FISCAL ACCOUNTABILITY REPORT FISCAL YEARS 2019 – 2022 A REPORT TO THE APPROPRIATIONS COMMITTEE AND THE FINANCE, REVENUE AND BONDING COMMITTEE PURSUANT TO SECTION 2-36B OF THE CONNECTICUT GENERAL STATUTES BENJAMIN BARNES, SECRETARY OFFICE OF POLICY AND MANAGEMENT NOVEMBER 15, 2018 OFFICE OF POLICY AND MANAGEMENT 2018 FISCAL ACCOUNTABILITY REPORT TABLE OF CONTENTS Page Overview .................................................................................................................................................... 1 Current Year Outlook ................................................................................................................................. 3 Outlook for the Upcoming Biennium ......................................................................................................... 6 General Fund................................................................................................................................. 6 Special Transportation Fund ....................................................................................................... 13 Connecticut’s Economy............................................................................................................... 15 Special Topics .............................................................................................................................. 18 Long-Term Liabilities ................................................................................................................... 20 State Employees Retirement System............................................................................. 21 Teachers’ Retirement System ........................................................................................ 22 Other Post-Employment Benefits .................................................................................. 24 Debt Service ................................................................................................................... 25 Medicaid ..................................................................................................................................... 26 Municipal Aid .............................................................................................................................. 28 State Workforce .......................................................................................................................... 29 Federal Funds .............................................................................................................................. 30 Special Commissions Studying Fiscal and Pension Issues ........................................................... 31 Bonding .................................................................................................................................................... 33 Budget Reserve Fund ............................................................................................................................... 36 Projected Tax Credits ............................................................................................................................... 38 OVERVIEW Section 2-36b of the Connecticut General Statutes requires the Office of Policy and Management and the Office of Fiscal Analysis to annually analyze issues affecting spending and revenue for the current biennium and the three succeeding fiscal years, and to report those analyses to the Appropriations Committee and to the Finance, Revenue and Bonding Committee. By statute, there are seven components of the report: 1. 2. 3. 4. 5. 6. A comparison of the consensus revenue estimate to annual growth in “fixed costs;” Projected tax credits; Estimated deficiencies for the current fiscal year; Projected balance in the Budget Reserve Fund; Projected bond authorizations, allocations and issuances; An analysis of revenue and expenditure trends and of the major cost drivers affecting state spending; and 7. An analysis of possible uses of surplus funds. The information in this report outlines the challenges identified by the Office of Policy and Management that will confront decision-makers when developing future budgets. A summary of findings is below, and more detail can be found in the pages that follow. FY 2019 The General Fund is on track to finish the year with a $254.9 million operating surplus. This surplus, combined with amounts subject to the revenue volatility cap, will be deposited to the Budget Reserve Fund, boosting the state’s reserves from nearly $1.2 billion to almost $2.1 billion by the end of FY 2019. The Special Transportation Fund is expected to finish the year with a $67.3 million operating surplus. The fund balance on June 30, 2019, is projected to grow to $313.0 million. FY 2020 Through FY 2022 As shown in the table below, General Fund revenues in FY 2020 are $1,446.2 million below projected FY 2019 revenues. However, this decline is primarily due to previously enacted policy changes embedded in the forecast. Without those policy changes, General Fund revenue is actually growing in FY 2020 by over $200 million. The largest factor contributing to the decline in revenue is related to the state’s taxation of hospitals, foremost of which is the reduction in the hospital tax rate in FY 2020 which serves to reduce revenue by $516.0 million. Federal grant revenue is also falling by $760.7 million in FY 2020, again primarily related to issues involving the hospital industry whether it is reimbursement related to hospital supplemental payments or one-time revenue received in FY 2019 that will not repeat in FY 2020. In addition, other factors affecting FY 2020 include a greater portion of the Sales Tax on car sales transferring to the Special Transportation Fund ($91.0 million), scheduled tax decreases passed in the FY 2018 and FY 2019 biennial budget ($127.0 million), loss of one-time revenue transfers ($125.2 million), and recommencement of the amortization schedule to pay down the GAAP deficit ($75.5 million). In FY 2021, projected General Fund revenues rise by $214.8 million compared to FY 2020 even after accounting for additional transfers out of the General Fund to accommodate additional car sales tax collections transferring to the Transportation Fund. Scheduled tax decreases passed in the FY 2018 and 1 FY 2019 biennial budget account for another $52.6 million reduction in FY 2021 revenue growth. Without those two factors, revenue growth in FY 2021 would amount to $352.2 million over FY 2020. “Fixed” costs are anticipated to rise by $620 million, $569 million, and $552 million in fiscal years 2020 through 2022. These costs are driven by the following factors: • Decreasing federal support for the expansion population under the Medicaid program, as well as the Children’s Health Insurance Program, • The continued phase-in from level percent of payroll to level dollar amortization of unfunded SERS liabilities (this transition will be complete, and SERS expenditure growth is anticipated to leveloff, after FY 2023), • Continued increases in the Teachers Retirement System (TRS) which are likely to accelerate through the current primary amortization period which ends in FY 2032, • Annualization, in FY 2020, of private provider low-wage COLAs and other rate increases that were implemented in FY 2019, • Rising debt service projections, • A return to the statutory level of contributions for Retired Teachers’ Healthcare and projected growth in retired state employee healthcare requirements, and • Caseload growth in both entitlement and quasi-entitlement services. FINANCIAL SUMMARY YEAR-OVER-YEAR REVENUE GROWTH vs. FIXED COST GROWTH (in millions) GENERAL FUND Revenue Growth FY 2020 vs. FY 2021 vs. FY 2022 vs. FY 2019 FY 2020 FY 2021 $ (1,446.2) $ 214.8 $ (127.9) Fixed Cost Growth Debt Service State Employee Pensions Teacher Pensions State and Teachers OPEB Medicaid Other Entitlements Total Fixed Cost Growth Difference 93.5 115.9 99.9 100.7 169.0 41.0 620.0 $ (2,066.2) $ 169.1 98.8 45.2 75.1 146.6 33.6 568.5 (353.7) $ 230.3 104.1 30.4 43.6 113.7 29.8 551.9 (679.8) SPECIAL TRANSPORTATION FUND FY 2020 vs. FY 2021 vs. FY 2022 vs. FY 2019 FY 2021 FY 2020 $ 118.9 $ 101.3 $ 89.8 Revenue Growth Fixed Cost Growth Debt Service State Employee Pensions Total Fixed Cost Growth Difference $ 2 44.9 36.5 81.4 37.5 $ 74.4 12.5 86.9 14.4 $ 65.8 13.1 79.0 10.8 CURRENT FISCAL YEAR OUTLOOK FY 2019 - GENERAL FUND The adopted budget anticipates a $10.5 million balance from operations during FY 2019. The Office of Policy and Management is projecting an operating surplus of $254.9 million. Projected revenues exceed the budget plan by $260.7 million, while estimated expenditures exceed the budget plan by $16.3 million. FY 2019 - General Fund (in millions) OPM Enacted 11/15/2018 Budget Projection Variance Revenue $ 19,008.7 $ 19,269.4 $ 260.7 Expenditures $ 18,998.2 $ 19,014.5 $ 16.3 Balance from Operations $ 10.5 $ 254.9 $ 244.4 Revenue Revenues reflect the November 13, 2018, consensus forecast, with total revenues projected to exceed the original budget plan by a net $260.7 million. The largest difference between the adopted budget and the consensus forecast is in the estimated and finals portion of the Personal Income Tax, up $284.9 million compared to the budget plan. This additional revenue is offset by a corresponding increase in the volatility cap transfer of resources to the Budget Reserve Fund. The forecast for collections from the withholding portion of the Personal Income Tax is $255.4 million more than budgeted, reflective of strong collections year-to-date due to rising employment levels and better wage growth projected for the fiscal year. All other projected revenue changes net to a positive $5.3 million compared to budgeted revenues. Expenditures and Discussion of Projected Deficiencies OPM is projecting that, in aggregate, the year will end approximately in line with the budget plan. General Fund overruns are largely offset by under-spending, and net to $16.3 million above the budget plan. Projected shortfalls total $54.6 million and consist of the following: • • • • • Department of Emergency Services and Public Protection. A $2.5 million deficiency is anticipated in Personal Services as a result of higher than anticipated overtime costs. Office of the Chief Medical Examiner. A $300,000 deficiency is expected in Personal Services. The appropriation for FY 2019 is less than FY 2018, expenditures are impacted by overtime, and unbudgeted salary increases were approved by the Commission on Medicolegal Investigations for the Chief Medical Examiner and the Deputy Chief Medical Examiner. These costs are partially offset by the expected receipt of a federal Opioid Surge grant during the current fiscal year. Department of Mental Health and Addiction Services. A $5.0 million deficiency is projected in Personal Services, primarily as a result of overtime and staffing costs at Whiting Forensic Hospital and Connecticut Valley Hospital. Office of Early Childhood. A $14.0 million deficiency is projected in the Care4Kids TANF/CCDF account to reflect spending associated with increased federal Child Care Development Fund receipts. Department of Correction. A $27.0 million shortfall is projected. Personal Services is anticipated to have a $15.0 million