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Applause For GAAP

by Christine Stuart | May 24, 2011 5:00am
(6) Comments | Commenting has expired
Posted to: Business, Labor, State Budget

Christine Stuart photo

Gov. Dannel P. Malloy

It was Gov. Dannel P. Malloy’s type of crowd.

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.

Malloy was the keynote speaker at the Connecticut Society of Certified Public Accountants Monday afternoon at the Aqua Turf in Southington.

Malloy touted the two year $40.11 billion budget, which raises taxes an additional $1.4 billion, cuts spending by about $760 million, and asks state employees for $1.6 billion in concessions. The state employee unions still need to ratify the $1.6 billion concession package and Malloy’s administration is working on coming up with $400 million more in spending cuts and revenue changes, which don‘t raise taxes further than $1.4 billion.

Malloy also bragged that for the first time in years his budget fully funds the actuarially required contribution to the state employees pension fund.

It’s those long term obligations like the pension fund and other post employee benefits, which includes retiree health insurance, that the group of accountants seemed to care about the most.

“We have presented a plan to move towards GAAP very solidly, including making it the law of the state of Connecticut. And we’ve also presented a plan for paying off the deficit over a period of time,” Malloy told the group.

But Michael Kraten, assistant professor of the Department of Accountancy at Providence College, said Malloy’s plan to move toward GAAP wasn’t bold enough because it’s recommends modified GAAP and not full accrual GAAP.

Under full accrual GAAP, the state’s assets would be depreciated, however, modified accrual only recognizes revenues if they are available to finance expenditures of the period.

Malloy said he doesn’t know enough about the difference between the two to really explain why the state went with modified GAAP. He said he left that up to his Budget Director Ben Barnes to decide.

“Unfortunately for you, you got me and not Ben. He’s a lot brighter than I am,” Malloy quipped.

“I suppose what I’m saying is we need time. I didn’t create this mess and we need time to dig our way out of it,” Malloy said. “Remember I’m a lawyer, not an accountant.“

But even as a former prosecutor Malloy made moving to GAAP one of the main platforms of his campaign, despite its wonkish appeal.

“Look I was ready to lose the election rather than lie to people,” Malloy said. “I ran against a guy who said he was going to close a $3.5 billion deficit, by cutting spending by $2.5 billion. CPA’s? Little problem there?”

He said there’s not 18 percent, or $2.5 billion to cut from the budget, which is why he chose a combination of spending cuts and tax increases, in addition to a transition to GAAP. He said GAAP improves the transparency of the budget process.

Currently the state reports its budget 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 leaving less room for gimmicks. In the past lawmakers and former governor’s have delayed payments in one fiscal year to make the budget for the current fiscal year balance, a gimmick unacceptable under GAAP.

Malloy reminded the group that he doesn’t talk about surpluses because Connecticut really doesn’t have a surplus based on its long term unfunded liabilities, even though close an additional unallocated $1 billion is built into the two year budget.

He said he doesn’t call it a surplus because the history in Hartford is “everybody scrambles around to say well now let’s try to figure out a way to spend that and I reject it and I’m not going to do it.“

Marcia Marien, president of the organization, said in Malloy’s defense the method of full accrual was only adopted in 2002 and few governments have adopted the method.

“Government’s don’t adapt to new things very easily,“ Marien said.

She said her concern is that Malloy has promised not to borrow to cover operating expenses, but what about future governor’s?

It’s great that Malloy has acted responsibly when it comes to straightening out the state’s budget mess, but “what about the next administration?,” Marien said. “He’s hitting the biggest concerns individually, but we’re worried about long term for the state.”

She said the final concern that group has is related to funding the pension benefits and the other post employee benefits. She said he’s the first governor to fully fund the pension, but funding the other post employee benefits is important, too.

“At 48 percent funded, we need to be serious about reform,” Malloy said describing the 52 percent unfunded pension liability. “Let me assure you that this [SEBAC] agreement that we reached, if not getting to perfect sustainability will move us rapidly in the direction of sustainability.”

Malloy defended the state’s defined benefits pensions over 401K type plans offered in the private sector. He said if the state had made payments to the fund as required then there wouldn’t be a problem.

“As Mayor of the City of Stamford we had pension plans that were 125 percent funded,” Malloy said. “And even in this gigantic downturn remained relatively well-funded.”

Julie McNeal, who represented the Connecticut Society of Certified Public Accounts on former Gov. M. Jodi Rell’s Post Employment Benefits Commission, said she has some concerns about the estimated savings in the SEBAC agreement, but doesn’t disagree with Malloy regarding defined benefit plan.

She said if the state decided to close its defined benefit plan to new employees, who would likely be offered a 401K type plan, then you’re still going to have an unfunded liability because there will be no new employees contributing to the plan.

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(6) Comments

posted by: Disgruntled | May 24, 2011  8:09am

The Nutmeg King is relying on the same industry that gave us Enron and Madoff and the current banking crisis. As anyone having anything to do with corporate America knows,one can purchase any kind of accounting one desires. Ask the good folks at Lehman. Check Moody’s and S&P’s track record.
“Modified” v “full accrual” GAAP should be a red flag to any reader,and telling the group that BEN is the expert? Ben has had several jobs since he left school,the bulk of them as an “expert” in Stamford.Just saying something often and loudly does not make it true!
Dan left huge pension liabilities in Stamford that might well have been funded at one time. Not anymore.
Dan has a spooky and casual way of twistng facts. As I said in another post the link below,generated by people with their own agenda,is a fun but clear warning about Dan.

http://www.youtube.com/watch?v=Re5XdukW4oI

posted by: Michael Kraten, PhD, CPA | May 24, 2011  9:40am

Full Accrual vs. Modified Accrual GAAP

Thank you, Ms. Stuart, for your detailed and timely coverage of our event. As you accurately reported, and as I indeed raised at yesterday’s session, the Connecticut Society of CPAs strongly recommends the adoption of the full accrual method of GAAP by our state government. In fact, the statement “Connecticut must implement full-accrual GAAP budgeting” is the very first of the Society’s three formal core recommendations regarding state budgetary issues.

It may be worth noting that the Governor did not rule out transitioning from modified accrual GAAP to full accrual GAAP at some time in the future. As you noted in the article, my colleagues and I would indeed consider that to be a very “bold step” for the Governor, one that would be embraced wholeheartedly by us.

Michael Kraten, PhD, CPA
Providence College

posted by: JAM | May 24, 2011  2:29pm

Malloy made GAAP a centerpiece of his campaign.
Now he says he doesn’t know enough about the subject to explain why they did what they did.
Please!
If this was so important to him during the campaign, one would think he would have made the effort to get himself educated on the subject so he could discuss it intelligently. He is the Chief Executive. Isn’t he?

posted by: Disgruntled | May 24, 2011  3:24pm

It is called passing the buck. Dan excels at passing the buck when it applies to actions that he might be held accountable for. Having a pet apparatchik,like Ben,also helps.
Public money? Dan never passes the bucks there…

posted by: Noteworthy | May 24, 2011  9:23pm

If Malloy doesn’t know the difference, then he shouldn’t be talking about it. Fact is, I’m quite sure Barnes went over the two options with him. But he chose GAAP Light because the other version is much harsher and requires more cash. Since he wasn’t cutting the budget, nor was he getting any real concessions from the unions, he was limited to $3 Billion from taxpayers - if he had sought $4 billion, that would probably have been a choker. Stop lying about this budget, governor. We’re sick of it.

posted by: JAM | May 25, 2011  10:50am

Noteworthy, I’m not arguing, but the other fact is that if he doesn’t understand the accounting (by his own admission), he can’t understand his own Budget.