Midterm Budget Adjustments Summary

1. Midterm Budget Adjustments Summary

2. Facing the Economic Realities of Our Times • The longest period of national economic expansion, lasting ten years, ended last March. • The September 11th attack on our nation changed the course of much in American life, including the economy. The length of the recession grew and it has prolonged recovery. • Decreasing revenues and increased costs for programs and safety net services have led to substantial deficits in many states. • Connecticut has not been immune from terrorism’s fallout. • A gap of $550 million gross deficit in FY 01-02 • An anticipated gap of $633 million in FY 02-03

3. Connecticut has Fared Better in this Recession • Connecticut has fared remarkably well in comparison to many other states in the current recession because of our historic conservative budgeting of tax revenues and the spending cap. • Our current budget deficit has never exceeded more than 3% of its total expenditures. • The FY 90-91 deficit was 14.5% of spending. • NCSL found that 43 states had revenues below budgeted forecasts; 26 states had costs exceeding or about to exceed appropriations. • Many other states are dealing with deficits in the range of 10% or greater of spending. • Moody’s reported that as many as 13 states could see their bond ratings downgraded because of their fiscal plight.

4. Lessons Learned from the 1980s Raiding of the Rainy Day Fund • By FY 86-87, the state’s Rainy Day Fund reserve peaked at 5% of General Fund expenditures, with a balance of $319.6 million. • By FY 90-91, the Rainy Day Fund was dry but the storm wasn’t over and the shortfall rose to $965 million.

5. Lessons Learned from the 1980s Raiding of the Rainy Day Fund • The only remedy left was deficit bonding, $1 billion in new and increased taxes, the introduction of the income tax, and major spending reductions. • The unwillingness to make difficult decisions early on created the need for dramatic and much more painful decisions later. • The swift liquidation of the Rainy Day Fund taught us that the Fund is a precious resource, not to be squandered. • Governor Rowland is committed to protecting the Rainy Day Fund from being prospectively raided, especially in light of the lessons learned from the premature raiding of the fund in the 1980s. The Rainy Day Fund is for stabilizing the budget and not for subsidizing spending we can’t sustain.

6. Connecticut has Fared Better in this Recession • The spending cap clearly controls spending and put us in a better position to weather the recession. • Despite some healthy economic times, the cap held the average annual growth in spending to just 4.9%.

7. What Explains the Huge Change from Surpluses to a Deficit? • Connecticut had 10 years of surpluses, with windfalls of between $500 and $700 million for the last four years.

8. What Explains the Huge Change from Surpluses to a Deficit? • CT’s surpluses have largely been driven by capital gains. • According to federal data, capital gains realizations for CT residents went up 37% on average each year from 1995 to 1999. • State data for the estimates and finals portion of the income tax went up 20% per year from FY 95-96 to FY 00-01.

9. What Explains the Huge Change from Surpluses to a Deficit? • CT’s surpluses have largely been driven by capital gains. • Revenue variances in the general fund averaged 42% for estimates and finals for the previous 6 fiscal years because of the booming stock market. • In FY 00-01, the revenue variance attributable to estimates and finals was 68.9%, meaning that almost $400 million of last year’s surplus was attributable to better than anticipated capital gains activity.

10. What Explains the Huge Change from Surpluses to a Deficit? • Without capital gains to provide growth in revenues, the budget will rely more heavily on the withholding portion of the income tax and the sales tax. • Instead of seeing modest growth, revenues have dipped as a whole in the current fiscal year.

11. What is the Impact on FY 02-03? • Economic recovery will not mean immediate recovery in revenues. • Because of the steep drop in revenues in the general fund this fiscal year, the FY 02-03 adopted budget was put well out of balance. • Budget assumed 4.5% growth • Need 8.8% growth to balance • General Fund revenue is estimated to grow by about 4.1%, leaving a gap of $525.8 million next fiscal year.

12. Liquidating the FY 01-02 Deficit • The $551.1 million gross deficit is made up of two parts: • The first part is a $467.6 million revenue shortfall from budgeted levels. • The second part is $83.6 million in expenditures that exceed budgeted levels.

13. What if No Special Session or Reductions Occurred? • Under the strong leadership of Governor Rowland, effective steps have been taken to mitigate the deficit this fiscal year. • Implemented rescissions of $29.5 million in September. • Called for a Special Session for further reductions, leading to $171.1 million in reductions or surplus reallocations in November. • Further erosions in revenue led the Governor to: • implement $28.1 million in additional rescissions in December. • call for a reallocation of the remaining FY 00-01 surplus of $157.3 million. • propose increasing the tobacco tax by 61 cents effective 4/1/02, generating another $42.5 million in revenue. • Without the Governor’s actions and proposals of $428.5 million in deficit mitigation actions, the current deficit would be at least $551.1 million, rather than just $122.6 million. • If the Special Session or Governor’s reductions did not occur, the Rainy Day Fund would have only $43.6 million left.

