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Connecticut CPA
g
January/February 2014
On Halloween, Connecticut Treasurer
Denise Nappier announced the results
of the Generally Accepted Accounting
Principle Conversion Bond sale to close
the state's budgetary GAAP deficit.
As most households know, the way to
balance a budget is simple current
revenue equals or exceeds current ex-
penses. Somehow, for decades, that
mathematical equation has eluded the
legislative and executive branches of
Connecticut government when crafting
the state budget. We as a state should
acknowledge that our "balanced bud-
gets" are financial farce and move on
to confront financial reality.
Is taking on even more long-term debt
to close the budgetary GAAP deficit
smart? Financially, absolutely not. Po-
litically, maybe, but time will tell.
Three key concepts highlight the dis-
connect between headlines and the
bottom line:
Connecticut's "balanced budget"
is a political, not a financial exercise.
I suspect most of us think of a "bal-
anced budget" as taking in revenue
and paying expenses, with a bit of rev-
enue left over or owing a few expens-
es. In Connecticut state government,
nothing could be further from the truth.
If Connecticut's budgets balanced, the
state would not be sliding billions of
dollars into debt.
Connecticut does not balance its
budget the way a family or business
would. Consider your home budget.
Annually, you compare your antici-
pated income, your non-discretionary
expenses taxes, mortgage, rent, utili-
ties, food your discretionary spend-
ing vacations, clothing and your an-
ticipated savings. Then you decide just
how you are going to allocate income.
If you came up short, you have five
choices: cut spending, bring in more
income, ignore some bills, refinance
your debt, or don't save. The first two
choices, arguably the most sensible,
provide your family some long-term
fiscal breathing room.
The last three choices make the prob-
lem worse in the long run. Ignoring bills
doesn't make them go away; it only
makes balancing the following year's
budget more difficult. Refinanced
debt cuts into your family's cash flow
through increased interest costs and
more years of debt repayments. Not
saving indicates your family is spend-
ing more than it can afford.
Connecticut "balances" its budget by
borrowing, deferring expenses, and
having a negative net worth. In the 10
years between 2002 and 2012 Con-
necticut's borrowing nearly doubled,
from $15.5 to $28.2 billion dollars. That
is a direct result of the methods used
to balance the budget. No family, non-
profit, or business could reasonably or
legally call their budget balanced using
Connecticut's biennial tactics.
Connecticut's true financial condi-
tion is rarely reported to the public.
The truth is readily available through the
comptroller's website in Connecticut's
Consolidated Annual Financial Report
(CAFR). The CAFR records Connecti-
cut's financial results on a GAAP basis.
GAAP is the only approved method of
financial reporting, designed to ensure
all governments are following the same
reporting rules. The only reporting that
counts, and can be compared to other
states, is the CAFR reporting.
The June 30, 2012 CAFR results show
on-balance sheet debt of $29.9 billion
and off-balance sheet debt of $67.4
billion. In numbers we can understand,
that's $48,900 of debt for every Con-
necticut taxpayer, by far the highest in
the nation. By comparison, $9,318 is
the national average per taxpayer debt.
In case you are thinking "This is just
how state government works," take
pause to take in the implications. Not
all states are in debt. Five states with
the highest per taxpayer surpluses are
Nebraska at $2,400, Utah at $2,600,
North Dakota at $9,500, Wyoming at
$20,200, and Alaska at $21,200.
Will taking on even more long-term
debt accomplish the goal of clos-
ing the budgetary GAAP deficit? No,
Connecticut rarely balances a budget
without borrowing for general fund
expenses. If the point of the bonds
was to pre-borrow the money, it won't
help for more than one budget cycle.
Biennium after biennium, there is not
enough revenue to pay the bills with-
out borrowing, proving that Connecti-
cut's revenue and spending patterns
are out of balance and unsustainable.
As residents, business leaders, and
taxpayers, what should we do?
We must insist that the governor and
legislature not exercise the trap door
they put in the Generally Accepted Ac-
counting Principle Conversion Bond
covenant to use the money for an
"emergency."
We must throw out Connecticut's ridicu-
lous "balanced budget" concept and
replace it with one where no future oper-
ating budget is balanced by borrowing.
We must adopt pay-as-you-go policies
without emergency appropriations or
other loopholes.
We must demand financial facts and
discount political packaging.
By Julie E. McNeal, CPA,
CTCPA Director of Finance and Operations
This piece originally appeared in the Hartford
Business Journal on November 18, 2013.
CT State Finances:
Trick or Treat?