(This is a revised version of an article that originally appeared on Oct. 5.)
Democratic Governor-elect Dan Malloy said in an Aug. 30 interview that he wants the state to change over to GAAP accounting the day his administration begins.
“The state government requires that of every municipality and board of education,” Malloy said, but the state exempts itself.
Malloy downplayed the costs of GAAP accounting.
“It doesn’t cost a billion,” Malloy said. “It doesn’t cost a billion dollars to change your method of accounting.”
“I understand that requirement,” he said. “It only means you start telling the truth.”
“When you start telling the truth, it gets really ugly,” he added.
Comptroller Nancy Wyman, Malloy’s running mate for lieutenant governor, has long pushed for a transition to GAAP accounting.
Tom Foley, the Republican candidate for governor, also supported the change to GAAP accounting.
Currently, Connecticut keeps two sets of books. The budget is balanced using a modified cash basis of accounting, similar to the way an individual balances a checkbook. When money is spent or received, it is noted in the state’s books.
Most businesses and many governments, including Connecticut’s 169 municipalities, use Generally Accepted Accounting Principals, or GAAP. Accounting under GAAP is based on accruals. Changes in the state’s accounts are noted at the time money is spent or earned, regardless of when the money actually changes hands.
GAAP is considered preferable because it better matches costs with revenue over a period of time. The Comprehensive Annual Financial Report accounts for the state’s finances using GAAP.
John Clark, director of budget and fiscal analysis in the Comptroller’s office, said the CAFR is not required by state statute, but it helps sell the state’s debt. The CAFR “reconciles the budgetary basis to the GAAP,” he said.
The Comptroller’s annual report is required by statute, according to Clark. “Beyond the statutory requirement we believe it is a useful tool for policy-makers,” he said.
Clark said under GAAP the state had a $1.5 billion negative unreserved fund balance in fiscal year 2010. He said changing to GAAP, without reconciling the costs, isn’t possible. “Then your budget’s not in balance,” Clark said. “That’s constitutional rather than statutory.”
Connecticut has a constitutional amendment requiring a balanced budget (Article XXVIII).
The state has made some efforts toward a GAAP changeover, but such a changeover will force the state to reconcile years of budget-balancing gimmicks all at once because those methods aren’t allowed under GAAP.
For example, the state collects revenue to pay for the last fiscal year until August even though the new fiscal year began July 1.
“Really the two should match,” said Tom Fiore, Office of Policy and Management section director for economics, revenue and capital forecasting. “Revenues and expenditures should match.”
Fiore said the state has made some changes in that direction, by shortening the period when revenue from the next year is brought back into the previous.
“According to GAAP, it should be cut off on June 30,” he said.
To make the change to GAAP the state will have to shift the revenue and expenditure calendars so they both match, July of one year to June of the next.
The effect of this change – paying for a more expensive quarter at the end of the year instead of a cheaper quarter at the beginning – is called “baby GAAP.” It will cost about 3 percent of one-sixth of the state budget, or about $70 million.
The state will also have to pay all at once the cost of goods and services received that would normally be pushed to the next fiscal year and make up for the revenues normally drawn from the next year.
This cost, “Big GAAP,” is much larger, at least $1 billion.
Fiore said Big GAAP represents “the sins of the past.”
He said bond investors look at Connecticut’s Rainy Day Fund and the GAAP deficit and say, “Well, you’re in balance,” because the two approximately cancel each other out.
The June audit report breaks out the changes that would need to occur under GAAP, totaling $2.3 billion. Among the changes are:
- $891 million in additional accounts payable
- $585 million in additional Department of Social Services accounts payable
- $364 million less in accrued income tax revenues
- $242 million in additional salary and fringe benefits payable
These accounting costs are partially balanced by:
- $758 million more in federal and other grants
- $199 million more in accounts receivable
“This is our way of saying – while we’re auditing the books of state government – that we need to make this change” to GAAP accounting, Auditor of Public Accounts Kevin Johnston said, referring to the adverse opinion on the Comptroller’s annual report
According to Fiore, the state began to amortize the cost of the GAAP transition over 15 years in 1993. However, the state used some of that money to balance the budget in 2008.