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Still learning to live with Connecticut's fiscal reality GAAP

By Paul Choiniere

Publication: The Day

Published June 30. 2013 4:00AM

Among the loudest applause lines delivered by Gov. Dannel P. Malloy in his Inaugural Address to the General Assembly on Jan. 5, 2011 was the one referencing, of all things, accounting.

"We must adopt a responsible tell-it-like-it-is approach to balancing and managing our budget, and treat it just like any company treats a budget, with generally accepted accounting principles - commonly referred to as GAAP," declared Malloy as Democrat and Republican lawmakers cheered.

I doubt if a reference to accounting principles has ever generated such excitement even at an accountants' convention.

The Connecticut General Assembly had long played fast and loose with accounting, pushing current expenses into future years, balancing budgets with revenues not yet collected. The approach put off hard decisions and set aside solving problems for later years.

But by 2010 the approach had caught up with Connecticut, which faced record deficits. Sensing voters were sick of the gimmickry, Malloy made conversion to GAAP a centerpiece of his 2010 campaign. Under GAAP expenses, accountants must assign expenses to the year in which the state incurs them. It is honest accounting and on that January day legislators, chastened by charges they had helped cook the books, were eager to show fiscal fraternity with the new governor.

Unfortunately, Gov. Malloy and the legislature have found promising to go GAAP was much easier than accomplishing it.

With the new fiscal year that begins July 1 every state department is ordered to report using GAAP principles, no more fudging. It remains to be seen how well that goes and whether old habits will return when budget problems arise.

The bigger challenge may be dealing with the GAAP differential, created by all those years of dodging fiscal obligations. It is a situation akin to looking at your ATM receipt, discovering you're flush with $1,000 in the account, but failing to consider the checks you wrote that have not yet cleared or the automatic payments soon to be deducted from the account.

Adjust the state budget to account for the GAAP differential and you discover it is $1.2 billion in the red. The state cannot balance its check book, and be fully GAAP compliant, until it addresses that differential. Additionally, the past accounting methods, combined with little or no surplus "Rainy Day Fund" in recent years, has created cash flow problems when the money going out sometimes exceeded the revenues coming in.

The Malloy administration's original plan was to ask the legislature to set aside $80 million annually until Connecticut paid off the debt to itself. It quickly backed off that plan, however. There was no mood in Hartford to cut programs and services to meet a seemingly arbitrary accounting goal.

In the recently completed session the General Assembly adopted the governor's new plan - borrow a large chunk of the money - $750 million - and pay it back beginning in fiscal year 2016, the first fiscal year of Malloy's second term, or for that of a new governor. The state would finish paying the GAAP bonds in 2028, accruing an estimated $186 million in interest.

You read right, the state will fix its historic accounting gimmicky by getting everything straight in 15 years. Well, not everything straight, because it will take another $450 million to close the GAAP differential, with the General Assembly expected to find that money among its general expenditures over the next decade or so.

Ben Barnes, the administration's budget director, says it makes sense. By making the $750 million a loan obligation, it will force any future governors and legislatures to make the payments, he said.

The influx of cash also gives Connecticut some badly needed liquidity, Barnes added. Treasurer Denise L. Nappier has reported problems in having enough cash on hand to pay the state bills. She has at times turned to temporarily transferring dollars between operating and capital programs, raising questions whether this is appropriate.

Despite Barnes' stated optimism, the potential for future game playing is significant. The Public Act approving the bonding provides an avenue "to diminish such required appropriation" for repaying GAAP if the governor declares a fiscal emergency and gets a three-fifths vote in the House and Senate. There is also the potential the legislature could tap into the $750 million to fill some future budget hole, with the promise of catching up later, of course. That would be the definition of ironic.

Barnes told me he considers the prospects of any of that happening as unlikely. "It would be a big mistake," he said. And while he concedes the bonding does not totally lock in the GAAP payments, they are "locked in as tightly as we can."

So does that assure everyone that a GAAP-compliant Connecticut government has put its accounting shenanigans behind it?

I didn't think so.

Paul Choiniere is editorial page editor.

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