'17 Fcst.

'18 Fcst.Fiscal Year

General Fund Economic Growth Rates

13

8.9%7.6%

8.9%

6.1%

3.3%

-11.1%

-2.1%

10.3%

0.9%

6.6%

0.9%

3.3%4.1% 3.8% 4.4%

-15%

-10%

-5%

0%

5%

10%

15%

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Est.

'15 Fcst.

'16 Fcst.

'17 Fcst.

'18 Fcst.

Gen

eral

Fun

d R

even

ue E

cono

mic

Gro

wth

Rat

e

Fiscal Year

Slow Economic Recovery

• For the two most recent recessions, revenue peaked in FY 2001 and FY 2008, respectively.

• Unlike the prior recession, Sales Tax revenue has yet to exceed its previous peak.

• If this recovery had been similar to the 2003 recovery, Income Tax revenue would be $1.3 billion higher, while Sales Tax revenue would be $600 million higher.

14

86.3

108.1

120.2

100.0

82.7

95.5

104.4

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

0 1 2 3 4 5

Years from Peak

Personal Income TaxImpact of Recessions on Baseline Revenue

2002Recession

2008Recession

Peak Years: FY 2001 & FY 2008

99.3

108.9

112.0

100.0

88.9

95.596.7

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

0 1 2 3 4 5

Years from Peak

Sales TaxImpact of Recessions on Baseline Revenue

2002Recession

2008Recession

Peak Years: FY 2001 & FY 2008

$22,630.2

$21,779.8

$21,448.0 $21,341.2 $20,953.5

$18,500.0

$19,000.0

$19,500.0

$20,000.0

$20,500.0

$21,000.0

$21,500.0

$22,000.0

$22,500.0

$23,000.0

2014 2015 2016 2017 2018

Fiscal Year

Revenue +2%

Revenue +1%

ExpenditureCapExpenditures

Revenue

Outyear Cap and Balance –Sensitivity Analysis

15

All Funds(in millions)

Tepid Income Growth (US)

• From its peak in 2008, Qtr. 2, U.S. real personal income had declined $469 billion, or 3.8% by 2009, Qtr. 4.

• From its peak in 2008 Q2 to 2013 Q2, there has been a 5.4% growth in U.S. real personal income, or 1% annually.

16

11,500

11,700

11,900

12,100

12,300

12,500

12,700

12,900

13,100

13,300

13,500

2007 2008 2009 2010 2011 2012 2013

Year

Real Personal Income(Billions)

Source: Bureau of Economic Analysis (12Q3-13Q2 Projected)

$12,021

$12,491

$13,159

Consumer Debt (US)

• After reaching unsustainable levels, U.S. households have begun to address their debt.

• However, debt remains at elevated levels.

• At this rate it will take 10 years to reach the 1952-1990 average of 65%

• Despite historically low interest rates, which would normally be an incentive to borrow more, households continue to deleverage.

• This reduction in debt combined with the increase in the savings rate is equivalent to 1.8% annually of U.S. GDP.

17

0%

20%

40%

60%

80%

100%

120%

140%

160%

19

53

19

56

19

59

19

62

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

20

13

De

bt

to P

ers

on

al I

nco

me

Year

US Household Debt as a Percentage of Personal Income

Source: FederalReserve (2013 Projected)

Depressed Household Net Worth (US)

• Household net worth for all Americans peaked at $71,372 billion in 2007 Q2.

• The financial crisis wiped-out 20% of households’ total net worth, from peak to trough.

• Even today, U.S. household net worth remains 1% below the 2007 peak. This has had a negative impact on consumers’ ability to borrow against their assets and consumer confidence via the “wealth effect” during the recovery.

18

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Year

Total Household Net Worth(Billions)

Source: Bureau of Economic Analysis (12Q3-13Q2 Projected)

Expenditures:Major Cost Drivers &

Long Term Obligations

19

FY 2014 General Fund Deficiencies

20

FY 2014

Dept. of Administrative Services $8.0

Dept. of Emergency Services and Public Protection 3.0

Dept. of Education 9.0

Public Defenders Services Commission 3.2

Total $23.2

(in millions)

As of OPM letter to Comptroller, Nov. 20, 2013.

• Unlike recent years since the Great Recession began, relatively minor shortfalls are forecast for FY 2014.

• As of Nov. 20, 3013, OPM is forecasting lapses of $98.3 million beyond budgeted levels, more than offsetting the shortfalls noted above.

