Cash, Deficits and GAAP’s, Oh My…

I’ve talked a lot about how out-of-control spending and general fiscal mismanagement plunged our state into a nearly inescapable hole.  However, last year Republicans passed historic reforms that fundamentally changed how our state approaches the biennial budget.  We had to make a number of especially difficult choices to close Governor Doyle’s $3.6 billion deficit.

This deficit reflects the difference between what the state government has said it will pay for and the amount of revenue it will bring in this year.  Think of it as how much cash the state has on hand.

But how did the deficit get so large?  Simply put—accounting gimmicks.  For example, previous legislatures would often mask the cost of unaffordable programs by pushing off the bill into the next budget.  This meant that the cost of the program would be hidden, at least for the time being, and was part of a political calculus that placed short-term fixes over long-term solvency.   Ongoing trust fund raids, heavy borrowing, an over-reliance on federal stimulus dollars: this is Governor Doyle’s fiscal legacy.

In contrast, Governor Walker campaigned on using a more meaningful fiscal measurement: Generally Accepted Accounting Principals (GAAP).  Last week, Assembly Republicans brought forth Assembly Joint Resolution (AJR) 100, a measure that, if approved by voters, will eventually prohibit the legislature from passing any bill that would increase the projected deficit under GAAP.

As some of you may know, GAAP is shorthand for the accounting rules generated by the Financial Accounting Standards Board (FASB), used to prepare and standardize the reporting of financial statements for governments and businesses alike.  GAAP reporting accurately measures financial operations, fully discloses an organization’s financial position, and provides more meaningful information to financial managers.

Unlike cash accounting, GAAP does not allow governments to hide the true cost of programs. For example, under GAAP, purchasing a new television on a “no payment for six months plan” does not allow you to hide the cost for six months.  GAAP requires that the television debt be counted as a liability immediately, not six months later when the bill comes due.  For a government, GAAP is helpful because it forces the legislature to think beyond the confines of the current biennial budget.

Of course, what is ironic about this debate is that state law already requires local governments and school districts to balance their budgets under GAAP.  Bringing the state government up to the standards of Wisconsin counties would also improve our relative fiscal position nationwide. Wisconsin is one of only 15 states not using GAAP accounting, and according to recent figures, our $2.99 billion GAAP deficit is one of the largest in the nation.  Only New York, New Jersey, California, and Illinois have larger deficits.

Last year the Assembly passed an honest budget, one balanced without raising taxes, without raiding trust funds, and without laying off workers.  That budget was also the first since 2004 that saw a decrease in the GAPP deficit.  For these reasons, I was proud to support AJR 100.  The resolution passed with bi-partisan support in the Assembly and is now before the Senate.  Should the resolution pass both chambers this session, and next, the proposal will go to the taxpayers of Wisconsin.  If the taxpayers vote yes, the resolution will then become part of the constitution.

To contact me with any questions or comments or to sign up for my regular e-updates, please send an e-mail to Rep.Knodl@legis.wi.gov or call me at (608) 266-3796.