A bill that would let Connecticut's state comptroller set aside any or all of the Governmental Accounting Standards Board (GASB) accounting rules got shot down by the state's governor, but the issue may not be over.

On July 6, Governor M. Jodi Rell vetoed the bill, "An Act Concerning the Implementation of Generally Accepted Accounting Principles" (HB 7338), after its approval by state legislators. It would have authorized the comptroller "to implement the use of generally accepted accounting principles, as prescribed by the comptroller, with respect to the preparation and maintenance of the annual financial statements of the state."

“I have serious concerns about the potential fiscal impact this bill may have on the state,” Rell said in a statement. “The plain language of this bill would allow the comptroller to issue financial statements using whatever standards she prescribed. While our current comptroller does not intend to deviate from GAAP for financial reporting purposes, there is nothing in the bill that would prevent a future comptroller from doing so.”

Asked if Comptroller Nancy Wyman has any interest in reviving the legislation in the future, a spokesperson says, “It is hard to say. We are discussing all options at this point. Exactly how we will approach it, we are still deciding, but she is not dropping the issue entirely.”

The Connecticut legislation follows passage of a bill by Texas legislators this spring that would let the state and local governments opt out of GASB Statement 45 (see “Texas Two Step,” PLANSPONSOR, July 2007). Beginning in fiscal 2007-2008, it starts requiring states to disclose their annual OPEB (post--employment benefits other than pensions) costs and their unfunded actuarial accrued liabilities for past service costs.

“Politicians, in the past, have promised benefits that were particularly nice, and they did not want to have to report them,” says Relmond Van Daniker, Executive Director of the Alexandria, Virginia-based Association of Government Accountants. “Now, people are going to be able to see, and they are going to say, ‘Holy smokes, look what they did.’”

Like many other states, Connecticut finds itself in a bind with retiree health-care liabilities—a $21 billion bind, to be precise.

“Connecticut has a pretty large liability. It is an older, mature state with a large state workforce,” says Douglas Offerman, a New York-based director at Fitch Ratings who follows the state’s finances. “[The state has agreements on fringe benefits with workers] that go well into the future,” he says, “so its hands are tied on making changes in the immediate future.”

Is the Connecticut bill’s timing a coincidence? Yes, says the comptroller. Maybe not, say some others.

The move had nothing to do with the new OPEB disclosure rules, Wyman says. “People are getting this confused with what is happening in Texas,” she says. “I have no problem reporting under that [GASB 45].”

The comptroller’s office already has disclosed the OPEB liability, she says, pointing to a report it released that pegged the total at $21 billion. Wyman has recommended that the state take $100 million out of its budget surplus—currently estimated at $925 million—and 10% of any future surpluses to address the OPEB liability. If legislators had gone with that plan, she says, the liability immediately would have dropped to $16 billion.

Wyman points to a very different motivation for this move. Since 1993, it has been on the books that the state start reporting fully under GAAP, she says, but “that has been delayed every year because the cost would be too much to implement.

” As a result, the state has accumulated a $1 billion deficit in GAAP reporting since then, she says. To get fully in line with GAAP, the state would have to pay the deficit off at a rate of $150 million a year for 14 years, she adds.

“When we spoke to GASB, they basically said, ‘Tell the legislators to bite the bullet and put the $150 million a year in,’” Wyman says. “I understand that they want us to do it the purist way.” However, that was not realistic, she believes. “The legislature does not want to do that. So, what I have tried to do is find a way to get to that without paying off that debt. This is a step toward much better, honest accounting.”

Except for not starting to pay down that debt, Wyman maintains that the state would follow GAAP. So, the state would “still be reporting any liabilities we have,” she says.

Wyman may argue that it is actually a step toward full accounting compliance for the state, but some others point to a very different potential scenario. They disapprove of both the legislation's terminology and its underlying concept.

GASB objects to the use of the terminology "generally accepted accounting principles" in the legislation, Financial Accounting Foundation President and Chief Operating Officer Robert DeSantis wrote in a June letter to Governor Rell. (The FAF oversees GASB.)

The letter maintains that "only GASB, due to its recognition by the accounting profession, can prescribe such principles." However, the letter also balks at the idea of allowing one state official to set accounting principles. "[That] threatens the integrity and objectivity of the independent standard-setting process and is a step backward for public trust, government accountability, financial transparency, and the state's investors," the letter says.

“Technically, they can set their own accounting principles, because they are sovereign entities,” Van Daniker says of states. “The issue is, if all the sovereign entities created their own rules, what kind of ridiculous scenario would we have? How would people evaluate anything? There have got to be some kind of general rules.”

DeSantis describes the state's broad move as “a little baffling, to be honest.” The legislation could have put standard-setting “at the political whim of one person,” he says. “It leaves open the possibility for deviation from good accounting and reporting. It could put all of the state’s taxpayers at risk.”

Diverging from accounting principles could result in a lack of comparability in the state’s financial statements, DeSantis explains. That could lead accounting firms evaluating those statements to issue a qualified opinion, he says, which, in turn, could prompt Wall Street analysts to lower their ratings on the state’s debt. Lower ratings would force the state to pay investors higher interest rates to buy its bonds.

DeSantis calls Rell’s veto “a wise decision.” He says that the bill’s accounting-principle provision “is not only unnecessary to achieve the expressed goal of facilitating the state budget process, but also has the potential to adversely affect the state’s financial standing. Governor Rell understood that its language went well beyond what it was intended to do.”

Moreover, setting its own accounting rules also potentially could free the state to ignore uncomfortable requirements in the future, like disclosing the OPEB liability. “I cannot   say that we would look favorably on reducing transparency,” Fitch Ratings’ Offerman says. “Our message has been that it is important to recognize the liability and figure out how to address it.”

Van Daniker finds himself “very dismayed” by the moves that some politicians have made. “The liability has always existed; it is just that governments have not reported it. All GASB is saying is, report it,” he says. “GASB did not say that it has to be funded.”