MIND THE GAAP – Confronting the Cost of Fiscal Honesty

January 5, 2011:  Dan Malloy is sworn in and Connecticut finally gets a Democratic Governor.  Oh, and the state will likely see the largest tax increases and deepest budget cuts in history.

Furthermore, as the state of Connecticut enters this new year and new decade, we will get a firsthand look at the underlying cost of introducing Fiscal Honesty to the state’s budget.

Why…because one of Governor-elect Dan Malloy and Lt. Governor-Elect Nancy Wyman’s  most significant campaign  promises was to move Connecticut government to Generally Accepted Accounting Principles (GAAP).   Connecticut requires all cities, towns and boards of education to adhere to GAAP standards, it just exempts itself from these common sense requirements.

During this year’s gubernatorial campaign Dan Malloy and Nancy Wyman repeatedly pledged to Connecticut to GAAP accounting as the single most important way to ensure greater honesty and transparency in state budgeting.  He made it clear that it would be one of his first and highest priorities.  Over the months he said he’d veto any budget that was not based on GAAP Accounting and recently said he will sign an executive order on his first day in office implementing GAAP accounting for state government.

The task is a noble, important and worthy one.  Connecticut state government should be required to conduct itself using this basic accounting system.  There is only one problem;

Shifting the State to GAAP will cost $1.2 billion dollars.  That’s $1.2 billion on-top of the $3.7 billion dollar budget short fall Connecticut is facing for next year. 

Borrowing an additional $1.2 is out of the question since the overall final cost to state taxpayers would actually exceed $2 billion once the loan and interest was paid.  Furthermore, it isn’t even clear the state could successfully float that much debt on Wall Street in the present economic environment.

Alternatively rather than actually shift to GAAP accounting all at one time, the new Governor and his Administration could “phase in” GAAP accounting.  Not quite the clean-cut shift that was originally promised or implied, but it could be argued that taking a real step in the right direction would certainly “move the state toward greater fiscal honesty”. 

The process of shifting to GAAP accounting is a very complex one, but an initial first step would be to “freeze the existing GAAP gap” and thereby make sure that the existing GAAP gap does not grow beyond the $1.2 billion figure.  While the state would not make any real forward progress toward eliminating the GAAP gap, a move to freeze the existing problem in place would, at the very least, make sure that Connecticut didn’t slide further into the financial chasm caused by our elected official’s unwillingness to hold state government to the most basic rules of honest financial accounting.

The move to “freeze the GAAP Gap” would cost the state an addition $80 to $100 million dollars in NEXT YEAR’S BUDGET.  After that, assuming the state then devoted an additional $80 million or more a year to the task of shifting the state to GAAP accounting, Connecticut could be fully GAAP compliant in – oh – let’s say 15 years.  

Any deviation from that task over the next decade and a half would prevent that goal from being reached, not to mention that the state could not engage in any more fiscal gimmicks over the same time period. 

The underlying problem (and big question) is that since the new Administration will already be proposing significant tax increases and program cuts (while seeking major state employee “give backs”), will the state government have the political will to allocate an additional $80 million to begin a 15 year shift to GAAP accounting.

With the state and nation still mired in the greatest economic recession since the Great Depression and the demand for vital state services increasing dramatically, it may be hard to convince a majority of legislators to allocate $80 million to freeze the GAAP gap at a time when most constituents will see major tax increases and many constituents will see their level of state services reduced.

Even in an era when Connecticut has a $19 billion dollar budget, $80 million is a lot of money.  For example, $80 million would go a long way toward ensuring that Connecticut’s most vulnerable residents get the additional services they need.  Alternatively, $80 million would help preserve the state’s critical state property tax credit program that helps middle-income families off-set a portion of increasing local property taxes.  And certainly an additional $80 million dollars in education aid to cities and towns would prevent the layoff of thousands of school teachers as cities try to maintain current levels of funding for their schools.

Virtually every candidate running for office in 2010 pledged to support the effort shift Connecticut to GAAP accounting.

As Connecticut state government finally confronts its economic crisis and moves to address the impact of years of failed budget policies keep a careful eye on what happens with the GAAP accounting issue.  Doing what is right on GAAP will likely mean that a lot of vital programs and services will go unfunded.

Keith Phaneuf’ at CT Mirror.org has been leading the coverage on this issue.  Here is one of his recent articles on the topic can be found here:   http://www.ctmirror.org/story/8536/conversion-gaap-means-kicking-bad-fiscal-habits .

Brian Lockhart has more on Malloy’s plans for GAAP on his blog today.  Take a look.  http://blog.ctnews.com/politicalcapitol/2011/01/03/malloy-explains-his-gaap-plans-sort-of/


Beware the GAAP
  • Facing reality has its price, doesn’t it? In America, where people believe you can lose weight by eating cookies, we love our delusions. I hope Dan Malloy can get us off our cookie diet.

    • jonpelto

      still laughing hours later! If only I had a working credit card, I’d order some of the cookies myself and see how they taste…

  • matt

    Presumably you could also phase in GAAP accounting department by department, right?

    • jonpelto

      Matt, such a great idea. A little complex to implement since some costs like employees benefts go across multiple agencies but it is definately worth exploring. Although it would still take 15+ years to get the state fully onto GAAP, at least people could get a glimpse of the reality of the situation as agencies made the transition. Will have to do some checking on this one.

  • I am hopeful about Dan Malloy putting us back on the right track again. My concern is that folks realize the pickle we are in and not lay blame at his feet. It took years to fine tune this mess and it will take a while to get us out of it. There are no magic wands, just a belt that needs to be tightened a few notches for everyone.

    Thanks for keeping us honest, JP.

  • jonpelto

    Groundhog – I hope you are right. While shooting the messenger is always tempting, it sadly won’t solve the underlying problem. The real question, in my mind, is whether the legislature can find the will to make the cuts, raise the taxes and allocate the funds necessary to bring honest budgeting to Connecticut. Let’s hope.

  • Doug

    congrats on the blog launch jonathan!

  • Don’t know how I missed you starting blogging! Just to be clear – and I really should’ve read the whole post thoroughly, but time is of the essence – by “cost” you mean increase the deficit further, correct? Not the actual cost of implementing GAAP, because that would be absurd.