February 19, 2009
IMPLEMENTATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
By: Laura Cummings, Legislative Fellow
You asked for an update of the 1997 OLR report (97-R-1120) summarizing the legislation delaying Connecticut's implementation of the generally accepted accounting principles (GAAP), as prescribed by the Government Accounting Standards Board (GASB), for preparation and maintenance of the state's annual financial statements, and preparation of the annual budget.
The law authorizes the comptroller and the Office of Policy and Management (OPM) to implement the use of GAAP for the state's annual financial statements and its annual budget. The conversion to GAAP, considered for years and authorized by legislation enacted in 1993, was most recently addressed during the 2008 session of the General Assembly. Legislation that year removed the GAAP implementation requirement, and instituted a broad grant of authority allowing the comptroller to gradually phase-in use of GAAP.
Although legislators from both parties have characterized the move to GAAP as a “good government” measure, the cost to change the state's accounting method is significant enough that the original proposal amortized the changes over a 15-year period. Legislation delaying the conversion was part of the governor's proposals introduced in 1995 and 1997. The reason cited in public hearing testimony and by legislators in House and Senate debate for delaying GAAP is the cost of implementing the conversion and its impact on the state budget. In 1995, implementation would have cost $97 million over the following biennium. The cost in FY 1997-99 was described as “enormous,” approximately $122.7 million. In 2007 and 2008, the cost of implementation was estimated to be $150 million.
In 1993, the General Assembly enacted PA 93-402 (codified at CGS § 3-115b) authorizing but not requiring the state comptroller and OPM to use GAAP as prescribed by the Government Accounting Standards Board (GASB) to prepare annual financial statements and annual budgets, respectively, beginning July 1, 1995. They had to prepare conversion plans to implement GAAP and submit them to the Appropriations Committee by February 1, 1994. The act also required the comptroller to establish an opening combined balance sheet for all appropriated funds based on these accounting principles by July 1, 1995. By June 30, 1995, the accrued and unpaid expenses and liabilities and other adjustments had to be aggregated and set up as a deferred charge on the combined balance sheet. The act required the deferred charge to be amortized in equal increments in each annual budget beginning in FY 1996-97 and for the next 14 fiscal years.
The bill (SB 1090) came out of the Appropriations Committee as a study of GAAP procedures and was amended in the Senate to authorize the use of GAAP beginning July 1, 1994 (subsequently changed in the House to July 1, 1995). The bill, passed unanimously in both chambers, was generally characterized as a good government proposal. Representative Reginald Jones said the bill “gives us the opportunity to be in the forefront of generally accepted accounting principles in this country and it will improve the quality of our state in the eyes of rating bureaus and the public generally” (House of Representatives Proc., June 9, 1993).
PA 95-178, AN ACT POSTPONING THE IMPLEMENTATION OF GENERALLY ACCEPTABLE ACCOUNTING PRINCIPLES (GAAP)
Before reaching the 1995 deadlines in the original legislation, the General Assembly changed them, postponing them for two years. PA 95-178 postponed implementation of the accounting changes to FY 1997-98 and required the amortization to begin in FY 1998-99.
SB 975 was proposed as part of the governor's bills to implement the budget and would have repealed the authority to implement GAAP. In the Appropriations Committee's public hearing on the matter, OPM Undersecretary Donald Downes testified that repeal of GAAP would allow the continued development and implementation of the state budget on a modified cash basis rather than on a modified accrual basis. He maintained that failure to adopt GAAP had not affected the state's credit ratings. At that time, OPM argued that Connecticut would be the only state to fully implement GAAP for all facets of budgeting, including entitlements, if it were to go ahead with the conversion. He said that conversion would have a “significant financial impact on the state's budget for the foreseeable future” (Appropriations Committee Proc., April 5, 1995). Downes told the committee that implementation would require an additional $104. 6 million appropriation in the General Fund for FY 1995, with an accompanying offset of approximately $40 million in additional accrued revenues. Beginning with FY 1996, the amortization costs of the accumulated GAAP deficit would require an additional $35 million each year for 15 years. He opposed using such significant state resources to “make an accounting change.”
On the other hand, Comptroller Nancy Wyman opposed the bill and testified in support of GAAP. She noted that GAAP represents a more realistic picture of the state's financial situation and also that businesses and municipalities are required to adopt the principles. Michael Levin, vice president of the Connecticut Policy and Economic Council, also opposed the repeal. He testified that the budgetary system then in place “facilitates the use of gimmicks to bring the budget in balance and undermines accountability and public trust.”