Summary of Appropriated Fund Projections – General Fund

21

In Millions Estimated Enacted Projected

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

DSS - Medicaid 2,476.6 2,289.6 2,378.6 2,485.0 2,597.0

STATEWIDE - Personal Services 2,210.5 2,315.7 2,411.3 2,510.7 2,614.1

SDE - Education Equalization Grants 2,066.6 2,122.9 2,122.9 2,122.9 2,122.9

OTT - Debt Service 1,419.0 1,554.9 1,913.4 1,999.0 2,089.2

TRB - Retirement Contributions 948.5 984.1 1,062.8 1,147.9 1,239.7

OSC - Employee Retirement Contribution 916.0 969.3 1,023.3 1,080.2 1,140.3

OSC - State Employees Health Serv Cost 615.9 651.0 677.9 707.6 739.4

OSC - Retired Employee Health Serv Cost 548.7 568.6 591.5 615.9 641.4

STATEWIDE - Other Expenses 482.4 483.8 483.8 483.8 483.8

DDS - Community Residential Services 435.2 453.6 456.6 458.4 460.2

SDE - Magnet Schools 274.4 281.3 281.3 281.3 281.3

OSC - Employers Social Security Tax 220.9 235.6 240.7 246.7 253.3

DDS - Employment Opportunities & Day Svcs 212.8 222.9 222.9 222.9 222.9

UOC - Operating Expenses 202.1 229.1 247.9 268.1 284.4

BOR - Regional Community - Technical Colleges 148.7 155.9 155.9 155.9 155.9

BOR - Connecticut State University 148.6 155.5 155.5 155.5 155.5

SDE - Regional Vocational-Technical School Sys 146.6 155.6 161.0 166.5 172.3

OTT - Pension Obligation Bonds - TRB 145.1 133.9 132.9 119.8 140.4

SDE - Excess Cost - Student Based 139.8 139.8 139.8 139.8 139.8

DCF - Board and Care - Residential 131.4 142.1 132.5 132.3 132.3

OTT - UConn 2000 - Debt Service 121.3 156.0 155.9 173.5 190.6

UHC - Operating Expenses 125.1 135.4 134.2 131.1 130.5

OSC - Other Post Employment Benefits 0.0 0.0 0.0 0.0 129.5

STATEWIDE - ALL OTHER 3,106.4 3,119.4 3,168.0 3,185.4 3,205.7

General Fund - Gross 17,251.6 17,656.1 18,450.7 18,990.2 19,722.4

Total Lapses -137.9 -158.5 -151.0 -151.0 -151.0

General Fund - Net 17,113.6 17,497.6 18,299.6 18,839.1 19,571.4

Summary of Appropriated Fund Projections – Other Funds

22

In Millions Estimated Enacted Projected

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

SPECIAL TRANSPORTATION FUND - Gross 1,244.1 1,333.3 1,400.4 1,459.8 1,520.4

Unallocated Lapse (0.9) (11.0) (11.0) (11.0) (11.0)

Special Transportation Fund - Net 1,243.2 1,322.3 1,389.4 1,448.8 1,509.4

BANKING FUND 26.6 27.8 28.8 29.8 30.9

INSURANCE FUND 30.7 32.0 33.1 34.2 35.4

CONSUMER COUNSEL/PUBLIC UTILITY FUND 24.9 25.4 26.3 27.2 28.2

WORKERS' COMPENSATION FUND 23.2 24.8 25.6 26.4 27.1

MASHANTUCKET PEQUOT AND MOHEGAN FUND 61.8 61.8 135.0 135.0 135.0

SOLDIERS, SAILORS AND MARINES' FUND 3.1 0.0 0.0 0.0 0.0

REGIONAL MARKET OPERATION FUND 0.9 0.9 1.0 1.0 1.0

CRIMINAL INJURIES COMPENSATION FUND 3.4 2.8 2.8 2.8 2.8

TOTAL ALL FUNDS - NET 18,531.4 18,995.4 19,941.6 20,544.4 21,341.2

General Fund Cost DriversGrowth in Budget Components Relative to FY 2008

23

State Employee Retirement System

Active & Retired Employee Healthcare

Teachers' Retirement System

GF Salaries & Wages

Debt Service

CPI

70%

100%

130%

160%

190%

220%

250%

280%

2008 2010 2012 2014 2016 2018 2020

Reduction in Executive Branch Workforce

24

Based on full-time Executive Branch employees on the last payroll of each month; includes all appropriated funds, excludes constituent units of higher education.

