Malloy struggling to keep some portion of GAAP pledge

While gubernatorial candidate Dan Malloy pledged repeatedly to dive into a new budgeting system based on honesty and transparency within moments of taking office, Governor Malloy waded more gradually into Generally Accepted Accounting Principles.

And now, plagued 16 months later by sluggish revenues, a small-but-growing deficit and reluctant legislators, Malloy may not get to dip his toe in the GAAP pool.

Answering reporters' questions Monday about state finances, the Democratic governor spoke for the first time about GAAP in less-than-emphatic terms.

"I'm still hopeful we'll be able to do that," Malloy said about making a $75 million deposit into a new GAAP reserve -- a payment necessary only to keep the $1.7 billion cost of converting to GAAP from getting larger. The more arduous tasks of paying off that huge sum and of reporting state finances based on GAAP rules don't start until the 2013-14 fiscal year.

Compare that with Malloy's Aug. 2, 2010, appearance on WNPR's "Where We Live," when the candidate told host John Dankosky that state government couldn't wait until its next budget was adopted in the spring of 2011 to commit to GAAP.

"I get sworn in on the 5th of January. Before I give a speech, I'm going to sign a document that says every state department will have to report under Generally Accepted Accounting Principles, GAAP finance rules," Malloy said. " ... I'll give my speech and then I'll seek legislation of the legislature that makes GAAP the law of the land. ... We need to start telling the truth to the people of the state of Connecticut."

Malloy repeated his GAAP-Can't-Wait pledge during an Oct. 13 televised debate at The Garde Arts Center in New London.

"What I'm going to do, right as I'm sworn into office, is put my hand down and sign an executive order that says Generally Accepted Accounting Principles, telling the truth, transparency, will be the law of the state of Connecticut," he said.

But converting to GAAP is neither cheap nor easy to accomplish politically.

Unlike the modified cash basis system 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 would end 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.

If GAAP standards are used, state finances are deep in the red. Fiscal analysts for the executive branch pegged that GAAP differential at $1.7 billion last November.

Further complicating matters for Malloy, the budget he inherited was more than $3 billion in deficit under the old accounting rules.

So while Malloy signed an executive order, it didn't direct state agencies to immediately begin reporting finances under GAAP rules. Instead Malloy used the order to give his budget office two months to study the issue.

And while the budget bill Malloy signed last May ordered GAAP reporting and set up a 15-year plan to pay off the GAAP differential -- it  pushed the start of these chores off until the fiscal year that begins July 2013.

The budget does pledge to set aside surplus funds -- $75 million this year and $50 million in 2012-13 -- to stop the GAAP differential from growing worse due to inflation. But even then, the money is deposited only if there's a surplus.

That's where the latest budget problems come into play.

'There just isn't a lot of money right now'

For the past few months, both the legislature's Office of Fiscal Analysis and Comptroller Kevin P. Lembo have projected there won't be a surplus. And last Friday, Malloy's budget office issued its first deficit forecast, projecting a $67 million shortfall due in part to sluggish income tax revenues.

In addition, the $20.7 billion budget Malloy proposed for 2012-13 -- with new money for municipal education grants and to bolster the state employees' pension fund -- was balanced for only 12 months. According to the administration's own numbers, that plan would slip $424 million into deficit by 2013-14.

So if there's a deficit to be closed now, and potential shortfalls to be filled in the years to come, can Connecticut afford to take millions of dollars away from other programs and put them in a GAAP-lock box? Several of Malloy's fellow Democrats on the legislature's Appropriations Committee said this week that the governor's campaign pledge may have to wait.

"I haven't managed to express it out loud until now," Rep. Peter Tercyak, D-New Britain, said, adding he couldn't choose funding the GAAP reserve over social services, town aid, or filling crucial vacant state positions. "There is some value to using the GAAP system of accounting, but we're not in great times where it would be an easier choice."

"You have to respect the governor's position, but there just isn't a lot of money right now," said Sen. Edith G. Prague, D-Columbia. "Maybe that's why GAAP hasn't been instituted all of these years."

Sen. Toni Harp, D-New Haven, chairwoman of the Appropriations Committee, said it's hard to lobby for support to tackle a problem state government has long ignored, won't be paid off until nearly 2020 and is competing with other programs lawmakers can relate to more easily.

"It's sort of like batting at windmills," she said. "I don't think there's a lot of room in the budget for GAAP unless we want to make some tough decisions about changing the responsibilities of this state."

Sen. Robert Kane of Watertown, ranking GOP senator on the Appropriations Committee, said any further delays in GAAP implementation "just proves it was more of a campaign promise than an actual plan. It sounds good and people like to hear buzz words like 'transparency.'"

A priority for a few lawmakers

The 1993 legislature enacted a law mandating the GAAP differential to be paid off over 14 years starting in 1996 -- a requirement that subsequent legislatures and three governors would push into the future, again and again.

And if the best Malloy can say, Kane added, is that he signed a law to address GAAP in the future, so can the governor's predecessor, and the one before that -- and the one before that.

Still, Malloy was back to talking decisively about state finances on Tuesday after writing his commissioners and asking them to redouble efforts to save money. After his monthly meeting with department heads, the governor told reporters, "we are aggressively implementing GAAP."

And not all on the budget-writing committee were willing to push the GAAP conversion effort any further into the future.

"It's still a top priority for me," said Rep. Tom Reynolds, D-Ledyard. "I think we have to wait until we're closer to the end of the fiscal year before we talk about letting this go."

"I think Governor Malloy has been really courageous in taking on this issue," said Rep. Patricia Dillon, D-New Haven, who said a compromise might be a reduced GAAP payment this year, or further delay in dealing with other requirements. "I think we should do something, but the fact is, we're not budgeting on a GAAP basis right now."

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