Risk Management

Gov. Derails GAAP Use for Connecticut Budget

A veto of an accounting bill gives the governor a victory over the state's comptroller–for now.
Marie LeoneJuly 9, 2007

A stand-off over generally accepted accounting principles, pitting Governor M. Jodi Rell against State Comptroller Nancy Wyman has, has bubbled up in Connecticut. On July 6, Rell vetoed legislation that would have named the state comptroller as the key arbiter of GAAP and thereby gived Wyman the power to switch the way she prepares financial statements.

In effect, the governor derailed a push by the comptroller to use GAAP for the purposes of budget accounting.

The rejected bill had been passed unanimously by the state’s House of Representatives (148-0) and by a 22-14 margin by the Senate. The lawmakers could vote to override the veto, but no decision has been made as to whether that will take place.

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In vetoing the bill, the governor noted that current law gives Government Accounting Standards Board the authority to determine which accounting standards are “generally accepted” in Connecticut. GASB is an independent, private-sector organization that sets GAAP standards and provides accounting-rule guidance for state and local governments.

“The plain language of this bill would allow the [c]omptroller to issue financial statements using whatever standards she prescribed,” declared the governnor. And while Rell conceded that Wyman does not intend to deviate from GAAP, the governor cautioned that “there is nothing in the bill that would prevent a future [c]omptroller from doing so.”

Rell praised GAAP accounting, noting that it is favored by “bond investors and those making economic decisions.” In fact, Connecticut uses GAAP to report financial results to bond-rating agencies, such as Moody’s Investors Service and Standard & Poor’s. But the state currently does not use GAAP for budget reporting. Instead, the comptroller uses a modified version of cash accounting, a practice Wyman wants to eliminate.

GAAP accounting – more specifically accrual accounting – is said to be more accurate and transparent than cash accounting, as well as harder to manipulate. Indeed, in her response to the governor’s veto, Wyman says that by refusing to sign the bill, Rell is helping to preserve “an accounting system that is full of gimmicks and wiggle room.” Further, Wyman charges that Rell has “missed [an] opportunity for the state to adopt a budget accounting system that better reflects fiscal reality.”

Under Connecticut’s cash-accounting system, certain revenues are counted before they are earned, and some corresponding expenses are not recorded until months after they are incurred. That lopsided accounting treatment leads to artificially low levels of state spending, says Wyman, and “can make the budget’s bottom line look much better than it really is.” As a result, Wyman wants to move to accrual accounting, a position that she’s been advocating since she took office in 1995. But switching accounting methods won’t be easy.

To move to GAAP immediately, Connecticut would have to recognize a $1 billion budget deficit on its books. By recognizing the deficit, the state would put its budget out of balance. But an unbalanced budget is illegal, according to the state constitution. The deficit was initially spawned when, in the early 1990s, lawmakers approved skipping one of the state’s monthly Medicaid payments. Later deferrals, combined with inflation and related interest expense inflated the budget gap to its current level.

Interestingly, the Connecticut Constitution grants the state comptroller the authority to “prescribe” the state’s method of accounting. Depending on the definition of prescribe, the constitution may trump the law deeming GASB the official arbiter of GAAP. If that’s the case, the comptroller would be free to use any accounting methodology she sees fit. But so far, Wyman has chosen to follow legislative guidance on the matter.

For her part, Wyman proposed a plan to lawmakers that involves “freezing” the budget deficit at its current level – without recognizing the charge on the state balance sheet – and implementing GAAP going forward. Wyman would then work with the legislature to develop a phased plan to start paying down the deficit, perhaps paying $50 million toward the deficit in fiscal 2008. Eventually, Wyman and lawmakers would establish a firm amortization schedule that was acceptable under GAAP. Wyman figures it would take payments of $150 million every year for the next 14 years to close the deficit gap.

In a previous interview with CFO.com, Wyman acknowledged that the deficit freeze is not what GASB considers GAAP treatment, because when she makes the move from cash accounting to accrual accounting, Wyman would not immediately recognize the $1 billion deficit, and an amortization schedule would not be defined. But there is a reason that she doesn’t take a “purist” view of GAAP, says the comptroller. She operates in a “political” environment, in which lawmakers base budgetary decisions on improving schools, roads, and healthcare programs, not accounting methodology.

And despite winning support from the House and Senate, Wyman’s phased-in GAAP proposal, which helped push through the bill, has been met with great skepticism by GASB and the governor. The Financial Accounting Foundation, the parent organization of GASB, “strongly believes that standard setters must be free from political or commercial influence,” says FAF spokesman, Gerard Carney, noting that the Connecticut comptroller is an elected official. “We applaud Governor Rell and appreciate her support and understanding of the importance of independence to standard setting,” Carney told CFO.com, adding that FAF believes Rell’s decision was “in the best interest of the public – particularly taxpayers and investors in Connecticut debt.”

In vetoing the legislation, Rell said that she had “serious concerns about the potential fiscal impact” the bill might have on the state. “I understand the intended purpose of this legislation and I have not objection to providing the Office of the Comptroller … the flexibility [it needs] in preparing our state budget,” said Rell. “This bill, however, goes well beyond providing that flexibility.”