14. Liquidating the FY 01-02 Deficit • Despite the cutbacks, many programs continue to receive major funding from the FY 00-01 surplus. • About $300 million of that surplus has been used for new programs and investments.

15. Ensuring an Adequate Rainy Day Fund • The Governor is committed to increasing the Rainy Day Fund. • Under the Governor’s deficit reduction plan, as we emerge from the recession the state should still have over $470 million in the Fund to cover shortfalls. • The Governor is proposing to increase the Rainy Day Fund threshold from 5% to 7%.

16. Economic Outlook • Due to better economic diversification, our recessions will now mirror national ones and will not be as deep as earlier years. • What does the future hold? • Our unemployment rate is up from a low of 1.9% to 3.6% currently and is estimated to rise to 4.6%. • We may lose another 13,000 jobs by the end of the fiscal year, for a total loss of 35,000 jobs. • Personal income growth will slow to 3.5% for FY 01-02, but will rebound to 4.3% in FY 02-03. • Retail sales were flat for the fourth quarter of 2001. • Equity markets are still acting whimsically. • Average weekly initial unemployment claims peaked at about 6,000 in October 2001, to below 5,000 in December 2001.

17. Index Index Economic Outlook • Two-thirds (2/3) of all economic activity is generated by consumer spending. • This index is a bellwether for manufacturing purchasing.

18. A Record To Be Proud Of

19. A Record To Be Proud Of

20. The Spending Plan – Adjusted 02-03 Budget • Based on these mixed signals, a blend of healthy optimism and fiscal prudence is the right recipe for capitalizing on the coming recovery. • Governor Rowland is mindful of both the needs of residents for basic services in such times, as well as the accomplishments of the past few years in terms of tax cuts and an improved state business climate. • To safeguard basic services and to repair the FY 02-03 deficit, the Governor recommends a combination of spending reductions, permanent revenue enhancements, and reasonable one-time revenues.

21. The Spending Plan – Adjusted 02-03 Budget • Governor Rowland proposes an adjusted FY 02-03 all funds appropriation of $13.5 billion, about $28 million less than the original appropriation. • The growth rate will be 4.1% over estimated spending this fiscal year.

22. The Spending Plan • The adjusted budget is $94.4 million under the spending cap, leaving a comfortable amount of room to cover deficiencies, based on historical patterns.

23. The Spending Plan • Governor Rowland continues his record of fiscal prudence.

24. Revenue Forecasts • Anticipated revenues are based on prudent and realistic assumptions coming out of the recession.

25. Revenue Forecasts • Connecticut’s largest revenue generators are:

26. Revenue Forecasts • Following the slowdown, personal income tax revenues are expected to rebound modestly in 2003.

27. Revenue Forecasts • Revenues from the Sales & Use Tax will return to a moderate growth pattern.

28. Closing the Gap • Governor Rowland’s adjusted budget closes the entire $633 million gap without prospectively raiding the Rainy Day Fund. • Some of the ways the gap was closed include: • Gross expenditure reductions totaling $204 million offset by $53 million in expansions. • Increasing the cigarette tax to generate $129 million. • One-time transfer of $100 million from three quasi-public sources. • Use of $98 million in Anthem demutualization. • Increased use of tobacco settlement funds of $57 million. • Tax deferrals and other miscellaneous tax/fee increases of $38 million.

29. One-Time Revenues • Between $250 and $300 million of the $633 million hole was closed with one-time revenues. • While not normally a recommended practice, it is a good idea now because: • The one-time revenues add up to only about 2% of total spending. • The one-time revenue is a stopgap until healthy revenue growth returns. • We can avoid reducing important programs during a time of need. • We retain the Rainy Day Fund, just in case the economic picture worsens. • We are also recommending increasing the Rainy Day Fund threshold from 5% to 7% in the future.

30. Tax Changes and Revenue Enhancements • Governor Rowland has a strong record of reducing taxes and continues to resist raising broad-based taxes.

31. Tax Changes and Revenue Enhancements • To deal with revenue shortfalls, Governor Rowland proposes to: • Delay the Gift Tax phase-down until 1/1/04 ($2.6 million in FY 03). • Maintain the Sales Tax on Computer & Data Processing Service at 1% until 6/30/04 ($9.7 million in FY 03). • Delay the increased exemption on single filers for 2 years ($9 million in FY 03). • To both raise revenue, safeguard health and human service programs and reduce teen access to cigarettes, the Governor proposes increased taxes on cigarettes.