deficiency, as the revised FY 2019 appropriation for Personal Services is $20 3 • million less than projected expenditures for FY 2018. The Other Expenses account will be $1.0 million over budget, and the Inmate Medical account faces a projected shortfall of $11.0 million. It should be noted that the enacted budget assumes saving $8 million immediately through an RFP process for inmate medical services. While many of these services have been brought in-house to DOC, some are being put out to bid via RFP. The transition from UConn to DOC will take some time and may entail costs, making achievement of overall savings unlikely before the next biennium. Department of Children and Families. A net deficiency of $5.8 million is projected across a variety of accounts. This shortfall is due to three factors: 1.) the lack of funding in the revised FY 2019 budget to honor the state’s commitment to the 2017 Revised Juan F. Exit Plan, which in part requires adequate support for community-based programming to address service needs in order to implement the Exit Plan’s outcome measures; 2.) the legislature did not concur with the Governor’s recommendation to restore to DCF a portion of Juvenile Justice Outreach Services funding that was moved to the Judicial Branch in the biennial budget. DCF is committed to maintaining important clinical interventions and other services utilized by non-delinquent youth, and this programming further enables the department to meet Juan F. requirements; and 3.) the need to support unanticipated other expenses to implement corrective actions at the Solnit Children’s Center. Offsetting the shortfalls noted above are funds that will go unspent in agency budgets that exceed the level envisioned in the budget plan by $58.3 million. These include: • • • • Office of Policy and Management. A total of $3.3 million will lapse, with $900,000 in the State-Owned PILOT account and $2.4 million in the Municipal Transition account after all required payments have been made. Department of Social Services. A net total of $35.5 million is projected to lapse. Given favorable expenditure trends, the Medicaid program is expected to end the year $25.0 million under budget, the Connecticut Home Care Program is projected to lapse $5.0 million, and the Temporary Family Assistance program is expected to lapse $5.5 million. State Comptroller – Fringe Benefits. A net lapse of $22.3 million is anticipated and is attributable mainly to lower than anticipated expenditures for Active and Retired State Employee Healthcare as well as recoveries in the Higher Education Alternative Retirement System that exceed the level assumed in the adopted budget. Department of Administrative Services – Workers’ Compensation Claims. A $300,000 lapse is projected as a result of lower than anticipated claims costs during the first quarter of the fiscal year. Additionally, OPM projects $20.0 million in unappropriated expenditures for Adjudicated Claims, which impacts General Fund balance. Of this amount, $6.5 million is for a settlement that was delayed from late FY 2018 into FY 2019, and the remainder is for payment of other claims. FY 2019 - SPECIAL TRANSPORTATION FUND The adopted budget anticipates a $3.2 million balance from operations. OPM estimates a $67.3 million operating surplus for FY 2019, which would result in a $313.0 million Transportation Fund balance on June 30, 2019. Projected revenues from the Oil Companies Tax exceed the budget by $50.2 million, and all other revenues net to $13.9 million above the budget plan. There are no significant deviations in projected expenditures compared to the budget plan. 4 FY 2019 - OTHER APPROPRIATED FUNDS Agency budgets in several other appropriated funds also are projected to experience shortfalls totaling nearly $1.6 million. In each case, the enacted budget did not make technical adjustments to fringe benefit and indirect overhead appropriations to match the recovery rates promulgated by the State Comptroller. • • • Department of Banking. A net deficiency of $415,423 is projected in this industry-funded agency. Shortfalls of $690,000 in Fringe Benefits and $150,423 in Indirect Overhead are partially offset by a $425,000 lapse in Personal Services. Department of Insurance. A net deficiency of $178,911 is projected in this industry-funded agency. A shortfall of $373,812 is projected in Fringe Benefits, offset by $194,901 over-budgeted in Indirect Overhead. Workers’ Compensation Commission. A net deficiency of $979,097 is projected in this industry-funded agency. Shortfalls of $1,330,400 in Fringe Benefits and $148,657 in Indirect Overhead are partially offset by a $500,000 lapse in Personal Services. If the enacted budget had included appropriation adjustments to accommodate the revised recovery rates, the annual industry assessments in these funds would have reflected the expected costs of oversight and regulatory functions of the affected agencies. Because of the various statutory provisions applicable to the process and timing of industry assessments, it is unlikely that deficiency appropriations in FY 2019 could be offset via adjusted assessments late in the fiscal year; appropriations unmatched by revenue are therefore expected to impact the cumulative balances of these funds. FY 2019 - BUDGET RESERVE FUND Based on projections through November 15, 2018, OPM estimates the transfer to the Budget Reserve Fund (BRF) pursuant to the revenue volatility cap will be $648 million in FY 2019, which, when combined with the projected General Fund surplus from FY 2019 operations, will increase the state’s reserves to nearly $2.1 billion by fiscal year end. (See page 19 for more information about the revenue volatility cap.) (in millions) $ 1,185.3 BRF Ending Balance - FY 2018 Projected Operating Surplus - FY 2019 (11/15 Est.) 254.9 Volatility Cap Deposit - FY 2019 (11/15 Est.) 648.0 $ Estimated BRF Total - FY 2019 5 2,088.2 OUTLOOK FOR FISCAL YEAR 2020 THROUGH FISCAL YEAR 2022 BACKGROUND AND METHODOLOGY Section 2-36b of the Connecticut General Statutes requires the Office of Policy and Management and the Office of Fiscal Analysis to annually analyze the state’s expenditure and revenue situation for the current biennium and the three succeeding fiscal years, and to report those analyses to the Appropriations Committee and to the Finance, Revenue and Bonding Committee. By statute, there are seven components of the report: 1. The level of spending changes from current year spending allowed by consensus revenue estimates in each fund, any changes to current year spending necessary because of “fixed cost drivers,” and the total change to current year spending required to accommodate fixed cost drivers without exceeding current revenue estimates. The law specifies that “fixed cost drivers” may include debt service, pension contributions, retiree health care, entitlement programs, and federal mandate costs; 2. Projected tax credits to be used in the current biennium and the next ensuing three fiscal years, and the assumptions on which such projections are based; 3. A summary of any estimated deficiencies in the current fiscal year, the reasons for such deficiencies, and the assumptions upon which such estimates are based; 4. Projected balance in the Budget Reserve Fund at the end of each uncompleted fiscal year of the current biennium and the next ensuing three fiscal years; 5. Projected bond authorizations, allocations and issuances in each of the next ensuing five fiscal years and their impact on the debt service of the major funds of the state; 6. An analysis of revenue and expenditure trends and of the major cost drivers affecting state spending, including identification of any areas of concern and efforts undertaken to address such areas, including, but not limited to, efforts to obtain federal funds; and 7. An analysis of possible uses of surplus funds, including, but not limited to, the Budget Reserve Fund, debt retirement and funding of pension liabilities. Each of the topic areas identified in statute is addressed in the pages that follow. FY 2020 TO FY 2022 - GENERAL FUND OUTLOOK Pursuant to Section 2-36b of the Connecticut General Statutes, this report compares year-over-year revenue growth to growth in fixed costs. Revenues are derived from the November 13, 2018, consensus forecast, and are explained later in this document. OPM’s approach for estimating “fixed costs” is explained in more detail below. Assumptions Used to Develop Growth Estimates for Fixed Costs The FY 2020 column in the table that follows represents the anticipated increase in spending versus the FY 2019 estimated level. The FY 2021 and FY 2022 columns reflect the estimated increases over FY 2020 and FY 2021 respectively. DEPARTMENT OF MENTAL HEALTH AND ADDICTION SERVICES • General Assistance Managed Care - Reflects leap year costs in FY 2020 and anticipated caseload growth. • Medicaid Adult Rehabilitation Option - Reflects anticipated inflation. 6 DEPARTMENT OF SOCIAL SERVICES • HUSKY B Program, Medicaid, Old Age Assistance, Aid to the Blind, Aid to the Disabled, Temporary Family Assistance, Connecticut Home Care Program, Protective Services for the Elderly, State Administered General Assistance, and Community Residential Services - Reflect anticipated cost and caseload changes based on current trends, as well as annualization of adjustments. • Medicaid, Old Age Assistance, Aid to the Blind, Aid to the Disabled, and Community Residential Services - Reflect leap year payments in FY 2020. • Medicaid - Reflects decrease in federal reimbursement for the Medicaid expansion population (HUSKY D) in accordance with the provisions of the Affordable Care Act (from 100% in 2016 to 95% in 2017, 94% in 2018, 93% in 2019 and 90% in 2020). • HUSKY B Program - Reflects provisions in the Affordable Care Act and the January 2018 Continuing Resolution, which increased federal reimbursement for the Children's Health Insurance Program (CHIP) by 23 percentage points effective October 1, 2015 through September 30, 2019 and 11.5 percentage points effective October 1, 2019 through September 30, 2020. For Connecticut, reimbursement is increased from 65% to 88% for the period ending September 30, 2019 and from 65% to 76.5% for the period ending September 30, 2020. OFFICE OF EARLY CHILDHOOD • Birth to Three and Care4Kids-TANF/CCDF - Reflects no increase over current year appropriations, since eligibility for these programs is subject to some level of administrative control. TEACHERS’ RETIREMENT BOARD • Retirement Contributions - FYs 2020 and 2021 reflect the actuarially determined employer contributions from the pension valuation as of June 30, 2018. FY 2022 reflects the increase estimated by the plan actuary. • Retiree Health Service Cost - Reflects the state share returning to the statutory one-third of costs for the basic health plan starting in FY 2020 and the medical inflation rate. • Municipal Retiree Health Insurance - Reflects the state share returning to the statutory one-third of the subsidy starting in FY 2020. FY 2022 reflects level funding based on flat volume. DEPARTMENT OF CHILDREN AND FAMILIES • Board and Care for Children - Foster & Adoption - Reflects anticipated growth in the number of children in foster care and subsidized adoptive and guardianship homes, and additional