The State of Connecticut is budgeted to run a surplus next year, but that result only occurs under the state’s unique system of accounting.
Under Generally Accepted Accounting Principles the state would have a larger surplus during the current year and a deficit next year.
Gov. Dannel Malloy and Lt. Gov. Nancy Wyman have been among the most enthusiastic supporters of changing the state’s accounting to comply with GAAP.
The General Assembly passed a bill Tuesday setting 2013 as the beginning of the state’s changeover to GAAP accounting.
Such a change would make it more difficult for elected officials to use gimmicks to make the budget appear balanced.
GAAP is less prone to manipulation because it is externally defined, while the state itself sets the rules for its current system.
The fundamental accounting difference between the two systems is when revenue and expenses are counted. Under GAAP – used by most businesses and municipal governments – revenue is recorded when earned, not when the cash is received.
The state’s modified cash accounting does the reverse, record revenue when cash is received not when the revenue is earned.
This is the principle that eliminates the projected 2012 surplus.
The state budget for 2012 includes an income tax increase that is retroactive to Jan. 1, 2011. Under GAAP, revenue from the tax increase on income earned between Jan. 1 and June 30, 2011, would count toward the current fiscal year.
However, the budget proposed by the Malloy administration puts that revenue toward the 2012 budget year which runs from July 1, 2011, to June 30, 2012.
The Governor’s original budget document attributed $145 million to the tax increase from January to June. Under GAAP, that $145 million should go toward the current year, but if it was shifted the surplus for next year – projected at $115 million – would be eliminated and the budget would be in deficit.
“I would call it political math,” said Sheila Weinberg, founder and CEO of the Institute for Truth in Accounting. “Because the states are sovereign, there is no standard of calculating the budget.”
Weinberg said all the revenue from Jan. 1 to June 30 should go to that fiscal year.
She compared what the state is doing to an employee who asks their employer to report their income in the next year because they expect to have more tax deductions.
Juliet Manalan, a spokesman for Malloy, referred questions about GAAP to the Office of Policy and Management.
“We will work with our auditors to apply GAAP principles to our FY11 closing in this respect and all others,” said OPM spokesman Gian-Carl Casa.
“What they try to do under this political math is push any revenues into this period and push any expenses out of it,” Weinberg said.
“It’s just manipulation of the numbers. That’s what got the corporations in trouble,” she said.
“A lot of corporate leaders are sitting in jail just for games like this.”
Weinberg’s institute recently put out a report on Connecticut’s finances.
“Connecticut is the worst in the nation,” she said.
David Walker, founder and CEO of the Comeback America Initiative and former Comptroller General of the United States, said retroactive tax increases can also create legal problems.
“It is not normal or advisable to have retroactive tax increases,” Walker said. “Retroactive increases have been successfully challenged in court.”
“If such an increase is challenged legally, there will be both budget and accounting implications,” he said.
“The Governor is not concerned that the budget will be challenged on Constitutional grounds,” said Manalan.
The Roger Sherman Liberty Center filed suit May 6 challenging the budget on the grounds that it is not balanced as required by the Connecticut Constitution.