32. Tax Changes and Revenue Enhancements • The Governor proposes a one-time cash infusion of $100 million from three quasi-public agencies. • $85 million from CHFA • $7.5 million from CDA • $7.5 million from CT Innovations • Use of $98 million of the proceeds of the sale of Anthem stock. • Escheating unclaimed bottle deposits to the State, $15 million.

33. Education: Developing Our Children’s Great Abilities • Funding for Sheff initiatives to improve urban education and reduce racial isolation will increase from $165.6 million estimated in the current fiscal year to $181.2 million. • For magnet schools, an increase of $12.2 million from this fiscal year’s estimated expenditures, to $45.2 million. In FY 02-03, 10,800 students will be in 33 magnet schools throughout the state, up by 2,600 students in one year. • For charter schools, an increase of $1.8 million from this fiscal year’s estimated expenditures, to $16.3 million. Enrollment is expected to grow in FY 02-03 by 12.5% or 260 students, to 2,320 students. • The Open Choice Program will increase from an estimated expenditure this fiscal year of $7 million to $8.7 million next fiscal year. An additional 400 students will be served in FY 02-03, bringing the number to 2000 students participating. • Early childhood education, early reading success, priority schools, extended school hours, school accountability, and interdistrict cooperation will be maintained at existing levels.

34. Education: Developing Our Children’s Great Abilities • Magnet School Funding Reform • Proposed bill will create a more equitable distribution of funding for the Regional Educational Service Center (RESC) sponsored schools. • School Choice • Connecticut has a large network of private schools, of which the majority are parochial schools. • Approximately 77,000 students attend private school, of whom about 58% are in parochial schools. • This option would allow Connecticut parents whose children attend failing schools to choose a public, charter, magnet, or parochial school. • New state law will build on H.R. 1, No Child Left Behind Act of 2001. • Regional Vocational-Technical Schools • Adjusted budget adds $2.9 million in operating funds and 18 positions; this is in addition to 30 new positions already in the adopted budget. • Adjusted budget adds $925,000 in the Capital Equipment Purchase Fund to properly equip the schools.

35. Education: Developing Our Children’s Great Abilities • Education Cost Sharing Changes • Reduce adopted budget by $46 million. • Reduce from $25 to $15 million for phase-out of the cap. • Net out special education adjustments from appropriation (save $3 million). • Eliminate one-time COLA of $4 million. • After including cap money in the formula, reduce grant by 2%.

36. Education: Developing Our Children’s Great Abilities • Special Education Changes • Increased appropriation of $5 million for caseload, after increasing this fiscal year’s budget after adoption by $6.5 million for additional caseload. • Delay for one year the lowering of the threshold for state funding of per pupil cost. • The threshold would remain at 5 times for FY 02-03. In FY 03-04, the threshold would go to 4.5 times. • Elimination of the special education equity grant, saving $7.5 million. • Special education funding reductions are expected to be offset by additional ($13-14 million) federal special education funding.

37. Education: Developing Our Children’s Great Abilities • Other elementary and secondary education changes: • Capping Adult Education - $1.6 million • Reducing reimbursement rate for RESC leases - $1.1 million • Reducing Regional Educational Service Centers Grant - $329,738 • Eliminating the Transitional School District grant - $1 million • Capping the Public School Transportation grant - $2.2 million • Capping the Non-Public Transportation grant - $240,000 • Reducing funding for Vocational Agriculture grant - $281,670 • Total savings of $6.75 million.

38. Education: Developing Our Children’s Great Abilities • Investments in educational technology: • $7.5 million and $2 million will be available in bonding in each fiscal year for school wiring. • The Connecticut Education Network will receive $4.5 million this fiscal year and $10 million next fiscal year in bonding. • The Digital Library received $1.4 million for this fiscal year from the FY 00-01 surplus. The Governor’s adjusted budget includes an additional $600,000 next fiscal year to continue the program. • Distance learning programs received $1.9 million this fiscal year from last fiscal year’s surplus plus an additional $500,000 general fund appropriation. The FY 02-03 adjusted budget includes $1 million in funding to continue this effort.

