Imagine recording expenses as money is actually spent, and recording revenue as money actually comes in. Hardly sounds revolutionary, right? Well in state government, that’s almost never how it happens.
Budget mavens have all kinds of tricks to disguise red ink. They can delay payments owed by just a few days in order to book the money in a different month or fiscal year, or project additional revenues using rosy scenarios that aren’t likely to pan out. But once they come clean, their states have to pay back the cash. In Connecticut, that process costs big bucks — as in, half a billion dollars.
Connecticut Gov. Dannel Malloy (D) pledged during his campaign to end the budget gimmickry. In part, that means giving up the usual system of government accounting in favor of what’s known in the industry as generally accepted accounting practices. Under GAAP, the state will take credit for revenue as it comes in, and recognize expenditures as money is actually spent.
“We allowed ourselves to get deeply in the hole for failing to follow the precepts of GAAP. At the heart of it, what this is about is paying your bills,” said Ben Barnes, Connecticut’s Secretary of Policy and Management. “There were years when they had a budget problem and they solved it by delaying payments to nursing homes for a month. That doesn’t actually solve budget problems.”
But changing accounting procedures isn’t as simple as rewriting a manual. Instead, Connecticut will have to account for the budget gimmicks that previous administrations used. That means a bunch of past-due bills are suddenly on the books. And last week, Connecticut floated $560 million in bonds to pay those bills.
That makes it look like Connecticut’s budget situation just got half a billion dollars worse. Instead, experts say, the state is actually accounting honestly for the money it has already spent.
“There’s a one-time recognition of a lot of deferred charges and other things that have been put off for the future,” said Mark Robbins, head of the University of Connecticut’s Department of Public Policy. “The more you start to push off into the future some of the expenses for things you consume today, the GAAP accounting really doesn’t let you reap a current benefit from doing that. Once you decide to reconcile all those accumulated charges, you have these big hits on the books.”
Republicans love the GAAP system. When Malloy used his state of the state address to issue a call for more reasonable accounting practices, Republicans gave him a standing ovation, said Senate Minority Leader John McKinney (R). And Robbins said the accounting system will force the state to show a more realistic portrait of its finances.
“If you are forced to recognize the costs today of the consumption that you have today, that would be a more conservative focus, and a better way to recognize the actual cost of government,” Robbins said.
But the GOP doesn’t like the fact that Malloy decided to float bonds to fill the budget holes, rather than cutting spending to get there.
“The governor and the legislature have been unwilling to reduce state spending and have been forced to borrow to cover our operating deficits,” McKinney said in an interview. “If [Malloy] were willing to spend less, he could have had the money to pay off the notes before he had to borrow.”
Earlier this year, Connecticut’s general fund was so short on cash that it had enough to operate for just eight days. The state secured a $300 million line of credit, though tax revenues began coming in fast enough that the state didn’t have to draw down any of that money.
Republicans say Malloy is using the bonds, supposedly floated to cover earlier payments made before the GAAP system, to refill that general fund, and to delay any new debts until after he stands for re-election in 2014. Connecticut issued another $314 million in bonds to refinance part of a $1 billion debt left over from the 2009 budget.
“Every fiscal bit of news we’ve gotten, they’ve used GAAP as camoflauge or to confuse the issue,” said state House Minority Leader Larry Cafero (R). “We are borrowing to pay the light bill. That’s what we’re doing.”
Barnes, though, said floating the bonds would force the state to get its fiscal house in order. Accounting gimmicks allow the state to effectively owe itself money; the political will to pay that money back almost never exists. But floating the bonds forces Connecticut to be accountable to the market, which means the state will have to pay it back. And with such low interest rates available now, Barnes said, that’s a good investment.
“This helps restore the cash position of the state and will help us to reduce some of the other measures that have been taken over time to ensure we had the cash to pay our bills,” he said. The cost of borrowing funds in the market are not very far out of line with our long-term assumptions about inflation. I’m not going to say it’s free money, but it’s very inexpensive for the state.”