There was heated debate about GAAP implementation in both chambers. Members who had supported the concept earlier cited the cost of implementation in their statements supporting the postponement. The Senate chairman of the Appropriations Committee, Senator Robert Genuario, reported that failure to enact the delay would cost the state $32 million in FY 1996 and $65 million in FY 1997. He noted that “while we are committed to the principle, and would oppose repeal of the principle, it may well be wise to defer the implementation of this until such time as the state is on sounder fiscal footing so that we can absorb the financial impact of this accounting practice when the state is fiscally healthy….” (Senate Proc., May 16, 1995). The vote in the Senate was 20-16 for postponement.
Debate in the House reflected the same sentiment. The bill passed there 106-39.
PA 97-305 - AN ACT POSTPONING THE IMPLEMENTATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
In 1997, the General Assembly passed a bill imposing another two-year delay (PA 97-305).
The 1997 bill (HB 6699) was introduced as An Act Repealing the Implementation of Generally Accepted Accounting Principles in order to implement the governor's budget recommendations. The administration again proposed abandoning the conversion to GAAP because of the costs involved. At the April 1 Appropriations Committee public hearing on the bill, Comptroller Wyman again testified in opposition to the repealer, arguing that by over-counting revenues and undercounting expenses, the modified cash basis budget resulted in a $640 million deficit. She stated that a GAAP-based budget would improve financial reporting and provide better information on which to base public policy. Ms. Wyman proposed to the committee a phased-in approach to GAAP. John Clark, the director of the Financial Analysis Division of the comptroller's office described the costs of the full implementation of GAAP:
The full cost of implementation for the . . . upcoming biennium would have been $122.7 million. That was with a fifteen-year amortization of the $640 million accumulated deficit and integrating all of the GAAP components on an ongoing basis, at an annual cost of $40 million. So if you were to fully implement GAAP or phase it in, ultimately you are . . . looking at about the $40 million plus the $42.7 or $82.7 million would be the annual cost of full phase-in of GAAP.
There was no other testimony on the bill, but at a February 18 hearing, John Rathgeber of the Connecticut Business and Industry Association (CBIA) spoke in favor generally of GAAP, noting that CBIA had supported the 1993 legislation. The Appropriations Committee changed the original bill's repealer provision, substituting another two-year postponement, but rejected the comptroller's modified conversion proposal.
The bill passed during the House last days of the session. The House passed it by a vote of 87-57, after Appropriations Chairman William Dyson told his colleagues that failure to pass the postponement would have an “enormous” impact on the budget. There was no other discussion (House of Representatives Proc., June 3, 1997). The bill passed in the Senate on consent on June 4.
2002 LEGISLATION – AN ACT CONCERNING GENERALLY ACCEPTABLE ACCOUNTING PRINCIPLES (GAAP)
On February 2, 2002, HB 5395 was referred to the Appropriations Committee. No further action was taken on the bill. The bill proposed a conversion to GAAP accounting principles.
PA 07-229 – AN ACT CONCERNING THE IMPLEMENTATION OF GENERALLY ACCEPTABLE ACCOUNTING PRINCIPLES (GAAP)
On June 6, 2007, the General Assembly passed PA 07-229. The act was vetoed by the Governor on July 6, 2007. The act authorized the State Comptroller to prescribe the use of GAAP. Previous law required the GASB to prescribe the use of generally accepted accounting principles.
HB 7338 was proposed by the comptroller to allow her office, rather than GASB, to establish standards for GAAP reporting. At the March 26, 2007 Appropriations Committee's public hearing on the bill, Comptroller Wyman testified in support of the bill. She testified that authorizing the comptroller to prescribe the use of GAAP was consistent with the requirement that the Comptroller's Office interpret GASB requirements pertaining to GAAP for the purpose of budget implementation. She testified that this would allow the state greater flexibility in implementing GAAP budgetary standards and would allow the comptroller and OPM to begin planning for the move toward GAAP accounting.
Also testifying in support of the bill was Arthur J. Renner, the Executive Director of the Connecticut Society of Certified Public Accountants (CSCPA). Mr. Renner testified that the financial statements of the state should depict how well the business of government is managed. While GAAP is not perfect, it does serve a useful purpose. It can accurately portray an entity's true fiscal condition at any point in time. GAAP also provided users with the benefit of a uniform standard of measurement, according to Mr. Renner.
There was no opposition expressed at the public hearing.
The bill was debated on the House floor on May 24, 2007. The Appropriations Committee vice-chairperson Representative Heinrich introduced the bill as a measure to give the comptroller more flexibility in the preparation of state financial statements. She referred to the proposal as “GAAP Light.” The House passed the bill 148-0.
The Senate debated the bill on June 6, 2007. The Senate Appropriations Committee Chairperson Senator Harp introduced the bill as a “phase-in” of GAAP standards, designed so the transition would create less of a financial impact. She said that without the legislation, the state would be required to appropriate an additional $150 million per year over 14 years to bring the budget into compliance with GAAP standards. She emphasized that the bill lowered the financial impact of GAAP, facilitating compliance with the original 1993 law.