39. Education: Developing Our Children’s Great Abilities • Higher Education Block Grants • Increases in the state commitments to the higher education block grants from FY 94-95 to the available FY 01-02 (after rescissions and reduced appropriations) levels: • University of Connecticut from $135 million to $180 million, a 33% increase • Connecticut State University System from $98 million to $130 million, a 33% increase • Community-Technical System from $82 million to $121 million, a 48% increase

40. Education: Developing Our Children’s Great Abilities • Block Grant Reductions from Adopted Budget • In the current fiscal year, between rescissions and November Special Session appropriations reductions, a total of $4.9 million was reduced from the University of Connecticut’s FY 01-02 original block grant appropriation. • The University of Connecticut Health Center saw total reductions in the current fiscal year of about $1 million. The FY 02-03 adopted budget is being modified down by that amount as well. • The Connecticut State University saw total reductions this fiscal year of $3.1 million. The FY 02-03 adjusted budget will reduce the appropriation by $2.8 million. • The Community-Technical Colleges saw total reductions this fiscal year of $2.8 million. The FY 02-03 adjusted budget will reduce the appropriation by $3.0 million. • Total reductions in the block grants from the adopted budget are $11.6 million; total expenditures from estimated FY 01-02 will still increase by $26.6 million in the adjusted budget.

41. Education: Developing Our Children’s Great Abilities Expenditures on Higher Education

42. Education: Developing Our Children’s Great Abilities • Given the significant growth in administrative positions in the CTC and CSU systems, the Governor recommends: • a merger of the administrative structure of the two systems. • a merged Board of Trustees. • a streamlined central office to govern the system. • The merger will be effective January 1, 2003, saving $2.5 million in FY 02-03 and $5.1 million in FY 03-04.

43. Education: Developing Our Children’s Great Abilities • Restructuring the Connecticut Independent College Student Grant: • Private universities whose endowments exceed $100 million will not receive the CICSG grants. • Impacted universities are: Yale, Wesleyan, Connecticut College, and Trinity. • Savings of $2.3 million will result from this change.

44. Education: Developing Our Children’s Great Abilities • Governor Rowland, in his legislative package, is recommending a new program, 21st Century UCONN. • It will be an eleven-year bond program beginning in FY 04-05 with a supplemental bond authorization of $50 million. • The total 11-year program will be a commitment by the state to the University of Connecticut of $1.3 billion. • About $1 billion will be invested at Storrs and the regional campuses, with about $300 million going to the Health Center. • All told, over the 20-year period, a total of $2.28 billion will have been invested in the UCONN system.

45. Education: Developing Our Children’s Great Abilities • As announced in the original biennial budget, Governor Rowland is extending his original commitment to the capital program of the Connecticut State University System (CSU) and the Community-Technical College System (CTCs) by 5 years. • The first capital plan ran from FY 95-96 and expires this fiscal year. It was actually formalized as an initial 5-year plan in FY 97-98. • Since FY 95-96 through the current fiscal year, CSU received a total of $426 million in authorizations to revamp its campuses. The CTCs received over the same time frame $343 million. • Beginning next fiscal year through FY 06-07, Governor Rowland is committing to additional capital dollars of $400 million for CSU and $335 million for CTCs.

46. Education: Developing Our Children’s Great Abilities • Governor Rowland has ensured that over $1.5 billion through FY 01-02 in higher education capital authorizations have passed. • In total, the Governor’s total commitment to higher education capital projects will be almost $3.8 billion. • This commitment has translated into a high level of debt service paid by the State Treasurer on behalf of the higher ed units. • $117.6 million in the current fiscal year, rising to $136.5 million in FY 02-03. • In FY 02-03, $916 million in bond authorizations, including about $100 million in previously authorized school construction bonds and surplus debt avoidance set aside, will be utilized for primary/secondary and higher education purposes.

47. Education: Developing Our Children’s Great Abilities Cost of Higher Education

48. Education: Developing Our Children’s Great Abilities • While $8.7 million was transferred to the Department of Higher Education to match the fundraising efforts of the units for FY 01-02, about $10 million to match the efforts in FY 02-03 was removed. • While no money remains to match the fundraising for next fiscal year, Governor Rowland is committed to ensuring that the public colleges and universities receive the FY 02-03 monies once the Rainy Day Fund is full again and there are available surpluses.

49. Growth In Nursing Home Alternatives $175 $154.5 $150 $140.0 $130.8 $125 $118.3 $108.1 Expenditures ($M) $100 $87.5 $77.4 $71.0 $75 $50 '96 '97 '98 '99 '00 '01 '02 '03 Est. Fcst. Fiscal Year Developing a True Continuum of Long Term Care • Governor Rowland’s FY 01-03 budget expends $154.5 million for alternatives to nursing home care.

50. Developing a True Continuum of Long Term Care • Expanding Home Care Eligibility • $3 million to continue expansion of the Connecticut Home Care Program. • Expanding Assisted Living Options • $5.3 million to continue assisted living in: • Congregate Housing • HUD Complexes • Free-Standing Units