postsecondary education costs for children adopted after January 1, 2005. • Board and Care for Children - Short Term and Residential, No Nexus Special Education - Reflect impact of regulatory increases in per diem rates for room and board, and special education at instate residential treatment facilities. • Board and Care for Children - Adoption, Foster Care & Short Term and Residential - Board and Care for Children accounts have been adjusted in FY 2020 for the cost of an additional per diem payment due to leap year. STATE TREASURER – DEBT SERVICE • Debt Service - Reflects Treasurer’s estimates of debt service requirements for FY 2019 through FY 2022 adjusted to reflect reduced issuance in order to comply with the bond covenant based on the assumption that both refunding debt and transportation related general obligation debt are subject to the issuance cap. • Municipal Restructuring - Includes the state’s required payment for Hartford’s municipal 7 assistance. Note that in FY 2019, a portion of Hartford’s municipal assistance was funded via a separate appropriation in the Office of Policy and Management. STATE COMPTROLLER – FRINGE BENEFITS • State Employees Retirement Contributions - FY 2020 reflects the actuarially determined employer contribution from the pension valuation as of June 30, 2018. FYs 2021 and 2022 reflect estimated employer contributions from the pension actuary. • Higher Education Alternate Retirement System - Reflects estimated expenditure requirements. • Pensions and Retirements - Other Statutory - Reflects estimated expenditure requirements with 3% COLA. • Judges and Compensation Commissioners Retirement - Reflects an estimate of the actuarially determined employer contribution. • Retired State Employee Health Service Costs - FYs 2020 and 2021 reflect estimated expenditure requirements. FY 2022 reflects medical inflation. Based on the assumptions explained above, OPM’s estimates of “fixed cost drivers” are shown in the following table. PROJECTED GROWTH IN EXPENDITURES FIXED COST DRIVERS (Amounts Represent Year over Year Change) GENERAL FUND FY 2020 Increase over FY 2019 FY 2021 Increase over FY 2020 FY 2022 Increase over FY 2021 DMHAS - General Assistance Managed Care $ $ $ DMHAS - Medicaid Adult Rehabilitation Option DSS - HUSKY B Program DSS - Medicaid DSS - Old Age Assistance DSS - Aid To The Blind DSS - Aid To The Disabled DSS - Temporary Assistance to Families - TANF 607,642 426,503 485,135 238,375 248,053 4,400,000 6,360,000 257,975 480,000 169,002,000 146,550,000 113,700,000 3,742,111 2,111,706 2,335,882 (42,712) 837 3,071 (1,234,773) 1,500,657 1,222,278 (852,054) 881,211 892,531 DSS - Connecticut Home Care Program 6,120,000 330,000 1,370,000 DSS - Community Residential Services 62,447,553 16,327,880 17,988,000 DSS - Protective Services to the Elderly DSS - State Administered General Assistance OEC - Birth to Three (184,437) 28,116 12,577 594,163 293,710 298,593 - OEC - Care4Kids TANF/CCDF (26,378,810) - - - - TRB - Retirement Contributions 99,869,000 45,246,000 30,403,000 TRB - Retirees Health Service Cost 11,426,050 3,848,100 1,193,976 887,447 3,520 - (263,782) 37,762 38,517 TRB - Municipal Retiree Health Insurance Costs DCF - No Nexus Special Education DCF - Board and Care for Children - Adoption 3,278,283 2,485,607 2,779,182 DCF - Board and Care for Children - Foster 4,324,503 1,569,780 1,008,631 DCF - Board and Care for Children - Short-term and Residential 4,310,420 1,031,041 623,121 DCF - Individualized Family Supports (125,042) OTT - Debt Service OTT - UConn 2000 - Debt Service 139,773,650 139,803,511 5,269,450 18,681,450 7,486,031 OTT - CHEFA Day Care Security - - OTT - Pension Obligation Bonds - TRB - - OTT - Municipal Restructuring 25,666,625 OSC - Adjudicated Claims (20,000,000) OSC - State Employees Retirement Contributions 104,201,856 OSC - Higher Education Alternative Retirement System OSC - Judges and Compensation Commissioners Retirement TOTAL - GENERAL FUND $ 8 (1,636,919) - - 97,285,148 316,755 OSC - Retired State Employees Health Service Cost 84,680,000 10,648,004 10,000,000 OSC - Pensions and Retirements - Other Statutory - 62,570,091 102,530,507 - - 55,131 60,874 1,371,374 1,439,943 1,511,940 88,422,000 71,288,000 42,365,450 619,984,088 $ 568,451,809 $ 551,893,863 General Fund Revenue The November consensus revenue estimate shows General Fund revenues at $17.8 billion in FY 2020, $18.0 billion in FY 2021, and $17.9 billion in FY 2022. The table below shows the detailed revenue estimates. PROJECTED REVENUES Consensus Revenue Forecast - November 13, 2018 (In Millions) Taxes Personal Income - Withholding Personal Income - Estimates & Finals Sales & Use Tax Corporation Tax Pass-through Entity Tax Public Service Tax Inheritance & Estate Tax Insurance Companies Tax Cigarettes Tax Real Estate Conveyance Tax Alcoholic Beverages Tax Admissions & Dues Tax Health Provider Tax Miscellaneous Tax Total Taxes Less Refunds of Tax Less Earned Income Tax Credit Less R&D Credit Exchange Total - Taxes Less Refunds General Fund FY 2019 $ 6,403.1 3,244.8 4,211.6 969.2 600.0 230.8 176.2 234.3 375.5 209.4 63.0 41.8 1,049.2 20.2 $ 17,829.1 (1,287.3) (94.2) (6.4) $ 16,441.2 FY 2020 6,498.4 2,972.7 4,203.5 928.6 600.0 237.7 155.8 237.4 356.4 217.5 63.4 42.1 534.0 20.7 $ 17,068.2 (1,391.6) (97.3) (6.7) $ 15,572.6 FY 2021 $ 6,633.8 3,051.8 4,218.6 992.7 600.0 244.7 134.2 239.6 338.8 224.4 63.8 42.4 535.5 21.2 $ 17,341.5 (1,460.3) (100.6) (6.8) $ 15,773.8 FY 2022 $ 6,774.3 3,133.1 3,902.7 971.7 600.0 251.9 126.0 241.8 322.0 232.7 64.1 42.7 536.9 21.6 $ 17,221.5 (1,530.8) (104.0) (7.7) $ 15,579.0 $ $ $ Other Revenue Transfers-Special Revenue Indian Gaming Payments Licenses, Permits, Fees Sales of Commodities Rents, Fines, Escheats Investment Income Miscellaneous Less Refunds of Payments Total - Other Revenue 352.7 223.6 292.6 29.1 151.1 29.8 174.1 (63.1) $ 1,189.9 Other Sources Federal Grants Transfer From Tobacco Settlement Transfers From (To) Other Funds Transfers to BRF - Volatility Adjustment Total - Other Sources $ 2,097.8 110.2 78.3 (648.0) $ 1,638.3 $ Total - General Fund Revenues $ 19,269.4 $ 17,823.2 $ 9 $ $ 360.2 201.2 322.7 30.2 153.4 30.9 178.1 (64.3) 1,212.4 $ 368.2 200.3 300.6 31.0 155.7 31.4 181.7 (65.7) $ 1,203.2 373.8 199.3 331.4 31.8 158.1 31.9 185.4 (67.0) $ 1,244.7 1,337.1 110.0 (130.8) (278.1) 1,038.2 $ 1,346.5 108.6 (130.8) (263.3) $ 1,061.0 $ 1,353.9 107.6 (130.8) (244.3) $ 1,086.4 $ 18,038.0 $ 17,910.1 The November 13, 2018, consensus revenue forecast assumes that General Fund revenues will experience economic growth rates ranging from 0.6% to 2.6% from FY 2020 to FY 2022. Economic growth rates are defined as baseline revenue growth prior to any state policy changes. Absent any recession, the growth rates remain conservative and well below growth experienced in prior recoveries. The 0.6% growth projected for FY 2020 is driven by the expectation that the Estimates and Finals component of the Personal Income Tax will revert to an average level of collections compared to the record amount received in FY 2018 and the still elevated amount projected to be received in FY 2019. Economic Growth Rates for General Fund Tax Revenues The following table shows estimated growth rates in each tax type implied by the November 13th consensus revenue forecast. The growth rates represent changes over prior year collections. Declines in FY 2019 in the estimates and finals component of the Personal Income Tax and in the Inheritance and Estate Tax are relative to the extraordinary level of collections in FY 2018. ECONOMIC GROWTH RATES FOR PROJECTED TAX REVENUES As Estimated by OPM Based Upon the November 13, 2018 Consensus Revenue Forecast (Percent Change) General Fund Taxes Personal Income Tax - Withholding Personal Income Tax - Estimates & Finals Sales & Use Tax Corporation Tax Public Service Tax Inheritance & Estate Tax Insurance Companies Tax Cigarettes Tax Real Estate Conveyance Tax Alcoholic Beverages Tax Admissions & Dues Tax Health Provider 10 FY 2019 FY 2020 FY 2021 FY 2022 4.0 2.3 2.4 2.4 -16.8 -8.0 2.2 2.2 2.0 2.4 2.3 2.5 3.7 2.6 3.2 2.6 0.0 2.4 2.4 2.4 -16.6 1.8 2.8 2.9 1.5 1.5 1.5 1.5 -4.6 -5.1 -4.9 -5.0 3.1 3.9 3.5 3.5 0.5 0.5 0.5 0.5 1.0 0.7 0.7 0.7 0.9 0.9 1.0 0.9 Personal Income Tax – Withholding Personal Income Tax collections from paycheck withholding tends to be relatively stable in nonrecessionary periods, reflecting changes in revenue as wages rise. Modest wage growth is projected during the upcoming biennium, and revenues are, in turn, expected to increase, but at a lower level. Personal Income Tax – Estimates and Finals Collections The volatile estimates and finals component of the Personal Income Tax typically represents one-third of total income tax collections. Receipts from this revenue source are highly correlated with capital gains and, as a result, collections experience wide fluctuations year-to-year in response to market conditions and changes in tax policy. The graph at right depicts this correlation. 11 $2,658.0 $586.8 $3,430.2 $3,164.1 $3,588.1 $3,498.1 $3,294.4 $3,043.3 $2,685.0 $2,308.8 $3,135.0 $2,230.6 $2,616.6 $2,322.0 $1,943.5 $1,588.4 $1,361.7 $1,230.6 $1,785.8 Millions $4,621.3 The current FY 2019 forecast calls for $3,224.8 million in estimates and finals collections. Through October 31, the state has collected $586.8 million, or 18% of the total forecasted amount. Over 30% of these collections are received in April when final tax returns are filed, concentrating volatility into the last quarter of the fiscal year. In FY 2009 alone, as the recession gripped the country, Connecticut’s estimates and finals collections fell by Personal Income Tax - Estimates and Finals Collections $5,000 $904.4 million. Excluding the Yet to be Collected impact of an enacted tax increase (as of 10/31/2018) $4,000 on millionaires, estimates and finals collections fell an additional $475.4 million in FY 2010, for a $3,000 total two-year decline of approximately $1.4 billion, or 44.5% from the 2008 peak. FY $2,000 2018 collections are anticipated to be an outlier due to $1,000 extraordinary collections resulting from repatriation of offshore hedge fund income and investor $0 behavior in anticipation of the Tax '01 '02 '03 '04 '05 '06 '07 '08 '09 '13 '14 '15 '16 '17 '18 '19 '10 '11 '12 Est. Fiscal Year Cuts and Jobs Act of 2017. Sales and Use Tax Revenue from the Sales and Use Tax is the second largest revenue source for the General Fund. The forecast for this tax projects growth in the mid 2% range over the next few fiscal years, as shown in the following graph. Each 1.0% change in the Sales and Use Tax growth rate results in a revenue change of about $45 million. 