27,000

28,000

29,000

30,000

31,000

32,000

33,000

Jun

-08

Au

g-0

8

Oct

-08

De

c-0

8

Feb

-09

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

$3,684

$4,089 $4,084

$4,594$4,842

$5,048

$2,553 $2,290 $2,379 $2,485 $2,597

$2,869 $3,327 $3,551

$3,684 $3,814

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

'08 '09 '10 '11 '12 '13 '14

Est.

'15

Fcst.

'16

Fcst.

'17

Fcst.

'18

Fcst.

Caselo

ad

Expendit

ure

s (in

millions)

Fiscal Year

General Fund Federal Share under Net Budgeting Caseload

$5,422$5,617

$5,930$6,169

$6,411

Department of Social Services -Medicaid

25

• Unlike prior budgets, the adopted budget "net appropriates" the Medicaid account in the Department of Social Services.

• Increases in “Federal Share under Net Budgeting” reflect the impact of federal health care reform, which expands Medicaid coverage to childless adults with income up to 133% of the federal poverty level beginning January 1, 2014. (Costs are 100% federally reimbursed through 2016, after which reimbursement is phased down to 90% in 2020.)

Health Care ReformMedicaid Expansion States

26

Source: http://www.ncsl.org/research/health/affordable-care-act-expansion.aspx

Health Care Reform –Affordable Care Act

• Medicaid eligibility for childless adults

– Increased to 133% of the federal poverty level effective Jan. 1, 2014

– 100% federally reimbursed through 2016, phasing down to 90% in 2020

• Health insurance exchanges to offer coverage options effective Jan. 1, 2014

• Medicaid rates for primary care providers

– Increased to Medicare levels in 2013 and 2014

– 100% federally reimbursed

• Financial incentives to increase the proportion of Medicaid spending on home and community-based services

• State Innovation Models (SIM)

– Development and testing of models for multi-payer payment and health care delivery system transformation

27

Bonded Indebtedness

30.7%

State Employees Pensions

20.6% Teachers' Pensions

17.2%

State Employees OPEB25.1%

Teachers' OPEB4.6%

GAAP1.9%

Long Term Obligations

28

• Bonded Indebtedness – as of 7/31/13 $19.8B

• State Employees Pensions – as of 6/30/12 $13.3B

• Teachers’ Pensions – as of 6/30/12 $11.1B

• State Employees Post Retirement Hlth & Life (OPEB) – as of 6/30/12 $16.2B

• Teachers’ Post Retirement Health and Life (OPEB) – as of 6/30/12 $ 3.0B

• Cumulative GAAP Deficit (General Fund Unassigned) – as of 10/13 $ 1.2B

Total Unfunded Long-Term Obligations $64.6B

Long Term Obligations –Growing Share of General Fund Budget

Includes debt service, payoff of the cumulative GAAP deficit beginning in FY 2016, pension and retireehealthcare costs for state employees and teachers, and matching state OPEB contributions starting in FY2018.

Increase beginning in FY 2014 is partly due to the net budgeting of Medicaid, including the federal shareof the Medicaid program, which accounts for an increase of approximately 5% in the long-term share. 29

18.4%19.3%

20.7%21.3%

20.9%20.0%

21.5% 21.2%

23.2%23.7%

28.1%

29.0%

30.5% 30.8%31.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Fraction of General Fund Budget Devoted to Long-Term Obligations

Long Term Obligations –Steps Have Been Taken

• Steps have been taken to address all of the state’s long termliabilities

– SERS: various changes to benefits, more conservative actuarialassumptions, increased ARC payments

– TRS: POBs and disciplined approach to ARC payments

– OPEB: beginning stages of trust fund vs. pay-as-you-go; contributions byemployees and employer

– Debt Service: continued commitment to reasonable debt serviceexpenditures as proportion of budget

– GAAP: bonds and appropriations to address cumulative shortfall;appropriations and budgeting approach to addressing any future GAAPshortfalls

30

State Employees Pension & Health Insurance

31

$415 $421 $470 $519 $623 $664 $712 $700 $721 $826 $926$1,058

$1,269$1,379 $1,443 $1,501 $1,575

$368 $394$430

$486$527

$572$619 $652 $636

$647$687

$738

$809

$854$890

$928$969

$203 $240$318

$374

$390$415

$450 $435 $528$491

$549

$587

$598

$569$591

$615$641

$986$1,055

$1,218

$1,379

$1,540$1,651

$1,781 $1,787$1,885

$1,964

$2,162

$2,383

$2,676$2,802

$2,924$3,044

$3,185

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14Fcst.

