HELP! HELP! They’ve Fallen into the GAAP and they Can’t Get Up

Hey Buddy, didn’t you see the sign.  It says “MIND THE GAAP.”

The issue was one of candidate Dan Malloy’s most important campaign promises and on January 3, 2011 it was the topic of my very first post here on Wait, What?;  MIND THE GAAP – Confronting the Cost of Fiscal Honesty.

Candidate Malloy had made it abundantly clear, he was going to put Connecticut fiscal house in order and that meant moving the state to Generally Accepted Accounting Principles, the modern accounting system.

My first post (link above) provides some background on the whole GAAP issue, but my assessment begins with the observation that with Malloy’s commitment, “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.”

Beware the GAAP

My post went on to say “during this year’s gubernatorial campaign Dan Malloy and Nancy Wyman repeatedly pledged that moving Connecticut to GAAP accounting was the single most important way to ensure greater honesty and transparency in state budgeting…and then I concluded with “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.”

So, the day Governor Malloy was sworn into office, he signed an Executive Orders requiring the state start utilizing GAAP principles.

A month later, after they realized a rapid shift to GAAP was prohibitively expensive, Malloy proposed a state budget that made a $75 million down payment this year and another $50 million down payment next year, followed by a 15 year $150 million dollar a year payment schedule that would complete the transition to GAAP and allow Connecticut to properly manage its state budget and finance system.   While the implementation was now scheduled to take place over 17 years and not immediately as he had promised, it was still a step forward.

All this year, even when Malloy’s budget office was begrudgingly forced to admit there might be a budget deficit, Governor Malloy, OPM Chief, Ben Barnes and anyone else with the authority to speak for the Governor stuck to their talking points, pledging that the State would find the funds to make that critical first payment toward its 17-year GAAP conversion process.

And then, quietly, in the middle of the chaos that is known as the last few days of the legislative session, the Malloy administration did it…they withdrew their commitment to make the $75 million payment this year and chose to forego the opportunity to take that first baby step toward fiscal accountability.

Speaking on behalf of Governor Malloy, Gian-Carl Casa, of the Office of Policy and Management, admitted to CTMirror’s Keith Phaneuf that “we do remain committed to GAAP…We are hopeful we will have a surplus at the end of FY 13 and can apply that to GAAP.”

The Malloy Administration is “hopeful” that you will have a surplus next year and can then begin the conversation toward GAAP?

Hopeful?

As a direct result of this administration’s bad fiscal policy decisions and the faltering economy, Connecticut’s next budget is already a half a billion dollars in deficit and they’re telling the public that they are “hopeful” that there will be a surplus so they can begin the GAAP conversion process that they had promised.

Oh, and when a reporter recently asked Malloy whether his new budget changes (including forgoing the GAAP payment) preserved his campaign pledges, Malloy was heard to say  “Yeah, I think it does…Yeah, I absolutely think it does.”

But perhaps the biggest kick of all is that as part of the budget changes that the Malloy Administration and Legislature made this week, they voted to remove the language that said if there was a surplus this year it would go toward the GAAP payment.  Instead, the law now reads that if, by some miracle there is a budget surplus, the money will automatically be shifted into next year’s budget.

For more see CTMirror’s http://ctmirror.com/story/16269/despite-governors-pledges-gaap-conversion-officially-deferred-close-budget-deficit

Malloy – The Accountability/GAAP Candidate Takes a Giant Step Backward

(Cross-posted from Pelto’s Point at the New Haven Advocate)

As CT Mirror reporter Keith Phaneuf reveals in a story today, the massive budget implementation bill that passed the House of Representatives last night not only upended Connecticut’s public financing system and undermined Connecticut’s community colleges but hidden inside the 350-page bill was language allowing Governor Malloy to push off his campaign promises on converting Connecticut to Generally Accepted Account Principles.

Day after day, week after week Candidate Dan Malloy and his choice for Lt. Governor, Nancy Wyman made the conversion to GAAP a lynch-pin in their effort to prove to voters that they would bring an end to politics as usual in Hartford.  GAAP was not only important in and of itself but a symbol of how Malloy/Wyman were going to bring honesty to Connecticut’s budget process.

But now in the driver’s seat, the Malloy Administration added language to the massive budget implementation bill that delays most of the changes necessary to implement GAAP for two years – and perhaps most amazingly – delays even beginning to pay off the $1.5 billion “GAAP conversion
cost” until FY 2014.

As Phaneuf explains;

“unlike the modified cash basis currently used, under GAAP expenses must be promptly assigned to the year in which they were incurred.  Similarly, revenues are counted in most situations in the year in which they were received.”

“In the context of the state budget, that ends an array of accounting gimmicks that have pushed current expenses into future years and similarly used revenues received in one year to balance the books of the prior year.”

But Malloy and his Administration failed to follow through on their most fundamental promise and now he has asked and received legislative authorization to postpone shifting to GAAP.

Last night’s approved bill also includes a provision that actually moves Connecticut in exactly the opposite direction of fiscal accountability.  Language was added that ends the “current requirement that agencies pay all expenses incurred in a fiscal year within 30 days of that year’s end.”

In short this change will mean agencies will be allowed to  book expenses that have no direct association to the fiscal year in which the money was authorized.

The State Comptroller must close the state books within a month of the end of the Fiscal Year but this legislation actually allows the Malloy Administration even greater flexibility to authorize payments in one fiscal year for expenses in another.  The very problem that helped create Connecticut’s fiscal disaster in the first place.

What on earth happened to the “Accountability Candidate”?

And after all that has happened and all the rhetoric, why isn’t the Legislative Branch drawing a line in the sand when it comes to the use of these fiscal gimmicks.

For more on this story,  read Keith Phaneuf’s articles on a regular basis and especially this one.  http://ctmirror.org/story/12759/gaap-conversion-doesnt-kick-until-2013-under-house-bill

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