Thursday, December 06, 2012

Cooking The Books The Malloy Way


Charming how Connecticut, whenever the state dips its toes into a budget crisis, tends to cook the books.

During his first gubernatorial campaign in 2010, Governor Dannel Malloy campaigned on a platform to adopt real world accounting measures so that the accounting sins of preceding governors – two of them Republicans and the third a “Maverick” Republican – would not be visited on Mr. Malloy or succeeding governors, yea, even to the third generation.

That was what Generally Accepted Accounting Procedures (GAAP) was all about. Connecticut’s modified cash basis system, an accounting method full of blue smoke and mirrors, had played havoc with state budgets, the governor and his Malloyalists said. Adopting GAAP would end what one reporter at the time called “an array of accounting gimmicks that have pushed current expenses into future years.” No more budgetary sleight of hand, the governor strongly implied in his public statements.

When Mr. Malloy first presented his plan to transition to GAAP at a Connecticut Society of Certified Public Accountants gathering at the Aqua Turf in Southington in May, 2011, “Three hundred Certified Public Accountants applauded when Malloy described his first executive order which requires the state to transition to Generally Accepted Accounting Principles, or GAAP,” according to one account.

At the point when GAAP was ready for launching, it was discovered that Connecticut would need about $75 million to fuel the rocket. The state, then suffering a budget deficit of about $285 million, did not command sufficient surplus funds to get GAAP off the launching pad, and the project was put on the back burner for five months. The differential between GAAP and Connecticut’s modified cash basis system at the time was about $1.7 billion – not pocket change – and the state needed the $75 million to cover inflation and retain the deficit at $1.7 billion. The first budget bill signed by Mr. Malloy allowed for a 15-year plan to pay off the GAAP differential, starting in the 2013-14 fiscal year.

Connecticut could not afford the down payment on GAAP, the first payment tied to the GAAP conversion having been sacrificed to pay for a then current budget deficit and, for all practical purposes, the GAAP conversion was indefinitely postponed last May.

As the French say, plus ça change, plus c'est la même chose: the more things change, the more they remain the same.

A few weeks after recent elections had been concluded in Connecticut, some gremlin deep within the Malloy administration discovered that the state budget was out of balance by about a half billion dollars; this after Mr. Malloy had reached deeply into the pockets of Connecticut’s citizens -- who regularly vote Democratic in the state by a margin of two to one -- and pulled out about one and a half billion dollars in new taxes to defray his first deficit in his first unbalanced budget.

Not to worry: Democratic President Barack Obama was in charge, and it was felt that under his hand the national economy would once again bloom, following the Bush blight. Similarly, Connecticut’s economy would flower under the hand of Mr. Malloy, who pledged to re-invent the way state government does business.

Didn’t happen. A government that spends beyond its means is sooner or later slated for the poor house.

According to a recent report, “cascading financial problems,” a poetic analogue indicating the newly discovered $415 million state deficit and other distressing economic shortfalls, “became even more complicated when Republican members of the Assembly found that an additional $260 million borrowed for long-term capital projects had been moved to the monthly cash pool to pay for operating expenses.

“The $260 million was transferred by Treasurer Denise Nappier on Monday, the same day she announced that as of the end of November, $366 million in bonding funds had been transferred to the cash pool because of low balances driven mostly by the growing shortfall in the budget. That gap ranges from $365 million to $417 million.”

Not quite as eupeptic as some other Malloyalists, Ms. Nappier has also taken other necessary precautions: “Nappier also announced that because of a ‘significant decline’ in the cash pool, she was establishing lines of credit with banks totaling about $550 million -- in case more money was needed to float monthly expenses.”

Ms. Nappier evidently is not a student of Mr. Malloy’s early campaign speeches.

The lede in the report covering the smoke and mirrors pretty much says it all: “The state turned to some creative accounting Wednesday to help pay the bills, raising concerns among minority Republicans in the General Assembly.”

Ah yes, creative accounting is back.

Ms. Nappier’s announcement that she has transferred $366 million in bonding funds to an exhausted cash pool designed as a hedge to keep the state’s head above its red ink, a deficit of $415 million announced during the post-election period by Comptroller Kevin Lembo, has bestirred Republicans.

For seven months in the last year, Ms. Nappier has used capital accounts to pay monthly bills totaling $1.6 billion.

"We're going month-to-month, borrowing money out of bond proceeds, and it's just getting progressively worse," said Republican leader in the House Larry Cafero. "I don't understand how the governor can say it's not a big deal."

It’s a big deal.

1 comment:

peter brush said...

Connecticut wouldn't be Connecticut if it were not cooking the books. We are a strong people...
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As governor, Mr. Malloy laid down ground rules. He said spending, which was on a course to grow by $1.8 billion, would remain flat. He said he would not borrow to cover operating expenses, as the state previously did. He promised to pay the state’s pension obligations fully and to make costly catch-up payments for years they were skipped. He ruled out early retirement plans, saying they really did not save anything and only stretched the pension system thinner. And he imposed strict accounting standards to bring more transparency to the state’s balance sheet.

The strategy was simple: demonstrate a willingness to make tough cuts first; then demand sacrifice from labor; and only then ask the public to go along with tax increases.

That, of course, puts him in direct opposition with Governors Christie and Cuomo, who say their citizens are already overtaxed.

But Mr. Malloy does not apologize for proposing tax increases.

“It’s what’s right for my state,” he said. “Connecticut would not be Connecticut if we cut $3.5 billion out of the budget. We are a strong, generous, hopeful people. We’d be taking $800 million out of education. You can’t do that in this state. You’d have to gouge the Medicaid system. You’d have to close 25 percent of the nursing homes. What do you do with people?”
http://www.nytimes.com/2011/02/16/nyregion/16malloy.html?pagewanted=all