12 FY 2020 TO FY 2022 - SPECIAL TRANSPORTATION FUND OUTLOOK OPM’s estimates of “fixed cost drivers” in the Special Transportation Fund are as follows: PROJECTED GROWTH IN EXPENDITURES FIXED COST DRIVERS (Amounts Represent Year over Year Change) SPECIAL TRANSPORTATION FUND FY 2020 Increase over FY 2019 FY 2021 Increase over FY 2020 FY 2022 Increase over FY 2021 OTT - Debt Service $ $ $ OSC - State Employees Retirement Contributions 44,856,517 74,357,998 36,523,058 TOTAL - SPECIAL TRANSPORTATION FUND $ 81,379,575 65,837,513 12,524,000 $ 86,881,998 13,149,600 $ 78,987,113 Revenue The November consensus forecast estimates Special Transportation Fund revenues at $1.8 billion in FY 2020, $1.9 billion in FY 2021, and $2.0 billion in FY 2022. The table below shows the detailed revenue estimates. PROJECTED REVENUES Consensus Revenue Forecast - November 13, 2018 (In Millions) Special Transportation Fund Taxes Motor Fuels Tax Oil Companies Tax Sales & Use Tax Sales Tax - DMV Total Taxes Less Refunds of Taxes Total - Taxes Less Refunds Other Sources Motor Vehicle Receipts Licenses, Permits, Fees Interest Income Federal Grants Transfers From (To) Other Funds Less Refunds of Payments Total - Other Sources Total - STF Revenues FY 2019 501.1 330.0 362.3 86.8 $ 1,280.2 (13.6) $ 1,266.6 FY 2020 501.6 346.5 460.7 87.6 $ 1,396.4 (14.3) $ 1,382.1 FY 2021 499.1 354.3 553.5 88.5 $ 1,495.4 (15.0) $ 1,480.4 FY 2022 496.7 364.0 633.1 89.4 $ 1,583.2 (15.8) $ 1,567.4 $ $ $ $ $ $ 252.5 141.4 22.4 12.1 (5.5) (4.9) 418.0 $ 1,684.6 $ $ $ 254.4 142.1 23.3 12.1 (5.5) (5.0) 421.4 1,803.5 $ $ 256.4 142.7 24.2 11.8 (5.5) (5.2) 424.4 $ 1,904.8 $ $ 258.4 143.2 25.1 11.0 (5.5) (5.0) 427.2 $ 1,994.6 Economic Growth Rates for Special Transportation Fund Tax Revenues Modest growth is anticipated over the next few years in the key taxes that support the Special Transportation Fund. The table below portrays estimated growth rates for the fund’s major tax sources. 13 ECONOMIC GROWTH RATES FOR PROJECTED TAX REVENUES As Estimated by OPM Based Upon the November 13, 2018 Consensus Revenue Forecast (Percent Change) Special Transportation Fund Taxes Motor Fuels Tax Oil Companies Tax Sales and Use Tax Sales Tax - DMV FY 2019 FY 2020 FY 2021 FY 2022 0.3 0.1 -0.5 -0.5 4.8 5.0 2.3 2.7 2.0 2.4 2.3 2.5 0.9 1.0 1.0 1.0 Motor Fuels Tax The Motor Fuels Tax represents the MOTOR FUELS TAX TRENDS single largest revenue source for ECONOMIC GROWTH RATES OF THE MOTOR FUELS TAX the Transportation Fund at 30.7% 5.0% of total revenues in FY 2018. The tax includes 25 cents per gallon tax on 2.9% 3.0% gasoline fuel and 43.9 cents per gallon tax on diesel fuel. Nominal 1.8% 1.1% 0.9% revenue growth of the Motor Fuels 1.0% 0.2% 0.3% Tax since FY 2009 to FY 2018 has 0.1% been only 1.0%, equivalent to less -1.0% -0.5% -0.5% than 0.1% growth per fiscal year -1.1% -1.2% -0.8% over the past 10 years. Growth in -1.9% -3.0% this revenue source is highly influenced by economic conditions, the price of motor fuels, and the -5.0% '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 fuel economy of the existing fleet. Est. Fcst. Fcst. Fcst. The last few fiscal years have shown Fiscal Year positive growth in this revenue source, but this growth trend is not indicative of anticipated long-term prospects for the motor fuels tax. Instead, it is anticipated that growth will turn negative as consumer behavior changes when prices begin to rise and by greater use of alternatively powered vehicles, returning to rates seen before the 2008 recession. Since FY 2015, new revenue sources have been added to the Special Transportation Fund in order to address this lack of growth and reduce the Special Transportation Fund’s reliance on a single slow growing revenue source. In FY 2018, motor fuels tax revenue was 30.7% of the total revenue deposited in the Special Transportation Fund, down from 47.9% in FY 2009. LONG-TERM OUTLOOK FOR THE SPECIAL TRANSPORTATION FUND The near term health of the Special Transportation Fund (STF) is strong in large part due to various revenue enhancements and growth in the oil prices. Over the next four years the cumulative fund surplus will grow from an estimated $313.0 million in FY 2019 to $518.3 million in FY 2022. However, slow growth in the STF’s major revenue sources, such as the motor fuels tax, will not be able to keep up with anticipated 14 growth in future construction costs and maintenance. Alternative revenue sources or financing will be needed to ensure the long-term health of the fund. SPECIAL TRANSPORTATION FUND - STATEMENT OF FINANCIAL CONDITION (In Millions) Actual & Projected Revenues Motor Fuels Tax, Motor Vehicle Receipts, Licenses, Permits, Fees Sales & Use Tax Sales Tax - DMV Oil Companies Tax Federal Grants Interest Income Transfers from / (to) Other Funds Total Revenues Refunds Total Net Revenues FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 $ 894.8 $ 895.0 $ 898.1 $ 898.2 $ 898.3 327.5 362.3 460.7 553.5 633.1 85.9 86.8 87.6 88.5 89.4 312.5 330.0 346.5 354.3 364.0 12.2 12.1 12.1 11.8 11.0 17.7 22.4 23.3 24.2 25.1 (5.5) (5.5) (5.5) (5.5) (5.5) $1,645.0 $1,703.1 $1,822.8 $1,925.0 $2,015.4 (14.9) (18.5) (19.3) (20.2) (20.8) $1,630.1 $1,684.6 $1,803.5 $1,904.8 $1,994.6 Projected Debt Service and Expenditures Projected Debt Service on the Bonds DOT Budgeted Expenses DMV Budgeted Expenses Other Budget Expenses Program Costs Paid from Current Operations Estimated Unallocated Lapses Total Expenditures 575.0 639.9 59.7 195.8 11.5 0.0 1,482.0 645.7 683.5 65.4 221.1 13.6 (12.0) 1,617.3 690.6 705.0 67.9 259.4 21.0 (12.0) 1,731.9 764.9 721.7 70.9 276.9 21.0 (12.0) 1,843.4 830.8 721.7 70.9 289.9 21.0 (12.0) 1,922.3 Excess (Deficiency) 148.1 67.3 71.6 61.4 72.3 Cumulative Excess (Deficiency) 245.7 313.0 384.6 446.0 518.3 Revised Debt Service Coverage Ratio 2.83 2.61 2.61 2.49 2.40 Note: FY 2022 assumes growth in fixed costs only. Fixed costs includes debt service and state employees retirement contributions. THE ECONOMY Connecticut’s recovery from the Great Recession of the late 2000’s continues. While the state reached full recovery in January 2018 of all private sector jobs lost during the recession, when public sector jobs are included the total job recovery rate stands at 89.9% as of September 2018. Connecticut’s unemployment rate in September 2018 was 4.2%, compared to 3.7% nationally. Employment recovery varies significantly by region, from 131.4% in Hartford to 21.8% in Enfield. As of September 2018, three labor market areas in Connecticut have seen Job Recovery by CT Labor Market Area From Pre-Recession Peak to September 2018 Hartford New Haven Danbury Bridgeport-Stamford-Norwalk Danielson/Northeast* Norwich-New London-Westerly Torrington/Northwest* Waterbury Enfield* Connecticut * Not s ea s ona l l y a djus ted Source: CT Dept. of La bor 15 131.40% 114.40% 104.30% 83.30% 62.50% 44.60% 38.20% 34.40% 21.80% 89.90% full job recovery from the recession: Hartford, New Haven, and Danbury. 1 Employment and Wages – Strong Recent Employment Recovery But Tepid Wage Growth Connecticut’s post-recession employment growth is roughly the same as it was pre-recession. However, average annual wages are growing at 1.5% per year in the post-recession period compared to 4.0% per year before the recession. In FY 2018, employment grew 0.3% while the average annual wage grew 1.8%. 2 As of September 2018, Connecticut has recovered 89.9% of jobs lost during the recession. Employment growth since the recession has, however, been skewed toward lower-wage industries, especially when compared to the jobs lost during the recession. 3 Housing The housing market similarly remains below its pre-recession peak. Median prices on existing homes fell 12.2% from about $323,629 in the second quarter of 2006 to about $284,147 in the second quarter of 2018. Total home sales remain 42.9% below the pre-recession peak. 1 Sources: IHS, Bureau of Labor Statistics. Source: IHS. Average annual wage is not adjusted for inflation. 3 Source: Bureau of Labor Statistics. Higher-Wage Industries include: Management of Companies and Enterprises; Finance and Insurance; Professional, Scientific, and Technical Services; Information; Wholesale Trade; and Manufacturing. Mid-Wage Industries include: Real Estate and Rental & Leasing; Construction and Mining; Government; Educational Services; Transportation, Warehousing, and Utilities; and Health Care and Social Assistance. 2 16 Gross State Product and Population Connecticut’s real gross state product (GSP), which is a measure of all goods and services produced in Connecticut, fell 9.3% during the Great Recession. As seen in the following graph, Connecticut’s real GSP continued to fall even after the end of the recession and currently stands below 2004 levels. Connecticut’s total population also fell by 0.4% between 2013 and 2016, but held steady in 2017. Connecticut's Real GSP and Total Population 3,630.0 3,610.0 250.0 3,590.0 3,570.0 240.0 3,550.0 230.0 3,530.0 3,510.0 220.0 3,490.0 210.0 200.0 2003-Q3 Population (Thousands) Real GSP (Billions of 2009 $) 260.0 3,470.0 3,450.0 2005-Q3 2007-Q3 2009-Q3 2011-Q3 Population 2013-Q3 2015-Q3 2017-Q3 Real Gross State Product (GSP) The table below compares Connecticut’s growth since the last recession to states in the region and to the national average. In essentially all indicators Connecticut is the slowest or one of the slowest in growth. In summary, Connecticut’s economic recovery continues from the last recession, but we trail the region and the U.S. Growth in Various Economic Indicators (2010 to 2017) Connecticut Maine Massachusetts New Hampshire New Jersey New York Rhode Island Vermont United States Employment* 5.4% 5.4% 13.5% 9.9% 8.7% 12.5% 9.3% 5.9% 14.2% Population 0.2% 0.7% 4.5% 2.0% 2.3% 2.2% 0.7% -0.3% 5.2% Home Sales 19.6% 34.7% 22.7% 29.3% 37.9% 13.4% 31.5% 29.2% 32.5% Home Prices 0.8% 17.1% 26.5% 20.5% 5.9% 13.6% 18.4% 11.6% 43.3% Real GSP -3.3% 3.7% 14.3% 10.7% 5.6% 8.9% 4.9% 5.9% 14.3% * Growth between 2010 to 2018 Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, IHS Connecticut’s Economic Projections The following table shows projections for various economic indicators for Connecticut over the biennium. Growth in real GSP is projected to remain below 2% over the forecast period. However, personal income and wages and salaries growth showed some recent strength and is anticipated to remain close to 4% over the biennium and beyond. Connecticut’s employment growth is projected to peak at 1.2% in FY 2019, 17 but then slow and decline by 0.2% in FY 2022. The unemployment rate, however, is expected to hold steady at approximately 4% over the forecast period. The state’s population remains flat through FY 2020, then slightly increases in the out-years by 0.1%. Connecticut Economic Indicators (Year-Over-Year Changes) Real G.S.P. Personal Income Wages & Salaries Unemployment Rate Total Employment Population U.S. C.P.I. - U 2016-17 -0.5% 1.8% 0.4% 4.9% 0.2% -0.1% 1.9% 2017-18 1.7% 3.6% 2.1% 4.5% 0.3% 0.0% 2.2% 2018-19 1.6% 3.5% 3.0% 4.2% 1.2% 0.0% 2.5% 2019-20 1.7% 4.1% 4.0% 3.9% 0.6% 0.0% 2.3% 2020-21 1.4% 3.6% 4.0% 3.9% 0.1% 0.1% 1.9% 2021-22 1.3% 3.7% 3.9% 4.1% -0.2% 0.1% 2.3% Source: IHS, as of 11/5/2018 These projections need to be tempered with the strong possibility of a national recession. Since 1945, on average, a recession occurs about every six years (from start to start). The last recession began in December 2007, which means the nation is currently 59 months past the national average for a recession to commence. In addition, the yield curve, which is the spread between the 10-year and 2-year treasury yield, has narrowed. An inverted yield curve is a strong indicator of a recession. The Federal Reserve has raised interest rates eight times since the last recession, and is anticipated to continue to do so. These factors in combination portend the possibility of a recession sometime during the next few years. SPECIAL TOPICS The 2017 and 2018 legislative sessions saw enactment of several caps and limitations that will impact budgeting for FY 2020 – FY 2021 and subsequent biennia. These measures include adopting definitions that give effect to the constitutional spending cap, a limitation on how much revenue can be appropriated, and a measure that directs above-average collections from volatile revenue sources to the Budget Reserve Fund. A brief description of the caps and limitations follows. Spending Cap The state’s constitutional and statutory “spending” or “expenditure” cap is, in reality, a limit on the amount of appropriations the General Assembly can authorize in a given year. The cap limits growth in general budget expenditures to the greater of the average five-year increase in personal income or the increase in inflation. 