Malloy moves to end budget gimmicks despite legislative reluctance

While Gov. Dan Malloy used his first executive order Wednesday to begin whipping Connecticut’s finances into shape, state legislators warned they aren’t ready to go cold turkey when it comes to budget gimmicks.

And though Malloy kept a campaign pledge to begin the conversion to generally accepted accounting principles on Day One, he stretched that promise by giving his budget staff an extra two months to develop a plan.

State government’s historic fiscal crisis has been “coddled by a habit of political sugarcoating that has passed our problems onto the next generation,” Malloy said Wednesday during his inaugural address. “Well, ladies and gentlemen, the next generation is here.”

The legislature initially mandated GAAP conversion in 1993–and has postponed it repeatedly since rather than swear off an array of fiscal gimmicks that has enabled it to balance budget after budget with hundreds of millions of dollars in phantom savings and creative accounting moves.

According to the Government Accounting Standards Board, adherence to GAAP means following a series of common financial guidelines–already imposed on Connecticut cities and towns–that emphasize transparency.

One of the key principles of GAAP accounting is that states recognize expenses on their books as soon as they are incurred. Similarly, revenues aren’t recorded until the money’s in the bank.

But in the context of Connecticut’s $19.01 billion state budget, tens  — and sometimes hundreds – of millions of dollars in tax hikes or spending cuts can be averted simply pushing an expense off for a week or two.

For example, nursing home payments due just before one fiscal year ends on June 30 could be pushed into mid-July, and therefore into the next year. Although the expense hasn’t gone away, the problem is temporarily avoided.

Similarly, Medicaid expenses incurred in one fiscal year can be paid in the next.

And certain tax revenues accrued at summer’s end often are effectively drawn back into the prior fiscal year to help balance the books.

The problem with this shifting process is inflation, which leaves the future inheriting a somewhat higher cost.

According to calculations by the comptroller’s office in the Comprehensive Annual Financial Report, these gimmicks have gradually amassed a sizable spread between the budget set under the modified cash system and a budget that adheres to GAAP.

By the end of 2008-09 fiscal year it had grown beyond $1.35 billion.

Malloy wants all of those maneuvers to go away at the same time he is asking the legislature to help him close the largest budget deficit in state history, a $3.67 billion gap built into the 2011-12 fiscal year.

But will legislators, most of whom already concede that considerable tax hikes and spending cuts will be needed to close that deficit, want to make more problems by converting to an accounting system many voters aren’t even familiar with?

“This is going to be a hard sell,” Sen. Toni Harp, D-New Haven, co-chairwoman of the budget-writing Appropriations Committee. “When we tell legislators we’re going to have to cut programs they care about so the money’s in the bank before the bills arrive, some people are going to be scratching their heads.

Though Malloy’s fellow Democrats control both the House and Senate, the challenge of GAAP conversion transcends party politics, two former House speakers said Wednesday.

“The best thing Gov. Malloy can do is be prepared to move gradually,” Moira K. Lyons, speaker from 1999 through 2004, said, noting many current legislators haven’t served during tough fiscal times. “I think it’s going to take a couple of years for people to adjust to this.”

Lyons’ successor, Milford Democrat James Amann, said Malloy needs to remember “people are going to be asked to make decisions they have never made before. They have no choice, but there are always going to be people in any (legislative) caucus who will fight to the end.”

Both Lyons and Amann predicted Malloy would be successful getting the legislature to embrace a GAAP conversion plan, but whether any real progress would begin before a more robust economic recovery arrives is questionable.

Lyons, who like Malloy comes from Stamford, added that the new governor does have one big advantage: he is not afraid to engage the legislature directly and, if necessarily, forcefully.

“Dan Malloy says what he thinks and he will allow for a difference of opinion,” she said. “But you can’t ignore the problem. If you don’t like something, he’s going to expect you to offer some other solution.”

Republican leaders in the House and Senate, who have endorsed GAAP financing, were less optimistic that the next state budget would look any different than the current one in terms of accounting principles.

“The majority’s track record is not very good,” said Sen. Tony Guglielmo, R-Stafford, a veteran member of the Finance, Revenue and Bonding Committee. “I would hope we would all understand that we’re really in very serious times and we need to start facing our problems. We’ll have to see.”

“I have heretofore been disappointed every time” by the legislature’s unwillingness to forgo budget gimmicks, House Minority Leader Lawrence F. Cafero, R-Norwalk, said. “I think it will be a very, very hard sell with the Democrats.”

Even as Malloy was launching the push toward GAAP financing, he was building in a delay.

Throughout the fall campaign, Malloy said that while he wouldn’t sign a new budget until the legislature enacted a GAAP conversion plan, he also insisted he wouldn’t wait for them. That meant, he added, that on his first day in office he would sign an order directing all agencies to follow these principles.

But the order signed Wednesday doesn’t go that far.

It does instruct, the Office of Policy and Management to prepare Malloy’s proposal for the next state budget, due to the legislature by Feb. 16, in accordance with GAAP principles.

But rather than order state agencies to follow GAAP principles now, despite the lack of a statutory mandate, Malloy ordered OPM to have a conversion plan completed “within 60 days” after his first budget proposal is submitted, which would mean by mid-April.

“A lot of this is going to depend on how the new governor leads,” Cafero added. “GAAP means you’re telling the truth. You can’t have GAAP lite.”

Malloy also signed two other executive orders on Wednesday that would:

  • Preserve e-mails received by former Gov. M. Jodi Rell’s administration for archival purposes.
  • Allow certain retired state employees serving under Rell to continue to serve briefly under the Malloy administration while it completes its applicant reviews.