FY 15Fcst.

FY 16Fcst.

FY 17Fcst.

FY 18Fcst.

SERS Active Health Retiree Health

Note: Retiree Health includes offsets for the Medicare Part D Employer Subsidy in FYs 2007 through 2012. SERS includes payment deferrals in FYs 2009 through 2011.

All Funds – As of 6/30(In Millions)

Components of Pension Liability

State Employees Retirement System

• $23.0 billion total liability.• Most (72.3%) of that liability is related to already-

retired employees.• $13.3 billion unfunded liability.• 80% of the actuarially required contribution is for the

unfunded accrued liability.

Retired/Deferred Liability , 72.3%

Active – Tier I , 6.3%

Active – Tier II, 15.5%

Active – Tier IIA, 5.9%

Active - Tier III, 0.0%

Based on 6/30/12 Valuation ($ in Thousands)

Retired/Deferred Liability $16,646,788 72.3%

Active – Tier I Hazardous 66,445 0.3%

Active – Tier IB 1,343,050 5.8%

Active – Tier IC 50,903 0.2%

Active – Tier II Hazardous 1,246,123 5.4%

Active – Tier II Others 2,316,785 10.1%

Active – Tier IIA Hazardous 590,337 2.6%

Active – Tier IIA Others 756,291 3.3%

Active - Tier III Hazardous 431 0.0%

Active - Tier III Others 1,599 0.0%

Total Accrued Liability $23,018,752

Actuarial Value of Assets 9,744,986

Unfunded Accrued Liability $13,273,766

Normal cost $249,996

Amortization of UAL $1,018,938

Annual Required Contribution $1,268,934

32

State Employees Retirement System Contributions

33

• The deferral of the SERS contribution was $50 million in FY 2009, $164.5 million in FY 2010 and $100 million in FY 2011.

• Starting in FY 2013, the SEBAC IV & V adjustments were eliminated.• Starting in FY 2014, the assumed rate of return was lowered from 8.25% to 8%.

Fiscal Year

Actuarially Required Employer

Contribution (millions)

Actual/Est. Employer

Contribution (millions) Percent

Rate of Return Market Value

Basis

2001-02 $415 $415 100% -6.60%

2002-03 $426 $421 99% 1.90%

2003-04 $474 $470 99% 15.20%

2004-05 $516 $516 100% 10.50%

2005-06 $623 $623 100% 11.00%

2006-07 $664 $664 100% 17.10%

2007-08 $717 $712 99% -4.80%

2008-09 $754 $700 93% -18.30%

2009-10 $897 $721 80% 12.90%

2010-11 $944 $826 88% 21.20%

2011-12 $926 $926 100% -0.90%

2012-13 $1,060 $1,060 100% 11.90%

2013-14 est. $1,269 $1,269 100%

2014-15 est. $1,379 $1,379 100%

2015-16 est. $1,443 $1,443 100%

2016-17 est. $1,501 $1,501 100%

2017-18 est. $1,575 $1,575 100%

SERS (cont’d)

• SEBAC 2011 changes• New Tier III for individuals hired after 6/30/11

• Normal Retirement eligibility age 63 and 25 YOS or age 65 and 10 YOS and salary based on final five year average;

• Haz. Duty 20 Years of HD service and age 50 or 25 Years of HD Service regardless of age and salary based on final five year average pay;

• Early Retirement age 60 and 15 YOS; • Ten year cliff vesting.

• For current employees who retire after 6/30/2022, Normal Retirement eligibility increase from age 60 and 25 YOS or age 62 and 10 YOS to age 63 and 25 YOS or age 65 and 10 YOS. By 7/1/13, present employees may elect to pay the actuarial pension costs of maintaining the normal retirement eligibility that exists in the present plan which is scheduled to change effective July 1, 2022.

