Fixing Our Future in Connecticut: Your sneak peek!

Posted on December 22, 2010. Filed under: Uncategorized |

The January/February 2011 issue of Connecticut CPA will prominently feature a critical analysis of Connecticut’s fiscal crisis done by CSCPA President Marcia Marien.

I’ll give you first read here as my holiday gift to you – thank you for reading our blogging and joining us in our fight to make Connecticut the great state it can be once again.

 

Fixing Our Future in Connecticut

By Marcia L. Marien, CPA, CSCPA President

As you may know from attending the annual meeting, reading Connecticut CPA, or attending one of the events of the Legislative Issues Taskforce, the CSCPA has become involved in promoting fiscal responsibility for the state of Connecticut. I wanted to give you a better understanding of what we are doing and why.

Connecticut is broke. Not going broke, but broke right now. Connecticut’s fiscal condition, based purely on an analysis of the state’s audited financial statements, has been deteriorating for years. There is no political party to blame. We, as citizens of Connecticut, are all to blame. None of us want our services cut. None of us want our taxes increased.

Short-Term Financial Health

Governments measure their short-term financial health using the “modified accrual” basis of accounting. This is, essentially, measuring our working capital. The equity is called a “fund balance” and is a measure of the cash that we would have 60 days after the end of the fiscal year if the government were to stop doing business.

At June 30, 2009, the state’s audited financial statements showed $2.3 billion of short-term assets and $3.1 billion of short-term liabilities. Our fund balance was a deficit of $800 million. In addition, some of this fund balance was already committed. When we account for that, we had a deficit of available fund balance of $922 million.

As a rule of thumb, the available fund balance should be 10 percent of the government’s annual expenditures (or roughly one month’s cash flow). The state of Connecticut’s available fund balance is negative five percent of our expenditures. In accounting, the presence of an available fund balance, or a portion of it, is considered a “rainy day fund.”

In Connecticut, we have a deficit of available fund balance of $922 million. We have artificially created a rainy day fund by dividing the deficit available fund balance into two parts: (1) a positive $1.4 billion we call the rainy day fund, and (2) an even bigger negative offset of $2.3 billion. This is not a rainy day fund!

How do we compare to other states? An analysis, done by the National Association of State Budget Officers, shows 14 states with an available fund balance of less than one percent of expenditures. Of that, we are one of just four states with a deficit of available fund balance.

Long-Term Financial Health

The state’s long-term financial health is measured on the “full accrual” basis of accounting. Here, our total assets are $16 billion. Our total reported liabilities are $25 billion. However, our reported liabilities do not include all our liabilities.

Some of our pension and all of our other post-employment benefit (OPEB) liabilities are being amortized onto the balance sheet over 30 years as allowed by the Governmental Accounting Standards Board (GASB). As of June 30, 2009, only 2/30 of our OPEB liability is included in the reported liabilities on the balance sheet.

If we were to report our total liabilities, we would report $70 billion in total liabilities. Our liabilities are almost 4.5 times our assets! According to Connecticut’s Office of Fiscal Analysis, we have the highest debt per capita of all 50 states. When we look at debt per capita as a percentage of personal income, we drop to number 48, with only Hawaii and Massachusetts being higher.

Our equity, on a full accrual basis, is called “net assets.” Our net assets, based on the June 30, 2009 financial statements, are a deficit of $8.8 billion. When we pull out the net amount we have invested into capital assets and restricted equity, our available net assets are reported as a deficit of $17 billion. If we were to add the amount of pension and OPEB liability that has not been amortized onto the balance sheet yet, this figure becomes a deficit balance of $62 billion.

Unfortunately, most of this is not the result of a bad economy. Our deficit balance was billions of dollars even in good economic times.

How Did We Get Here?

We have been budgeting on the “modified cash basis” of accounting. Essentially, expenditures are recorded as slowly as possible on the cash basis and revenues are recorded as quickly as possible on the modified accrual basis. When we borrow money, we treat the proceeds as revenue. This allows us to balance the budget by taking out new debt.

We do have some constitutional safeguards about a balanced budget: expenditure limitations and a requirement to use any annual surpluses to reduce debt or increase the aforementioned rainy day fund. However, we don’t really follow these because we did not define the terms well enough when setting up the constitutional amendment in 1992 and we can, and usually do, over-rule the safeguards.

In the past five years, the revenues – including three years of federal stimulus funding – have increased by about five percent. Spending during that same period has increased 28 percent. We “balanced” the budget by taking out more debt, delaying required pension payments, and using the rainy day fund. The federal stimulus funding ends on June 30, 2011. The debt payments begin on July 1, 2011. We are at the edge of a tremendous funding cliff.

Using figures estimated by Connecticut’s Office of Fiscal Analysis, at June 30, 2014 our fund balance (the measure of working capital) will be approximately an $11 billion deficit. This is 55 percent of our annual expenditures. This means that, if we don’t pay any bills for the next fiscal year so we use that year’s money to pay our June 30, 2014 bills, we will need to wait until January 2015 to start paying our July 1, 2014 payroll and bills.

Our Recommendations

We have to remember that our expertise and credibility as Certified Public Accountants lies in the analysis of the financial statements. For the greatest impact, we want to limit our recommendations to that area. We are recommending:

  • The state use Generally Accepted Accounting Principles (GAAP) for budgeting. It is important to note that in a government, both the full accrual and modified accrual basis of accounting can be considered GAAP. We are asking for the full accrual basis.

    If we were to change to the modified accrual basis, the biggest change would be converting our expenditures from a cash basis to an accrual basis. Payments towards the pension and OPEB liabilities would still be based on the cash paid and not the Actuarially Required Contribution (ARC). Debt would still be considered income.

    For these reasons, a full accrual basis would be the best indication of how we are progressing for our long-term health. (We understand that this will need to be phased in to comply with the balanced budget requirements in our state constitution.)

    We also are asking that we have a full actuarial report. In the June 30, 2009 financial statements, the auditors had to issue a scope limitation because the report was not complete. This cannot continue.

  • We must have an available fund balance to say we have a rainy day fund. We cannot artificially create a rainy day fund when we have no available fund balance. Should the available fund balance become higher than necessary, the excess should be committed to funding our pension and OPEB obligations.
  • We must have a strategic plan and incorporate long-term budgeting into it. We must manage the balance sheet by monitoring how our actions now will affect our full accrual balance sheet in the future.

The CSCPA has launched a campaign to “fix our future.” We are working on three fronts:

  1. We have hand-delivered a letter to Governor-Elect Dannel Malloy with our recommendations.
  2. We are working with our legislators. They need to understand the whole picture. They need to make the tough decisions and set limits for the good of the state’s long-term health.
  3. We need to inform the people of Connecticut of the state’s fiscal crisis through a grassroots effort. They need to understand the issues and support the legislators that make the tough decisions. They need to accept that we must all sacrifice. We have run out of options.

If you have a relationship with a legislator that we can talk to, please let us know. If you have a group of citizens that would be interested in an eye-opening 30 minute presentation relaying these facts through charts and graphs, please let us know.

We must act now to fix our future!

If you have any questions or comments, contact Mark Zampino at 860-258-0212 or markz@cscpa.org.

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2 Responses to “Fixing Our Future in Connecticut: Your sneak peek!”

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[…] go read Marcia Marien’s analysis, if you […]

Thanks for all your hard work on this issue Marcia. I am not sure that many people understand the urgency of the situation. Your article does a nice job of pointing this out.


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