4 4 "Increase in personal income" is defined as the compound annual growth rate of personal income in the state over the preceding five calendar years. "Increase in inflation" is defined as the increase in the consumer price index for all urban consumers, all items less food and energy, during the preceding calendar year. "General budget expenditures" are defined as expenditures from all appropriated funds, excluding the following: debt service; deposits to the Budget Reserve Fund; expenditures of federal funds; federally mandated or court ordered expenditures (in their first year); expenditures for federal programs for which the state receives federal matching funds (in their first year); payment of the unfunded liability for the state employee and judicial retirement systems through FY 2022; and payment of the unfunded liability for teachers through FY 2026. 18 Given the state’s low growth in personal income over the past few years, the core consumer price index is the limiting factor in FY 2018 and FY 2019. Personal income is projected to be the limiting factor in fiscal years 2020, 2021, and 2022. The enacted budget for FY 2019 is $0.5 million below the cap. For FY 2020, a growth rate of three percent would allow capped expenditures to grow by approximately $400 million over FY 2019 levels. CT Spending Cap Growth Rate 4.0% 3.3% Percentage Growth 3.0% 3.1% 2.2% 2.0% 2.9% 3.0% 2021 Proj. 2022 Proj. 1.8% 1.0% 0.0% -1.0% -2.0% 2017 2018 2019 2020 Proj. Fiscal Year Revenue Cap Public Act 17-2 of the June Special Session introduced a revenue cap that limits the amount of General Fund and Special Transportation Fund appropriations to a percentage of revenue for those funds. The appropriations limit will begin at 99.5% of estimated revenue in FY 2020 and phases down to 98% for FY 2026 and thereafter. Any resulting General Fund operating margin will help rebuild the rainy day fund and will also provide a buffer against drastic expenditure reductions and revenue increases if there is a sudden mid-year downturn in the economy. Revenue Volatility Cap The revenue volatility cap directs any collections from the estimated and finals component of the Personal Income Tax plus the Pass-through Entity Tax that in total exceed a designated threshold (adjusted for inflation) to the Budget Reserve Fund. The transfer threshold is indexed to the five year compound annual growth rate in personal income and is estimated as shown in the table at right. See page 36 for a discussion of the Budget Reserve Fund. 19 Fiscal Year 2020 2021 2022 2023 2024 2025 2026 Fiscal Year 2019 2020 2021 2022 Appropriations as % of Revenues 99.50% 99.25% 99.00% 98.75% 98.50% 98.25% 98.00% Revenue Volatility Threshold (in millions) $ 3,196.8 $ 3,294.6 $ 3,388.5 $ 3,488.8 LONG-TERM LIABILITIES The long-term liabilities facing the state include obligations to fully fund the State Employees Retirement System and the Teachers Retirement System, pay for other post-employment benefits (OPEB), retire outstanding debt service costs, and close the cumulative GAAP deficit. The state’s current long-term obligations total $81.1 billion, up 0.6% from FY 2017’s reported amount of $80.6 billion. The table below depicts the components of these long-term liabilities, and a discussion of each follows. LONG-TERM OBLIGATIONS (In Billions) Bonded Indebtedness – As of 8/31/18 State Employee Pensions – Unfunded as of 6/30/18 Teachers’ Pension – Unfunded as of 6/30/18 State Employee Post-Retirement Health and Life – Unfunded as of 6/30/17 Teachers’ Post-Retirement Health and Life – Unfunded as of 6/30/16 Cumulative GAAP Deficit – As of 6/30/18 Total $25.5 $21.2 $13.2 $17.4 $3.0 $0.8 $81.1 PENSIONS The state is the sponsor of two large pension systems, one for state employees and one for teachers (SERS and TRS), as well as several lesser retirement plans for judges, family support magistrates and compensation commissioners; and for probate judges and employees. 20 State Employees Retirement System (SERS) The state’s SERS obligation at the end of FY 2018 totaled $21.2 billion. The funded ratio has increased to 38%. The market value investment returns of 13.82% for 2017 and 7.12% for 2018 were greater than the 6.9% assumed rate, although the impact of these returns is smoothed over a five-year period to reduce volatility. The 6/30/2018 valuation recognized the increase in employee contributions of 1.5% of salary effective July 1, 2017 for all non-Tier IV members and the new Tier IV. The total SERS liability is $34.2 billion, with $21.2 billion the unfunded portion of that liability. Most of the liability – 72.5% – is related to already-retired employees. The pie chart and table that follow show the proportions of liability attributable to active employees and retirees. The overwhelming majority of the state’s contributions in FY 2020 – 86.7% –is to address the unfunded actuarial accrued liability. 21 Liability Based on 6/30/18 Valuation ($ in Thousands) Retired/Deferred Liability $24,813,844 Active – Tier I Hazardous 1,162 Active – Tier IB Active – Tier IC Active – Tier II Hazardous Active – Tier II Others Active – Tier IIA Hazardous Active – Tier IIA Others Active - Tier III Hazardous Active - Tier III Hybrid Active - Tier III Others Active - Tier IV Hazardous Active - Tier IV Hybrid Active - Tier IV Others Total Accrued Liability Actuarial Value of Assets Unfunded Accrued Liability 501,017 20,777 729,335 3,197,760 2,148,017 2,013,223 1.5% 0.1% 2.1% 9.3% 6.3% 5.9% 154,906 372,891 255,485 845 1,251 3,650 0.5% 1.1% 0.7% 0.0% 0.0% 0.0% $34,214,163 12,991,228 $21,222,935 Normal cost Amortization of UAL $235,397 $1,537,971 FY 2020 Actuarially Determined Employer Contribution (ADEC) $1,773,368 Teachers Retirement System (TRS) The state’s TRS obligations at the end of FY 2018 total $13.2 billion. While market value investment returns were 14.41% in 2017 and 7.24% in 2018 – an average of 10.76% compared to the assumed rate of 8% – TRS employs a four-year asset smoothing approach which results in a two-year compound average return of 6.88%, resulting in a $368 million loss. However, a minimal increase in unfunded actuarial accrued liabilities and an increase in the funded ratio occurred, due primarily to lower than assumed COLAs and salary increases. 22 72.5% 0.0% The following graph depicts the increase in contributions to the TRS. In FYs 2006 through 2009, contributions were supplemented by the use of surplus funds. The bars in the graph for FY 2010 and beyond include debt service on the $2.3 billion pension obligation bonds issued on April 30, 2008 for the benefit of the Teachers’ Retirement System. Contributions grew in FY 2018 and thereafter to reflect the impact of lowering the assumed rate of investment return to 8% from 8.5%. OUTLOOK FOR SERS AND TRS As noted above, the state is the sponsor of two large pension systems, one for state employees and one for teachers (SERS and TRS). Both systems are underfunded as a result of many decades of insufficient contributions to fund the promises made to generations of employees. Each system requires annual state contributions of over $1 billion now, and those are each expected to rise to over $2 billion or more in the coming years. Until recently, both systems were required to pay down virtually all of the unfunded liability by 2032, regardless of market performance in the meantime. In the last eight years, major changes have been made to SERS, including steep benefit cuts for newly hired employees, COLA reductions, increased contributions, lowering the investment return assumption and re-amortizing the unfunded liability over a longer period of time. As a result of these changes, the risk of insolvency in that fund is greatly diminished, and the fund is on a path – albeit a long one – to achieve full funding. The Teacher’s system, TRS, has not undergone similar changes, and there is risk of unsustainable increases in funding requirements over the next 10 years. There are two reasons why changes like those implemented with SERS have not been put in place with TRS. First, TRS is a statutory pension, and changes would require legislative action. At least three separate legislatively-created commissions have undertaken or are in the process of studying potential policy options: the Teachers’ Retirement System Viability Commission, the Pension Sustainability Commission, and the Commission on Fiscal Stability and Economic Growth. The issues are complex, and the path to legislative consensus on a solution — including any recommendations by these commissions — is unclear. Second, pension obligation bonds were issued in 2008 to shore up TRS funding, and those bonds included a covenant that required actuarial contributions to the fund each year, and also may limit the action of the state with respect to revising amortization methods and periods. The bonds are not callable until 2025, so short of calling the bonds the State Treasurer and bond counsel have opined that the covenant provides little flexibility for implementing funding reforms in the near term. Failure to address the funding issues in TRS leaves the state exposed to annual increases amounting to hundreds of millions of dollars each year throughout the coming decade. 23 OTHER POST-EMPLOYMENT BENEFITS (OPEB) Other post-employment benefits (OPEB) include non-pension related benefits for retirees such as health care, dental coverage and life insurance. Until FY 2010, benefits were budgeted on a “pay as you go” (PAYGO) basis, meaning that the state appropriated funds sufficient to pay for anticipated OPEB costs during the budget period. As with pension accounting, the PAYGO approach does not capture the current value of benefits promised during future periods, i.e., unfunded liabilities. The Governmental Accounting Standards Board requires states to report the unfunded liabilities for OPEB. The most recent OPEB valuation (as of June 30, 2017) shows the net OPEB liability decreased to $17.4 billion. Reforms negotiated in the 2011 and 2017 SEBAC agreements included: • Transitioning Medicare eligible retirees to a Medicare Advantage plan with pharmacy coverage which is expected to save $135 million on an annual basis; • Increasing premium cost sharing and health care design changes for new retirees after October 1, 2017 and increasing again for new retirees after June 30, 2022; • Increasing copays for non-HEP drugs from $5 generic/$20 preferred/$35 brand to a four-tier system of $5 preferred generic/$10 non-preferred generic/$25 preferred brand/$40 non-preferred brand; • Increasing the emergency room copay for non-emergencies from $35 to $250; • Converting to a tiered provider network plan; and • Increasing the number of years from ten to fifteen that health care eligible employees hired after July 1, 2017, must pay 3% of salary toward retiree health. 