State’s cash flow problem sparks partisan feud

A new report showing state government’s operating cash pool is running low sparked a partisan dispute Friday between minority Republicans in the House of Representatives and Gov. Dannel P. Malloy’s administration.

And while House Minority Leader Lawrence F. Cafero, R-Norwalk, tried to link the cash flow problem to an unstable state budget, Office of Policy and Management Secretary Benjamin Barnes countered that it stems from decades of fiscal gimmicks that preceded the current administration.

House Republicans cited state Treasurer Denise L. Nappier’s monthly cash flow report, which showed she temporarily shifted funds in December from capital programs to cover operating expenses. This is a legal procedure employed on past occasions at year’s end or on other occasions when bills exceed tax and other operating fund receipts.

“The state’s cash at hand is at near record-low levels, further evidence that Connecticut’s fiscal health is in question, contrary to the Malloy administration’s assertions,” Cafero said.

Barnes’ office and state Comptroller Kevin P. Lembo have reported in recent weeks that this fiscal year’s $20.14 billion state budget is roughly $80 million in the black, a surplus of less than one-half of 1 percent. And that’s despite about $1.5 billion in new state taxes.

In addition, both offices also concede that with key income tax filing data delayed last fall after two severe storms, the state won’t get a clearer picture of how its chief revenue source is faring until January.

According to Nappier’s report, the state had just under $196 million in its operating cash fund entering December. But Connecticut also had roughly $1.3 billion in accounts for capital projects being financed through bonding. And because the state operates from a common cash pool that mingles tax revenues, federal grants and receipts from fees and licenses with borrowed funds, the treasurer’s office is allowed to transfer funds between operating and capital programs.

Weekly disbursements from the entire common pool average approximately $540 million, according to the treasurer’s office.

During the past few years, several House Republicans have objected to this system, arguing it allows administrations to hide problems with the operating budget.

Malloy and his fellow Democrats in the legislative majority “rammed through the largest tax increase in history and we are borrowing millions for state employees’ salaries and to keep the lights on,” Cafero added. “Why can’t Connecticut keep up with its bills?”

Barnes countered that Cafero’s statement was false and Malloy’s budget chief particularly bristled at the GOP leader’s use of the term “borrowing,” since Nappier’s transfers didn’t cost the state any money.

“The assertion that the state is using “borrowing to cover operating gaps” is false and reflects ignorance of how the state’s budget and cash management work,” Barnes said.

Nappier said Friday that the House GOP release is “unfortunate evidence that they value political gamesmanship over the facts.”

Though Nappier conceded that transferring funds from capital programs — and restoring them shortly thereafter — is done “fairly infrequently,” it is “part of our arsenal of cash-management tools.” The treasurer has said these transfers enable the state to avoid incurring the high interest charges it would face if it approached Wall Street or a bank for financing explicitly to cover operating expenses.

The real culprit, Barnes added, is the modified cash basis accounting system that has allowed past administrations and legislatures to balance a series of budgets with hundreds of millions of dollars in phantom savings and creative accounting.

Malloy is pushing to convert state finances to generally accepted accounting principles, a series of common financial guidelines that emphasizes transparency. 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.

The legislature’s nonpartisan Office of Fiscal Analysis estimates state government would need another $1.7 billion on hand to be in compliance with GAAP rules.

State government did borrow to help pay its bills in 2010 under a plan crafted by Nappier and approved by then-Gov. M. Jodi Rell. The state obtained $580 million in bond anticipation notes — effectively a short-term loan — that were paid off one year later with an interest charge of about $10 million.