• Change the minimum COLA for individuals who retire after 9/2/11 from 2.5% to 2.0%.• Change the Early retirement reduction factor from 3% to 6% for each year before eligible to

take Normal Retirement.• Cap salary that can be considered as part of an individual’s pension benefit as provided under

the Internal Revenue Code.• Pension savings due to 2 year wage freeze.

34

SERS (cont’d)

• Eliminated SEBAC IV & V adjustments to pension ARC, which created back-loaded amortization schedule (see next slide)

• Revised actuarial assumptions• Economic Assumption Changes

• Decreased assumed investment return from 8.25% to 8.00%• Decreased assumed price and wage inflation from 3.0% and 4.0% to

2.75% and 3.75% respectively.

• Demographic Assumption Changes• Adopted more conservative estimates for withdrawal from active

service rates, disability retirement rates, and mortality rates.

• These changes had the impact of reducing the calculated funding ratio from 47.9% to 45.3% and increasing our ARC for FY 2014 by about 10.6%.

35

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

ARC - January 2012 Valuation Revised ARC - June 2012 Valuation

SERS (cont’d)Flatter, more sustainable pension ARC ($000)

36

Revised ARC reflects elimination of SEBAC IV & V adjustments and changes in actuarial assumptions. Year reflects valuation year; valuation year 2012 figures correspond to Fiscal Year 2014 budget impact.

Teachers’ Retirement System Contributions

37

$429 $329

$559 $582

$757 $788

$949 $984 $1,063

$1,148 $1,240

$170 $176

$90 $210

$59$65

$81$121

$145$134

$133

$120

$140

$205 $180 $185 $185

$396 $412

$519 $539

$618 $647

$838

$909

$1,094 $1,118

$1,196

$1,268

$1,380

$20

$120

$220

$320

$420

$520

$620

$720

$820

$920

$1,020

$1,120

$1,220

$1,320

$1,420

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Fcst.

'15

Fcst.

'16

Fcst.

'17

Fcst.

'18

Fcst.

Millions

Fiscal Year

Debt Service

Surplus Funds

FY 2010 and beyond include debt service on the $2.3 billion in pension obligation bonds issued on April 30, 2008 on behalf of the Teachers’ Retirement System.

Teachers’ Retirement System

• $2 billion pension obligation bond (POB) issued in April 2008.

• Bond covenant requires the state to fully fund the ARC for as long as POBs remain outstanding.

• The average cost of POBs is 5.88 percent, and based on 2012 projections, there is an 88 percent probability of exceeding that borrowing cost when the bonds mature in 2032.

• By continuing a disciplined approach to paying the ARC and the debt service on the POBs, the unfunded liability in the TRS will diminish over time.

38

Other Post Employment Benefits

• The 2012 updated OPEB valuation, received in April of 2013, showed another significant reduction in the state’s unfunded liability. This builds upon the prior reduction of $13.3 billion due to the OPEB reforms negotiated in the 2009 and 2011 SEBAC agreements. The updated actuarial report reflects:

– SEBAC 2009 and 2011

– Reduction in health care cost trends

– New prescription drug contract expected to reduce drug costs by 11%

– Conversion of the Medicare-age prescription drug program to an Employer Group Waiver Program. 39

OPEB (cont’d)

• Recent Reforms:

– The 2009 and 2011 SEBAC agreements require:

• 3% contribution to Retiree Health Care Trust Fund for all health care eligible employees, with phased in implementation.

• State match of employee OPEB contributions beginning July 1, 2017.

• Greater premium share for individuals who elect early retirement.

• The valuation as of June 30, 2011 (issued in May of 2012) reflects the reforms mentioned above and the corresponding impact on the OPEB liability.

• Based on the most recent valuation, the OPEB trust fund contained $49.6 million in net assets as of June 30, 2011.

• Deposits to the OPEB Trust Fund:

– State Contributions:

• $10 million in FY 2008 and $14.5 million in FY 2011.

– Employee Contributions:

• $1.4 million in FY 2010, $21.6 million in FY 2011 and $25.0 million in FY 2012.

