Connecticut’s two key financial reports for 2008-09 lacked critical information, according to a June report by the Auditors of Public Accounts.
The auditors lacked the information to give a complete endorsement, called an “unqualified opinion,” in both cases.
The Comprehensive Annual Financial Report, or CAFR, received a qualified opinion because an actuarial calculation for the post-employment benefits for state employees was not included in the report.
The Annual Report of the State Comptroller Budgetary Basis received an adverse opinion, a step below qualified, because certain disclosures and footnotes were not included as required by auditing standards.
According to the American Institute of Certified Public Accountants, a qualified opinion fairly represents the financial position “except for the effects of the matter to which a qualification relates.”
The AICPA defines an adverse opinion as an “auditor’s opinion which states that financial statements do not fairly present the financial position, results of operations, or cash flows in conformity with generally accepted accounting principles.”
Kevin Johnston, one of the two Auditors of Public Accounts, said the rules of the American Institute of Certified Public Accountants required his office to give the adverse opinion because the state did not follow an AICPA guideline.
“Basically, that is providing more information to the general public,” Johnston said. “It’s more of a discussion of the financial obligations of the state.”
He said one necessary section would be an extensive discussion of other debt.
Comptroller Nancy Wyman “does provide a lot of information, but it’s in a different report,” Johnston said, referring to the CAFR.
John Clark, director of budget and fiscal analysis in the Comptroller’s office, said the office made a decision not to add the disclosures to the annual report.
“We think that would be more confusing to the reader and the user,” Clark said.
The annual report let’s people see how the budget formulation and implementation differed, Clark said. GAAP basis reports don’t match with the state budget.
He said the disclosures would also add to the length of the report and the Comptroller’s office would exceed its printing budget.
Matthew Rugens, administrative auditor who handles the Comptroller’s office for the Auditors of Public Accounts, said he raised the required disclosures with the Comptroller’s office before they completed the reports.
Rugens said the Comptroller’s office concluded the disclosures were “not feasible.”
“So they were just going to accept the adverse opinion,” he said. “The adverse opinion is that the information is missing, not that anything’s wrong with the numbers.”
The state files the two separate reports because 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 CAFR accounts for the state’s financing using GAAP.
Rugens said his June report is a summary of findings from the CAFR and the Comptroller’s Annual Report.
Clark said the CAFR not required by state statute, but it helps sell the state’s debt. CAFR “reconciles the budgetary basis to the GAAP,” he said.
Clark said meeting the AICPA requirements for the annual report would “to a very large extent” require adding information available in the CAFR.
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.”
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 our Rainy Day Fund and GAAP 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, Johnston said.
Democratic candidate for governor Dan Malloy said he wants the state to change over to GAAP accounting.
“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 Wyman, Malloy’s running mate for lieutenant governor, has long pushed for a transition to GAAP accounting.
Tom Foley, Republican candidate for governor, also supports the change to GAAP accounting.
“I believe the state should adopt GAAP accounting,” Foley said. “I haven’t read the auditor’s adverse opinion, but it doesn’t surprise me.”
“The administration recognizes GAAP is the ideal we’d like to strive for,” said OPM’s Fiore.
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.