24 In FY 2008, the state began the process of setting aside funds in trust to address the OPEB unfunded liability. While not a full actuarial funding approach, setting aside funds now could begin a long-term transition to actuarial pre-funding of OPEB costs. The 2009 and 2011 SEBAC agreements introduced employee contributions, and now all state employees contribute 3% to the OPEB trust fund, with the state matching those employee contributions. The table at right depicts OPEB contributions by both employees and the state. As of September 30, 2018, the OPEB trust fund has a market value of $919.3 million and is the fourth largest investment fund managed by the Treasurer’s Office after the State Employees Retirement Fund, Teachers’ Retirement Fund and the Municipal Employees Retirement Fund. Other Post-Employment Benefits Summary of Contributions Fiscal Year 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 est. 2019-20 est. 2020-21 est. Total Employee State Total Contributions Contributions Contributions $1.4 $21.6 $25.0 $27.5 $45.5 $93.3 $125.2 $120.8 $116.8 $118.1 $122.3 $126.5 $944.0 $10.0 $14.5 $122.2 $123.1 $126.5 $130.9 $527.2 $10.0 $0.0 $1.4 $36.1 $25.0 $27.5 $45.5 $93.3 $125.2 $120.8 $239.0 $241.2 $248.8 $257.4 $1,471.2 Excludes investment earnings * In Millions DEBT SERVICE The graph below shows debt service as a proportion of General Fund expenditures. Debt service has increased from just under 10% of the General Fund in fiscal years 2013 through 2015 to about 12% during the upcoming biennium. General Fund Debt Service Expenditures 11.0% $2.8 Debt Service (Billions) $2.6 9.5% 9.7% 11.6% 11.7% 11.8% 9.7% $2.2 $1.97 $2.22 12% 11% 10% $2.48 $2.30 $2.0 13% $2.71 $2.4 $1.8 12.9% 12.1% 9% $2.31 8% 7% $2.06 6% 5% $1.80 $1.65 $1.69 4% 3% $1.6 2% $1.4 1% $1.2 0% '13 '14 '15 '16 '17 '18 Fiscal Year 25 '19 Est. '20 Fcst. '21 Fcst. '22 Fcst. Debt Service As % Of Budget 12.4% $3.0 MEDICAID Medicaid growth has been affected by caseload growth, increases in utilization and limited rate increases. The Medicaid expansion for low-income adults, which was approved by the federal government in June 2010, has driven significant increases in caseload and program costs. Expenditures for this program, now known as HUSKY D, increased from $228.7 million in FY 2010 to $769.0 million in FY 2013. The state further expanded Medicaid coverage for low-income adults by increasing income eligibility to 138% of the federal poverty level beginning January 1, 2014, resulting in significant additional growth. As a result of this expansion, the HUSKY D caseload has grown from 46,156 in June 2010 to 99,103 in December 2013 to 257,374 in September 2018. Over the last five fiscal years, HUSKY D expenditures have increased from $916.6 million in FY 2014 to $1,629.9 million in FY 2018. Under the Affordable Care Act, these costs were 100% reimbursed by the federal government for calendar years 2014 through 2016, after which the federal reimbursement is phased down to 90% beginning in 2020, as shown in the table below. Calendar Year Federal Reimbursement 2014 – 2016 2017 2018 2019 2020+ 100% 95% 94% 93% 90% This reduction in federal reimbursement is expected to result in additional state costs of approximately $36 million in FY 2020 and $58 million in FY 2021. The graph below shows total program costs as well as state and federal shares of the total. 26 The Department of Social Services is employing diverse strategies to achieve improved health outcomes and cost efficiencies in the Medicaid program. Strategies include: • use of an administrative services organization (ASO) platform to promote efficient, costeffective and consumer/provider responsive medical, behavioral health, and dental services; • use of data analytics to improve care; • activities designed to improve access to and use of preventative primary care; • efforts to integrate medical, behavioral health, long-term services and supports and social services; • initiatives designed to “re-balance” spending on long-term services and supports (shifting from institutional to community-based care); and • efforts to promote the use of health information technology. In contrast to almost all other Medicaid programs across the nation, Connecticut Medicaid uses a selfinsured, managed, fee-for-service approach rather than a managed care arrangement. It is one of the very few Medicaid programs with relatively steady expenditures on a per member, per month (PMPM) basis, as shown in the graph below. 27 MUNICIPAL AID State aid to municipalities comes from a variety of sources: appropriated funds, bond funds, revenue intercepts, and transfers from non-appropriated funds. The table below shows major statutory aid to municipalities. Pursuant to CGS Sec. 4-71b, the Office of Policy and Management is required to publish town-by-town estimates of these grants by August 15th after the budget is enacted. The most recent publication can be found at https://www.ct.gov/opm/cwp/view.asp?a=3019&q=383212&opmNav_GID=1807. 5 STATE AID TO OR ON BEHALF OF LOCAL GOVERNMENTS (in Millions) General Government State Owned PILOT College & Hospital PILOT Mashantucket Pequot & Mohegan Grant Town Aid Road Grant1 LoCIP1 Grants for Municipal Aid Projects1 Regional Performance Incentive Grants MRSF: Select PILOT2 MRSF: Councils of Government2 MRSF: Motor Vehicle Tax Grants2 (Municipal Transition) MRSF: Municipal Revenue Sharing Grant2 Municipal Stabilization Grants Municipal Restructuring Municipal Restructuring: Debt Service Misc. General Government Grants Subtotal - General Government Education Adult Education Education Cost Sharing Magnet Schools Special Education - Student Based Local School Construction1 Misc. Education Grants Subtotal - Education Local Teachers' Retirement Retiree Health Service Cost Retirement Contributions Debt Service - Pension Obligation Bonds Subtotal - Local Teachers' Retirement FY 2022 FY 2021 FY 2020 FY 2019 $ 56.0 $ 71.7 $ 71.1 $ 71.7 105.9 159.3 159.3 159.3 58.1 58.1 49.9 58.1 60.0 60.0 60.0 60.0 35.0 30.0 30.0 30.0 60.0 60.0 60.0 60.0 147.6 7.0 30.7 $ 36.8 37.8 27.3 20.0 29.0 548.4 $ - - 29.6 7.3 45.7 29.7 521.7 $ 7.3 56.3 29.7 531.8 $ 172.1 7.3 54.7 29.7 887.1 $ 20.4 $ 22.4 $ 22.5 $ 22.5 2,016.7 2,052.5 2,086.9 2,117.4 326.5 328.3 330.5 330.5 202.9 209.2 209.2 140.6 450.0 450.0 450.0 450.0 180.4 208.3 209.8 209.8 $ 3,134.6 $ 3,264.3 $ 3,308.9 $ 3,339.4 $ 14.6 $ 26.0 $ 29.8 $ 34.3 1,292.3 1,392.2 1,437.4 $ 1,467.8 118.4 118.4 118.4 $ 203.1 $ 1,425.3 $ 1,536.6 $ 1,585.7 $ 1,705.2 Total - Aid to Municipalities $ 5,108.2 $ 5,322.6 $ 5,426.4 $ 5,931.6 1. Bonded authorizations are at the discretion of the State Bond Commission. Outyear projections assume that authorizations remain at current levels for bonded grants. 2. Outyear projections for Municipal Revenue Sharing Fund (MRSF) grants are based on statutory formulas. Please note that revenue to MRSF has been suspended until FY 2022, so there is no available funding for these statutory formulas in FY 2020 or FY 2021. 5 Additionally, one-page financial summaries for each municipality can be found at: https://www.ct.gov/opm/lib/opm/budget/municipal_statistical_and_formula_aid_information.pdf. 28 Education Cost Sharing Grants The Education Cost Sharing Grant (ECS) is the state’s major education grant, designed to equalize the ability of towns to finance local education costs. The graph below shows past and projected levels of ECS funding; projections are based on the current formula. ECS Funding $2,200 $2,100 $10 in millions $2,000 $10 $1,900 $1,800 $1,700 $270 $269 $1,600 $1,500 $1,614 $1,620 '10 '11 $1,889 $1,930 '12 '13 $1,993 $2,035 '14 '15 $2,052 $2,012 $1,927 $2,087 $2,117 $2,017 $2,052 '19 Est. '20 Proj. '21 Proj. '22 Proj. $1,400 '16 '17 '18 Fiscal Year ECS Grant ARRA MRSF STATE WORKFORCE Long-Term Staffing Trends The number of state employees in the executive branch of state government has been reduced dramatically over the past few budget cycles. At the end of FY 2018, there were 26,177 permanent full-time employees being paid from appropriated funds in the executive branch (excluding higher education). Even though the June 2018 figure includes hundreds of positions that were transferred from the UConn Health Center to the Department of Correction, it is still 3,379, or 11.4%, lower than the number at the end of calendar year 2010. To take a longer perspective, this means that, when adjusted for changes in state population, executive branch agencies have fewer staff than at any time since the 1950s. This trend is the result of significant efforts to achieve attrition, as well as some minimal number of layoffs that occurred from time to time. This workforce reduction has resulted in significant budget savings. 29 FEDERAL BUDGET AND POLICY ISSUES A number of significant federal budget and policy issues must be dealt with over the next year, creating uncertainty for state policymakers as well as for the budgeting process. • • • • • • While several appropriations bills for federal fiscal year 2020 were signed into law before the beginning of the federal fiscal year on October 1st, a number of key appropriations measures still have not been enacted, leaving some government operations funded via a continuing resolution (CR) that expires December 7, 2018. The post-election period will prove critical for achieving consensus on funding for programs covered by the CR. Notable areas that received federal funding increases include the Student Support Block Grant (6%), adult education (4%), the Maternal and Child Health Block Grant (4%), health centers (4%), and Head Start (2%). In contrast, given the national employment picture, federal support for state administration of unemployment compensation programs is reduced by 5%. Several key federal programs are subject to mandatory sequestration (cuts) of 6.2% in FFY 2019, including the Social Services Block Grant, Housing Trust Fund, Vocational Rehabilitation, Promoting Safe and Stable Families, the Prevention and Public Health Fund, and a portion of highway funding. The TANF program must be reauthorized, and the current continuing resolution extends program funding until December 7th at FFY 2018 levels. Components of the program that are impacted include TANF, the TANF contingency fund, and the mandatory/matching portion of the Child Care Development Fund. Congress may consider an extension of the current program, perhaps for a year, but the level of funding and program parameters are subject to change, particularly in the House which has proposed changes to work requirements, outcomes, and limits on how states spend funds. New federal opioid legislation creates both challenges and opportunities for states. The policy implications of this recently-passed legislation are currently being reviewed by OPM and the state agencies. While the prospects of a government shutdown are less likely than in the last several years, some work remains to be completed to keep all federal government operations funded after December 