40

GAAP

• The State’s plan to address the cumulative GAAP deficit:

– Issuance of approximately $560 million of General Obligation, GAAP Conversion Bonds to be amortized through 2028

– Fund the remaining accumulated GAAP deficit over time through amounts deemed appropriated (approximately $46 million annually from 2016 to 2028)

41

GAAP (cont’d)

• Bond covenants are required by the GAAP bonding legislation

– Annual debt service of GAAP Conversion Bonds is deemed appropriated

– Annual appropriation of non-bonded portion of the accumulated GAAP deficit is also deemed appropriated

– GAAP Conversion Bond proceeds cannot be counted as General Fund revenue

– GAAP Conversion Bonds must be repaid over 15 years

• Appropriations to cover accruals starting in FY 2014 (to cover difference between cash basis budgeting and modified accrual basis)

• Requirement to address any future GAAP shortfall from operations in succeeding year’s budget

42

$474.7 $474.6 $459.0

$3,131.2 $3,284.1 $3,284.1

$1,114.0 $1,144.7 $1,232.3

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

FY 2014 FY 2015 FY 2016Teachers' Retirement Contributions, Retiree Health Service Cost and Debt ServiceEducationGeneral Government

$4,719.9 $4,903.4 $4,975.4

Growth from FY 14 to FY 15 is 3.9%

State Aid to or on Behalf of Local Governments

43

(In Millions)

Local School Construction, 32%

University of Connecticut, 16%

Board of Regents - State Colleges and Universities, 9%

Economic Development

Programs, 12%

Clean Water Grants, 7%

Municipal Grant Programs, 4%

Housing Programs, 5%

All Other Projects and Programs,

15%

Projected GO Bond Allocations FY 2014 – FY 2018

44

Impact of State Bonded Indebtedness

• Debt Service as a percentage of the General Fund budget has remained fairly steady.

• The secondary debt service percentage line (FY 2014-18, indicated with triangular tick marks) adjusts for the net budgeting approach to Medicaid expenditures; debt service would continue at about 10% of the General Fund budget.

45

$1.41 $1.47

$1.62 $1.63

$1.81 $1.80 $1.71

$1.85

$2.21 $2.30

$2.43 8.5%

8.5%

9.4% 9.1%9.7%

9.5%10.0%

10.6%

12.1% 12.2% 12.4%

8.6%8.9%

10.1%10.2% 10.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

$1.2

$1.4

$1.6

$1.8

$2.0

$2.2

$2.4

$2.6

$2.8

$3.0

'08 '09 '10 '11 '12 '13 '14Est.

'15Fcst.

'16Fcst.

'17Fcst.

'18Fcst.

Debt S

erv

ice A

s %

Of B

udget

Debt S

erv

ice (

Billio

ns)

Fiscal Year

General Fund Debt Service Expenditures

Ranked by State and Local Debt

As a % of Personal Income (PI)- 2011

Ranked by Per Capita State and Local

Debt-2011

Rank State Debt/PI

Rank State Amount ($)

1 New York 34.4%

1 New York 17,849

2 Alaska 29.5%

2 Alaska 14,194

3 Kentucky 28.9%

3 Massachusetts 14,162

4 Illinois 27.4%

4 Illinois 12,073

5 Nevada 26.4%

5 New Jersey 12,067

6 Massachusetts 26.1%

6 Connecticut 11,879

7 Texas 25.7%

7 California 11,459

8 South Carolina 25.7%

8 Washington 11,245

9 California 25.7%

9 Rhode Island 11,122

10 Washington 25.3%

10 Texas 10,553

11 Rhode Island 24.9%

11 Colorado 10,510

24 Connecticut 20.6%

12 Hawaii 10,213

UNITED STATES 20.3%

UNITED STATES $ 8,496

Source: U.S. Department of Commerce, Census & BEA

State and Local Debt Burden - 2011

• Connecticut’s state and local debt burden ranks 24th in the nation in 2011 as a percentage of personal income.

• The state’s burden as a percentage of personal income is lower than its three neighboring states.

46

$0.0

$93.5

$271.5

$406.2

$441.3

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0

$450.0

$500.0

2011 2012 2013 2014 Est. 2015 Fcst.

Fiscal Year

Budget Reserve Fund Balance(in millions)

47

• Deposits in FYs 2012 and 2013 and estimated surpluses from operations in FYs 2014 and 2015 have allowed the state to begin to build reserves.

Conclusion

• Connecticut’s economy is slowly recovering.– Continued recovery will stabilize Connecticut’s fiscal

outlook.

– Progress has been made in addressing long term liabilities.

– General Fund operating surpluses in FYs 2013, 2014 and 2015.

– Surplus operations have allowed Connecticut to begin to rebuild the Rainy Day Fund.

• Governor Malloy is committed to ensuring the state continues to live within its means.

48