Several senators supported an amendment to the bill, which was intended to delay the implementation of GAAP principles for two years. The amendment would have required the wholesale adoption of GAAP principles at the end of two years, rather that the “GAAP Light,” or “phase-in,” that the underlying bill proposed. Senators supporting this amendment raised concerns about the effect of giving the comptroller discretion over how to “phase-in” GAAP. The amendment was defeated 11-24. The Senate passed the original bill by a vote of 22-14.
PA 08-111 – AN ACT CONCERNING THE IMPLEMENTATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
On May 5, 2008, the General Assembly enacted PA 08-111, eliminating the requirement that the comptroller (1) use GAAP to establish an opening combined balance sheet for all appropriated funds beginning in FY 10 and (2) amortize the GAAP deficit over 15 years beginning in FY 11.
Starting in FY 09, the act allows the comptroller to make incremental changes to the way she prepares and maintains the state's annual financial statement. The changes must be consistent with GAAP as prescribed by GASB, and eventually lead to full GAAP implementation.
The act allows, rather than requires, the comptroller and presumably the OPM secretary to concurrently prepare conversion plans for implementing GAAP. If they decide to do so, they must prepare plans annually, rather than by February 1, 2009, and submit them to the Appropriations Committee when the governor submits her biennial budget and budget status report to the General Assembly. By law, the governor must submit the budget document by the first session day after February 3rd in odd-numbered years and the status report by the opening day of session in even-numbered years.
HB 5839 was proposed by the comptroller to allow her office to implement aspects of GAAP accounting to more accurately match current year revenue with current year expenditures. At the March 12, 2008 Appropriations Committee's public hearing on the matter, Comptroller Wyman testified in support of the bill. She testified that she and OPM Secretary Robert Genuario worked to create a bill that would address the concerns of GASB. GASB expressed concern about GAAP standards being set by any authority other than the board. The comptroller, while agreeing that full implementation of GAAP might be desirable, doubted the ability of the state to fund the $1.3 billion dollar GAAP deficit in a single fiscal year and to bring the state into full compliance.
Secretary Genuario also testified in support of the bill. He supported the idea of phasing in GAAP over a number of years, since full implementation would take a considerable effort. The secretary opposed a provision requiring OPM to implement the comptroller's directives in the absence of any requirement that the legislature implement the different standards for the budget. He also pointed out particular costs associated with the conversion.
Terry Polley of the Financial Accounting Foundation (FAF) spoke in opposition to the bill. FAF is the oversight body of GASB. FAF opposed the bill because it allowed the comptroller to selectively apply parts of GAAP. Ms. Polley testified that FAF would like to have language that would not allow the comptroller to represent financial results as prepared under GAAP if GAAP principles are not applied in whole.
Barry C. Melancon from the American Institute of Certified Public Accountants (AICPA) also spoke against the bill. AICPA was concerned any future comptroller would be allowed to make unilateral changes to the implementation of GAAP. Mr. Melancon testified that financial statements should be in full compliance with GAAP because individuals such as bond buyers need to know what accounting rules are utilized. He also stated that auditors would have to qualify GAAP opinions if accounting standards were used that were different than those required by GASB.
The House passed the bill on May 2, 2008 by a vote of 147-0. Appropriations vice-chairperson Heinrich reported the financial benefits of the “phase-in” effect of the bill. She explained without the “phase-in,” implementing GAAP would cost the state $150 million annually over the next 14 years. Representatives Delgobbo and Boucher also spoke in support of the bill.
The bill was debated in the Senate on May 5, 2008. This debate focused on two issues: (1) the constitutionality of the legislature prescribing accounting methods to the comptroller and (2) “phase-in” of GAAP principles. Three senators opposed the imposition of GAAP on the comptroller, citing Article 4, Section 24 of the Connecticut Constitution prescribing the comptroller's duties. Each senator argued it was an unconstitutional act of the legislature. Several senators opposed the “phase-in” effect of the bill, expressing concern over the need to keep two sets of books during the transition, and the lack of transparency in the process.
Senator Harp, Senate Chairperson of the Appropriations Committee, rose in defense of the bill. She reported that failure to enact the bill would cost the state $150 million annually over 14 years, and approximately $50 million a year annually to maintain GAAP compliance. Senator Harp argued that a “phase-in” approach to GAAP could be achieved at a much lower cost. She rebutted the constitutionality argument by stating although it was within the comptroller's right to select the accounting principles, the legislature has the power to fund her choice. The Senate passed the bill 23-13.