7th. EFFORTS TO PRESERVE OR MAXIMIZE FEDERAL REVENUE6 The state continues to make federal revenue maximization efforts a priority. Numerous Medicaid state plan amendments have been submitted or are in the process of being submitted to the federal government, and initiatives not requiring federal approval are being operationalized by impacted state agencies. In the current fiscal year and through the biennium, new federal revenue could be realized from these initiatives beyond normal increases in federal Medicaid reimbursement associated with growth in caseload and utilization. An interagency workgroup meets monthly to discuss revenue opportunities and implementation issues. Some of the major revenue-maximization and -retention initiatives being explored or under development include: • Supplemental payments for physician underpayments at UConn Health Center in recognition that Medicaid and other third party payers do not cover the entire cost of care at Dempsey Hospital; • Administrative process changes to help ensure Medicaid claims on behalf of the Department of Developmental Services are not lost because clients miss eligibility determination deadlines; 6 This section fulfills the reporting requirement found in subsection (c) of Sec. 4-31d, CGS. 30 • • • • Reviewing possible opportunities to cover health care for justice-involved individuals under the Medicaid program; Examining the implications of the new federal opioid bill on the state’s Medicaid program, including whether development of an 1115 waiver is needed to permit coverage of certain substance use disorder treatment services currently ineligible for Medicaid reimbursement; Examining the implications of the new federal Family First Prevention Services Act for the state’s claims for federal Medicaid, TANF and IV-E reimbursement; and Licensure change for the state’s healthcare facility for veterans in Rocky Hill. While much effort goes into maximizing revenue, equal or greater effort goes into preserving existing sources of federal reimbursement. The federal Centers for Medicare and Medicaid Services has strengthened its compliance activities, resulting in significantly greater scrutiny of all state claims. Department of Social Services staff and impacted state agencies have experienced significantly increased time and effort explaining and justifying revenue items in order to sustain claims worth hundreds of millions of dollars that had once been considered routine. SPECIAL COMMISSIONS STUDYING FISCAL AND PENSION ISSUES During the 2017 and 2018 legislative sessions, a number of special legislatively-created commissions and panels were authorized and tasked with studying significant fiscal and pension topics. A brief recap of the commissions, their mandates and work products follows. Commission on Fiscal Stability and Economic Growth (CFSEG) Created by Section 250 of Public Act 17-2, June Spec. Sess., this commission was tasked with developing and recommending policies to achieve state government fiscal stability and promote economic growth and competitiveness within the state. A report was issued on March 1, 2018, but the Legislature did not adopt the commission’s recommendations; instead, a series of additional commissions and reviews of the report were adopted (detailed below). 7 The report is available at: https://www.cga.ct.gov/fin/tfs/20171205_Commission%20on%20Fiscal%20Stability%20and%20Econom ic%20Growth/20180301/Final%20Report%20with%20Appendix.pdf. Teachers’ Retirement System Viability Commission Created by Section 59 of Public Act 17-2, June Spec. Sess., this commission was charged with developing and implementing a plan to maintain the financial viability of the Connecticut Teachers' Retirement System. A report was issued on March 19, 2018, and is available at: https://www.ct.gov/opm/Lib/opm/Budget/Special_Reports/CT_TRS__Viability__Commission__Report_ FINAL__03192019.pdf. 7 The Office of Policy and Management was tasked with issuing a Request for Proposals (RFP) for a national consultant to review and make recommendations regarding efficiency improvements in revenue collection and agency expense that would result in a savings of at least $500 million. The consultant’s report was to be submitted by February 1, 2019, to the Appropriations and Finance committees. No funds were appropriated to pay the consultant, so proposals in response to the RFP are being held for potential consideration by the next Governor and legislature. 31 Pension Sustainability Commission Authorized by Section 180 of Public Act 17-2, June Spec. Sess., this commission was asked to study the feasibility of placing state capital assets in a trust and maximizing those assets for the sole benefit of the state pension system. A report is due by January 1, 2019. The commission’s work is available at: https://www.cga.ct.gov/fin/taskforce.asp?TF=20180710_Pension%20Sustainability%20Commission Commission to Study CFSEG Recommendation Regarding TRS Section 58 of Public Act 18-81 called for a commission to conduct a study of the proposal made by the Commission on Fiscal Stability and Economic Growth for reform of the Teachers' Retirement System. To date, appointments and co-chairpersons have not been finalized. The act requires a report to be submitted to the Appropriations Committee by January 1, 2019. Panel Study of CFSEG Tax Rebalancing Proposal Section 56 of Public Act 18-81 required formation of a panel to study and make recommendations regarding the proposals by the Commission on Fiscal Stability and Economic Growth concerning the rebalancing of state taxes without raising net new taxes. To date, appointments and co-chairpersons have not been finalized. The act requires a report to be submitted to the Finance, Revenue and Bonding Committee by January 1, 2019. 32 BONDING PROJECTED BOND AUTHORIZATIONS, ALLOCATIONS AND ISSUANCE The table below depicts projected bond authorizations, allocations and issuance through FY 2023. FIVE YEAR BOND PROJECTIONS Bond Authorizations Genera l Obl i ga ti on Bonds Bi os ci ence Col l a bora ti on Progra m Bi os ci ence Innova ti on Fund Connecti cut Stra tegi c Defens e Inves tment Act UCONN Next Genera ti on CSUS 2020 Speci a l Ta x Obl i ga ti on Bonds Cl ea n Wa ter Fund Revenue Bonds FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 $ 1,133,162,050 12,525,000 15,000,000 200,000,000 95,000,000 1,574,424,392 350,300,000 $ 1,500,000,000 10,565,000 25,000,000 9,096,428 291,600,000 126,000,000 1,506,000,000 200,000,000 $ 1,500,000,000 10,570,000 25,000,000 9,446,428 186,200,000 800,000,000 200,000,000 $ 1,500,000,000 25,000,000 9,621,428 101,400,000 800,000,000 200,000,000 $ 1,500,000,000 25,000,000 9,796,428 98,000,000 800,000,000 200,000,000 Total Bond Authorizations Bond Allocations General Obligation Bonds Special Tax Obligation Bonds Clean Water Fund Revenue Bonds $ 3,380,411,442 $ 3,668,261,428 $ 2,731,216,428 $ 2,636,021,428 $ 2,632,796,428 $ 2,308,860,000 1,300,000,000 175,000,000 $ 2,109,000,000 1,300,000,000 175,000,000 $ 2,161,500,000 1,300,000,000 175,000,000 $ 2,215,500,000 750,000,000 175,000,000 $ 2,271,000,000 750,000,000 175,000,000 Total Bond Allocations $ 3,783,860,000 $ 3,584,000,000 $ 3,636,500,000 $ 3,140,500,000 $ 3,196,000,000 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 $ 1,900,000,000 750,000,000 250,000,000 200,000,000 $ 1,944,000,000 750,000,000 291,600,000 $ 1,993,000,000 1,000,000,000 250,000,000 186,200,000 $ 2,043,000,000 1,200,000,000 101,400,000 $ 2,094,000,000 1,200,000,000 250,000,000 98,000,000 Bond Issuance Genera l Obl i ga ti on Bonds Speci a l Ta x Obl i ga ti on Bonds Cl ea n Wa ter Revenue Bonds UCONN Next Genera ti on Total Bond Issuance Debt Service Genera l Fund Tra ns porta ti on Fund $ 3,100,000,000 $ 2,985,600,000 $ 3,429,200,000 $ 3,344,400,000 $ 3,642,000,000 $ 2,216,811,986 645,723,716 $ 2,307,129,895 690,580,233 $ 2,476,232,999 764,938,231 $ 2,706,565,622 830,775,744 $ 2,982,217,309 926,910,573 Total Debt Service $ 2,862,535,702 $ 2,997,710,128 $ 3,241,171,230 $ 3,537,341,366 $ 3,909,127,882 Assumptions Bond Authori za ti ons Projected Genera l Obl i ga ti on Bond a uthori za ti ons a s s ume tha t a uthori za ti ons conti nue a t hi s tori ca l a vera ge l evel s . Cl ea n Wa ter Progra m Revenue Bond a uthori za ti ons ba s ed on projected a l l oca ti ons . UConn Next Genera ti on a utoma ti c a uthori za ti ons i n a ccorda nce wi th C.G.S. Secti on 10a -109g. CSCU 2020 a utoma ti c a uthori za ti ons i n a ccorda nce wi th C.G.S. Secti on 10a -91e. Bi os ci ence Col l a bora ti on Progra m a utoma ti c a uthori za ti ons i n a ccorda nce wi th C.G.S. Secti on 32-41z. Bi os ci ence Innova ti on Fund a utoma ti c a uthori za ti ons i n a ccorda nce wi th C.G.S. Secti on 32-41dd. Connecti cut Stra tegi c Defens e Inves tment Act a utoma ti c a uthori za ti ons i n a ccorda nce wi th C.G.S. Secti on 32-4o. Speci a l Ta x Obl i ga ti on Bonds i ncl ude $749.8 mi l l i on i n FY 2019 a nd $706 mi l l i on i n FY 2020 previ ous l y a uthori zed i n s ecti on 232 of P.A. 15-1, June s peci a l s es s i on. Bond Al l oca ti ons GO Bond a l l oca ti ons i n a ccorda nce wi th C.G.S. Secti on 3-20(d)(2): "For the ca l enda r yea r commenci ng Ja nua ry 1, 2017, a nd for ea ch ca l enda r yea r therea fter, the Sta te Bond Commi s s i on ma y not a uthori ze bond i s s ua nces or credi t revenue bond i s s ua nces of more tha n two bi l l i on dol l a rs i n the a ggrega te i n a ny ca l enda r yea r. Commenci ng Ja nua ry 1, 2018, a nd ea ch ca l enda r yea r therea fter, the a ggrega te l i mi t s ha l l be a djus ted i n a ccorda nce wi th a ny cha nge i n the cons umer pri ce i ndex for a l l urba n cons umers for the precedi ng ca l enda r yea r, l es s food a nd energy, a s publ i s hed by the Uni ted Sta tes Depa rtment of La bor, Burea u of La bor Sta ti s ti cs ." Amounts a djus ted to a ca l enda r yea r ba s i s . GO Bond a l l oca ti ons i ncl ude a l l a utoma ti c a uthori za ti ons des cri bed a bove. Bond Is s ua nce GO bond i s s ua nce i n a ccorda nce wi th C.G.S. Secti on 3-21(f)(1): "On a nd a fter Jul y 1, 2018, the Trea s urer ma y not i s s ue genera l obl i ga ti on bonds or notes purs ua nt to s ecti on 3-20 or credi t revenue bonds purs ua nt to s ecti on 3-20j tha t exceed i n the a ggrega te one bi l l i on ni ne hundred mi l l i on dol l a rs i n a ny fi s ca l yea r. Commenci ng Jul y 1, 2019, a nd ea ch fi s ca l yea r therea fter, the a ggrega te l i mi t s ha l l be a djus ted i n a ccorda nce wi th a ny cha nge i n the cons umer pri ce i ndex for a l l urba n cons umers for the precedi ng ca l enda r yea r, l es s food a nd energy, a s publ i s hed by the Uni ted Sta tes Depa rtment of La bor, Burea u of La bor Sta ti s ti cs ." Infl a ti on CY 2018 CY 2019 CY 2020 CY 2021 CY 2022 Source: IHS Economi cs , Burea u of La bor Sta ti s ti cs 2.3% 2.5% 2.5% 2.5% 2.4% 33 STATUTORY GENERAL OBLIGATION BOND DEBT LIMIT Section 3-21 of the General Statutes, as amended, provides that “No bonds, notes or other evidences of indebtedness for borrowed money payable from General Fund tax receipts of the State shall be authorized by the general assembly except such as shall not cause the aggregate amount of (1) the total amount of bonds, notes or other evidences of indebtedness payable from