Despite governor’s pledge, GAAP conversion sacrificed to deficit

After five months of Gov. Dannel P. Malloy insisting that a souring fiscal outlook wouldn’t derail one of his biggest campaign promises, the oft-pledged conversion to Generally Accepted Accounting Principles officially landed on the political back-burner early Tuesday.

Both the governor’s budget director and the House chairwoman of the legislature’s budget-writing panel conceded that the first payment tied to the GAAP conversion was sacrificed to help solve the current budget deficit.

But the administration also insisted that it remains committed to a more transparent and honest budget reporting system, and hopes to begin saving for the GAAP conversion process one year from now.

“We do remain committed to GAAP,” Office of Policy and Management spokesman Gian-Carl Casa said early Tuesday, noting that the statute setting up a 17-year conversion process remains in place. “We are hopeful we will have a surplus at the end of FY 13 and can apply that to GAAP.

But the first financial step in that conversion, placing $75 million into budget reserve when the fiscal year ends on June 30, almost certainly won’t happen, Casa said.

“We can’t because of this year’s budget situation,” he said, referring to a shortfall in the current budget projected as high as $285 million by the legislature’s nonpartisan Office of Fiscal Analysis.

Malloy’s budget chief, OPM Secretary Benjamin Barnes, agreed, noting that while the state won’t close the books on this fiscal year for a few more months, he doesn’t expect $75 million will be available.

“That’s in the realm of possibility,” he said, “but that would be extraordinary good luck and you don’t budget based on extraordinary good luck.”

Technically, converting to GAAP means building up far more than $75 million in reserve.

Unlike the modified cash basis system currently used, under GAAP, expenses must be promptly assigned to the year in which they were incurred. In the context of the state budget, that would end an array of accounting gimmicks that have pushed current expenses into future years.

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. And that margin grows annually due to inflation.

The budget bill Malloy signed last May set up a 15-year plan to pay off the GAAP differential, starting in the 2013-14 fiscal year.

But that measure also pledges to set aside surplus funds — $75 million this year and $50 million in 2012-13 — to cover inflation and keep the GAAP deficit at $1.7 billion.

Even before the latest fiscal wrench was tossed into Malloy’s GAAP initiative, the Democratic governor drew criticism from Republican legislators who argued his conversion schedule didn’t match the pace he had promised as a gubernatorial candidate in 2010.

“Yet another broken promise from the governor,” said House Minority Leader Lawrence F. Cafero, R-Norwalk. “He held this up like a trophy and now, because he has mismanaged the budget, it will not happen.”

Following a press conference late Monday to announce a deal on education reform, Malloy was asked by a Capitol reporter if he felt the new budget-balancing plan his administration negotiated preserved his campaign pledges. “Yeah, I think it does,” he said. “Yeah, I absolutely think it does.”

But the news about GAAP falling off its schedule was broken about two hours later by Rep. Toni E. Walker, D-New Haven, co-chairwoman of the Appropriations Committee, during the House debate that began late Monday and stretched into Tuesday morning.

As Walker answered questions on a bill to close the current deficit and make revisions to 2012-13 finances, she was asked about a provision that made other plans for any budget surplus.

Should state finances somehow finish in the black when the fiscal year ends on June 30, the first $15 million would dedicated to support the 2012-13 budget. That language was crafted to supercede last year’s measure pledging the first $75 million of any surplus to GAAP.

“Because of the budgetary constraints we have this year, that (first GAAP payment) is not going to happen,” Walker said.