A new report by Gov. Dannel P. Malloy’s Budget Director Ben Barnes shows that when the state switches to Generally Accepted Accounting Principles the budget deficit will grow by $1.52 billion. That’s on top of the already $3.3 billion budget deficit for next fiscal year.
“The good news is that this is the bottom line on our state’s fiscal woes,” Malloy said in a press release Monday. “There aren’t any more gimmicks or other tricks being used to make the budget ‘look’ balanced in name only.”
The report required by his first executive order recommends starting to repay the $1.52 billion deficit over the next 15 years, “unless economic circumstances allow for a more rapid repayment.” Repayment wouldn’t begin until 2014 even though Malloy’s budget for the next two years recommends $72.8 million in fiscal year 2012 and $47.5 million in fiscal year 2013 for transition to GAAP.
Currently state budgets using a modified cash basis, which generally involves reflecting revenues when they are actually received and expenditures on the date payment is made. GAAP takes into account the revenues when they are measurable and available to finance the expenditures of the fiscal period leaving less room for gimmicks like delayed payments from one fiscal year to the next.
“Secretary Barnes’ report isn’t pretty, but it’s truthful and honest and will get us to a place that will make our state more fiscally sound and stable for years to come,” Malloy said.
“It makes sense he’s putting it out past this budget with an already $3.3 billion deficit,“ Rep. Vincent Candelora, R-North Branford, said Monday. “We’ve supported implementing changes in the out years.”
Implementing GAAP is a move the legislature has procrastinated for years even as it took baby steps toward it. But Malloy isn’t taking no for an answer. He has been saying since the campaign trail that he refuses to sign any budget that doesn’t recognize the state’s switch toward GAAP by 2014.
“There is no easy way to clean up years of deferring decisions that are in our state’s best interest,” said Barnes. “This report is a blueprint to help get our state on sounder fiscal footing and frankly, require of the state the same thing it requires of its 169 cities and towns – an honest, truthful budget.”
State Comptroller Kevin Lembo applauded the report.
“The comptroller’s office has prepared financial reports according to Generally Accepted Accounting Principals for more than 22 years, and has long advocated this format in all areas of state government,” Lembo said. “I commend Gov. Dannel P. Malloy’s administration for taking this important step to implement GAAP, which will provide greater budget transparency. The state’s bond rating agencies will also view GAAP in a positive light, which will help to keep state borrowing costs low.”
Barnes’ 49-page report makes the following recommendations:
* That the reporting and other statutory requirements with respect to the fiscal years 2012 and 2013 budgets continue on the budgetary basis, but that information be included by the Secretary of OPM in his monthly letters to the Comptroller, in the Fiscal Accountability Report, and in the development of consensus revenue estimates with OFA in regard to projected GAAP-based operating results.
* That starting with the full implementation of GAAP-based budgeting in fiscal year 2014, the Comptroller would issue one annual financial report each year (i.e., the CAFR), with the September 1st budgetary basis annual statement being eliminated. The Comptroller, in his monthly letters regarding the status of the current year budget, would provide updates as to estimated results for the prior year until the CAFR is issued.
* Starting in fiscal year 2014, the accumulated GAAP fund balance deficit, currently projected at $1.52 billion would be repaid over 15 years, unless economic circumstances allow for a more rapid repayment. The repayment amount would be treated as a gradual recognition of prior expenditures and not included in expenditure cap calculations. For accounting purposes, a one-time credit to expenditures is proposed in fiscal year 2014 to cover accruals in the July and August period that would, under the new GAAP method of budgeting, belong to the prior year.
* Necessary amounts for continuing appropriations, when identified, would be reserved in fund balance and be recorded as expenditures in the year of actual expenditure.
* Changes are proposed for the definition of budget balance under GAAP that would require that any audited GAAP fund balance deficit (not including the accumulated GAAP fund balance deficit being repaid under this plan) be addressed in the fiscal year following the completion of the audit containing the fund balance deficit.
* Related to the definition of a balanced budget under GAAP would be statutory requirements that designate the uses of future surpluses for uses such as: retiring Economic Recovery Notes, Economic Recovery Revenue Bonds, and other debt; reducing underfunded pension and OPEB liabilities; reducing the reserved GAAP transition charge; building the Budget Reserve Fund; and establishing a pay-as-you-go infrastructure program.
* The implementation of GAAP-based budgeting will require a number of changes and implementation actions, including in the following areas: year-end closing procedures and timeframes; the development, presentation and management of the budget; accounting and budgeting control practices and procedures; Core-CT and agency-specific systems; state statutes; and training of state staff. The proposed changes and implementation actions, along with the associated timelines, are outlined in this plan.