General Fund tax receipts authorized by the general assembly but which have not been issued and (2) the total amount of such indebtedness which has been issued and remains outstanding, to exceed one and six-tenths times the total general fund tax receipts of the State for the fiscal year in which any such authorization will become effective, as estimated for such fiscal year by the joint standing committee of the general assembly having cognizance of finance, revenue and bonding in accordance with section 2-35.” Tax Incremental Financings, Special Transportation, Bradley Airport, Clean Water Fund Revenue, Connecticut Unemployment Revenue Bonds, Economic Recovery Notes and Pension Obligation Bonds are excluded from the calculation. GAAP deficit bonds and Hartford Contract Assistance are included in the calculation. In accordance with the General Statutes, the Treasurer computes the aggregate amount of indebtedness as of January 1, and July 1 each year and certifies the results of such computation to the Governor and the General Assembly. If the aggregate amount of indebtedness reaches 90% of the statutory debt limit, the Governor is required to review each bond act for which no bonds, notes or other evidences of indebtedness have been issued, and recommend to the General Assembly priorities for repealing authorizations for remaining projects. The estimated debt-incurring margins as of July 1 of each fiscal year are as follows: FY 2019 FY 2020 $15,862,300,000 100% Limit $25,379,680,000 $24,916,160,000 $25,238,080,000 $24,926,400,000 Bonds Subject to Limit $22,661,976,165 $22,542,596,122 $23,044,291,936 $23,044,767,158 Debt Incurring Margin $2,717,703,835 $2,373,563,878 $2,193,788,064 $1,881,632,842 Margin to 90% Limit 1.6 1.6 89.29% 90.47% $179,735,835 $(118,052,121) $15,773,800,000 FY 2022 Revenues 11/13/2018 Consensus Multiplier Percentage of Limit $15,572,600,000 FY 2021 1.6 91.31% $(330,019,936) $15,579,000,000 1.6 92.45% $(611,007,158) FY 2019 represents the actual debt incurring margin. The estimates for FY 2020 through FY 2022 assume that all existing bond authorizations continue and that $1.5 billion of new bond authorizations are enacted each year. As shown in the table above, the General Assembly will be required to limit new bond authorizations and/or repeal existing bond authorizations to comply with the debt limitation. BONDING CAPS During the 2017 legislative session, limitations on bond allocations, allotments and issuances were enacted. These limitations are described below and summarized in the table at the end of this section. 34 • Allocation Cap: This cap imposes a limit on State Bond Commission general obligation bond allocations for each calendar year. The cap amount is indexed to inflation. The inflation-adjusted cap for calendar year 2018 is $2.036 billion. • Allotment Cap: This cap limits allotments issued by the Governor's Office each fiscal year. The cap amount is indexed to inflation. General obligation bonds issued as part of CSCU 2020 or UConn 2000 are exempted from the cap. The cap for FY 2019 is $1.9 billion. • Issuance Cap: This cap limits bond issuances by the Treasurer's Office each fiscal year. The cap amount is indexed to inflation. General obligation bonds issued as part of CSCU 2020 or UConn 2000 are exempted from this cap. The cap for FY 2019 is $1.9 billion. Connecticut's Bonding Caps 1. Cap Amount 2. Applies to 3. Onus 4. Exemptions 5. Index 6. Period of Cap 7. Start Date Subject to Bond 8. Covenant 9. C.G.S. 10. Escape Clause 11. History/Projection FY/CY 2017 FY/CY 2018 FY/CY 2019 FY/CY 2020 FY/CY 2021 FY/CY 2022 Statutory Debt Limit $25.380 Billion (1.6 X GF Taxes) GO Issued & Authorized Bond Allocation Cap Bond Allotment Cap Bond Issuance Cap $2.036 Billion $1.9 Billion $1.9 Billion GO Debt GO Debt GO Debt Treasurer Bond Commission Governor Treasurer Refunding debt, revenue bonds, TIFs and ERNs None CSCU 2020 and UConn 2000 GO Debt* CSCU 2020 and UConn 2000 GO Debt* Fiscal July 1, 1957 U.S. CPI less Food & Energy Calendar January 1, 2017 U.S. CPI less Food & Energy Fiscal July 1, 2018 U.S. CPI less Food & Energy Fiscal July 1, 2018 Yes 3-21(a) Per Bond Covenant Yes 3-20(d)(2) Per Bond Covenant Yes 3-21(f)(2)(B) Per Bond Covenant Yes 3-21(f)(1)(A) Per Bond Covenant $24.832 Billion $24.879 Billion $25.380 Billion $24.916 Billion $25.238 Billion $24.926 Billion $2.0 Billion $2.036 Billion $2.135 Billion $2.188 Billion $2.243 Billion $2.243 Billion NA NA $1.9 Billion $1.944 Billion $1.993 Billion $2.043 Billion NA NA $1.9 Billion $1.944 Billion $1.993 Billion $2.043 Billion None *Public Act 18-178 Section 16 included exemptions for refunding debt, short term notes and Transportation General Obligation debt authorized in section 41 of Public Act 18-178. These additional exemptions have been questioned by the State's bond counsel and as of September 21, 2018 are not considered to be valid. 35 BUDGET RESERVE FUND AND POTENTIAL USES OF SURPLUS After the accounts for the General Fund have been closed at the end of each fiscal year, Connecticut statute directs the Comptroller to deposit any unappropriated General Fund surplus in the Budget Reserve Fund (BRF, a.k.a. Rainy Day Fund) until the fund reaches an amount equal to 15% of net General Fund appropriations. The graph below depicts historical operating deposits to and withdrawals from the Budget Reserve Fund. If the budget for the FY 2020 and FY 2021 biennium is balanced without drawing from the BRF, and assuming adherence to the revenue volatility cap and the cap that limits the amount of revenue that can be appropriated, the BRF will reach its statutory cap at the end of FY 2021. $2,659.6 $2,455.4 $2,800 $2,500 $2,732.5 $2,088.2 $2,200 $1,900 $1,600 $1,381.7 $1,381.7 $1,381.7 $1,112.5 Millions $1,300 $972.4 $1,185.3 $902.9 $1,000 $700 $400 $302.2 $446.5 $363.9 $269.2 $100 $0.0 -$200 $0.0 $519.2 $406.0 $235.6 $270.7 $212.9 $0.0 $93.5 $103.2 $0.0 $0.0 $204.2 $72.9 $177.2 -$22.7 -$113.2 $248.5 -$170.4 -$103.2 -$500 Deposits/(Withdrawals) -$800 -$1,100 -$1,400 $367.2 Account Balance -$1,278.5 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 Fiscal Year Outyear forecast assumes state enacts balanced budgets that adhere to revenue and volatility caps. Balance reaches 15% in FY 2021, resulting in deposits to SERS/TRS of $194.4m in FY 21 and $350.5m in FY 22. Reforms Enacted Over the Last Biennium Several recent legislative changes impact the Budget Reserve Fund. Public Act 17-2 of the June Special Session implemented, and Public Act 18-81 later amended, a revenue volatility cap which directs collections from any volatile revenue sources above a certain threshold to the Budget Reserve Fund. (See page 19 for more about the revenue volatility cap.) The volatility cap resulted in transfers of $1,471.3 million to the rainy day fund in FY 2018 and an anticipated $648 million in FY 2019, resulting in substantial — and much-needed — improvement in the state’s reserves. This will serve the state well during future economic downturns. Public Act 17-2 of the June Special Session also introduced a revenue cap that limits the amount of General Fund appropriations to a percentage of General Fund revenue. The limit will begin at 99.5% in fiscal year 2020 and phases down to 98% for fiscal year 2026 and thereafter. (See page 19 for more about the revenue cap.) The resulting operating margin will help add to the rainy day fund in good years and provide 36 a buffer against drastic expenditure reductions or revenue increases when there is a sudden mid-year downturn in the economy. Use of Budget Reserve Fund Statutorily, the Budget Reserve Fund may only be expended: • To fund a deficit in the immediately preceding fiscal year; • By transfer of the General Assembly if any consensus revenue forecast projects a decline in General Fund revenues in the current biennium of one per cent or more; • By transfer of the General Assembly if the April 30th consensus revenue forecast projects a decline in General Fund revenues in the ensuing biennium of one percent or more from the current year; or • By transfer of the General Assembly if the BRF equals 5% or more of current year appropriations of the amount in excess of the 5% for the payment of unfunded past service liability of the SERS and TRS pension systems which are in addition to any regular contributions. Discussion of Possible Uses of Surplus Funds Under current law (CGS Sec. 4-30a), unappropriated surpluses are committed to the Budget Reserve Fund until the maximum 15 percent authorized by law. Other possible uses of surplus funds could include: • • • • • Reducing the unfunded liability of the State Employees Retirement Fund; Reducing the unfunded liability of the Teachers’ Retirement Fund; Reducing bonded indebtedness; Reducing the unfunded liability for Other Post-Employment Benefits; or Providing funds for higher education matching grants as per sections 10a-8c, 10a-77a, 10a-99a, 10a-109c, 10a-109i, and 10a-143a of the Connecticut General Statutes. 37 PROJECTED TAX CREDITS Tax credit projections are based on data from the Department of Revenue Services. Personal income tax credits are projected using income year 2016 data. Corporation business tax credits are projected using income year 2013-2015 data. This is because information regarding tax credits is typically delayed as firms often request an extension to file their final returns. This delays the receipt of such data by the Department of Revenue Services which then must still capture information from the return. Appropriate growth rates are applied to base year data to derive an estimate for future fiscal years. Projected Total Amounts of Tax Credits Claimed (In Thousands) FY 2018 Est. FY 2019 Proj. FY 2020 Proj. FY 2021 Proj. FY 2022 Proj. $ 65,700 $ 67,700 $ 125,000 $ 128,000 $ 131,000 115,000 118,300 121,800 125,500 129,300 10,000 10,300 10,600 10,900 11,200 3,000 3,000 - - - $ 193,700 $ 199,300 $ 257,400 $ 264,400 $ 271,500 67,000 67,000 67,000 67,000 67,000 56,500 58,000 60,000 61,500 63,500 15,000 15,000 15,000 15,000 15,000 22,000 22,500 23,500 24,000 25,000 Electronic Data Processing 44,500 46,000 47,500 49,000 50,500 Research and Experimental Expenditures 22,500 23,000 23,500 24,500 25,000 Research and Development Expenditures 27,000 27,500 27,500 41,000 41,000 23,000 23,500 24,000 24,000 24,500 10,000 10,000 10,000 10,000 10,000 3,000 3,000 3,000 3,000 3,000 3,500 3,500 3,500 3,500 3,500 1,000 1,000 1,000 1,000 1,000 35,000 40,500 40,500 40,500 40,500 $ 330,000 $ 340,500 $ 346,000 $ 364,000 $ 369,500 $ 523,700 $ 539,800 $ 603,400 $ 628,400 $ 641,000 Personal Income Tax Credits Property Tax Earned Income Tax Credit Connecticut Higher Education Trust (CHET) Angel Investor Total Personal Income Tax Business Tax Credits Fixed Capital Film Industry Production (1) Film Industry Digital Animation(1) Film Industry Infrastructure (1) (1) Urban and Industrial Reinvestment Housing Program Contribution Historic Rehabilitation (1) (1) Human Capital Machinery and Equipment All Other Credits (1,2) Total Business Tax Credits Total Projected Amount Claimed (1) (1) Includes credits claimed under the Corporation Tax, Insurance Premiums Tax, and the Public Service Companies (2) Includes Sales Tax abatements per PA 16-1 of the September Special Session in FY 2019 and FY 2020. 38