Introduction

The State of California at the State-level has approximately $59.83 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,695 for every man, woman and child in California or $6,779 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in California.

The Exhibit A below shows the results of the FY 2003 review.

What are these surpluses we refer to?

Government surpluses, as used in this report, are funds that are not required or needed for the operation of all government operations, funds, accounts, agencies, etc., directly or indirectly, for the year(s) covered by the budget which is usually one year. Theoretically, at the end of every fiscal year, governments should have little or no cash/investments on hand. But what we have found is that most governments have huge amounts of cash and investments on hand at the end of the fiscal year. And somehow these cash and investments are not being recycled back through the budget process the next year, but are being held year-after-year.

A Government Can Have a Budget Deficits/Shortfalls and Financial Surpluses At The Same Time.

This is the most deceiving topic that governments, politicians, and the news media have conveyed to the public about governmental financial matters. In realty, a government can simultaneously have a budget shortfall and a financial surplus of the taxpayers' money.

The problems are focused in four areas:

1. The budget only covers a small portion of the State's financial condition. There are a group of funds not part of the budget process. The complete list of funds and budgetary requirements are found in the Comprehensive Annual Financial Report (CAFR). This report depicts the complete financial status of the State. The budget only covers a portion of the financial resources of the government.

A Little Background:

The CAFR usually has four categories.

Governmental Funds
Proprietary Funds
Fiduciary Funds
Component Units

Governmental Funds involve activities of the government including most basic services such as environmental resources, general government, transportation, education, health and human services, and protection of persons and property. Most of the cost of these activities are financed by taxes, fees , and federal grants.

Proprietary Funds are used when a government charges customers for the services it provides, whether to outside customers or to other agencies with the state. For example, Enterprise Funds, a component of proprietary funds, are for activities that provide goods and services to outside (non-government) customers, which includes the general public. Fees, charges for services or goods, assessments, fines, licenses, etc. are the major revenue sources.

Fiduciary Funds are activities in which the state acts as a trustee or fiduciary to hold resources for the benefit of others. These funds are pension trust funds, investment trusts, and agency funds (which are for assets held for distribution by the government as an agent for other governmental units, other organizations, or individuals).

Component Units reportedly are legally separated organizations for which the government is financially accountable. Usually fees, charges for services or goods, assessments, fines, penalties, licenses, etc. are the major revenue source.

The budget, as commonly known to the public, only involves the Governmental Funds and may not even include all of the governmental-type funds. The remainder of the Funds shown above are not part of the budget and are commonly called "off-budget" items.

2. Next year's budget consists only of next year's estimated revenues and next year's estimated expenditures. Previous years' revenues not used (spent) are normally not considered in the next year's budget, but should be. In other words, the previous years' revenues (as shown in the CAFR) are not recycled back to the budget process.

Historically, a budget consists of three parts: 1) Funds brought forward (funds not previously spent); 2) Next year's estimated revenues; and 3) Next year's estimated expenditures.

But somewhere along the way the funds brought forward category was lost. In accounting, the previous years' revenues are no longer called revenue but have been converted to Cash and Investments. Since they no longer called Revenues governments have forgotten about them to the public. They are there but not considered in the budget process, but should be.

3. The budgeted items and non-budgeted items (off budget) should be budgeted to zero (usually referred to as zero-based budgeting). In addition, the government should be on a pay-as-you-go basis, no reserves for future years. What this means is that you budget to have a zero fund balance. If you plan to spend $100 you budget for $100 with no excess or reserve allowed.

For example, the State of California Special Revenue Funds (Governmental Funds), considered part of the budget, have fund balances of $8.6 billion that probably will not be considered in the yearly budget. The total cash and investments, funds that were not used during the current year, was $ 8.5 billion (surplus) and should be part of the next year's budget. So if there is a "budget deficit" ask about these funds not being considered or used.

4. Budgeted expenditures should be last year's expenditures (as shown in the CAFR) with an adjustment for increase in requirements (costed out) or reductions in requirements. In most cases the CAFR expenditures are not considered in the next year's budget because the CAFR in many cases is published after next year's budget is considered and sometimes approved.

Running Surpluses is Stealing

Although taxation is legitimate, running a government surplus isn't. It represents a taking by the state, because it exceeds the government's contract with the community. It is no different than if a federal agency were to take a person's land or possessions without just compensation (an activity barred by the Fifth Amendment). Excess taxation isn't what the people bargained for.

In presuming entitlement or authority not ceded by the community, the state abrogates its moral pact with those it governs. Its power is no longer derived from the people, whose rights to liberty and property it boldly denies.

"Collecting more taxes than is absolutely necessary is legalized robbery" - Calvin Coolidge

The Governor and the Legislators

The Governor and the legislators should include in the next year's budget the previous years revenues not spent as indicated by the CAFR. These were once a revenue and should still be considered revenue for budgetary purposes.

Also, they should consider a zero-balance budget concept for all budget and non-budgetary items in the CAFR including the College and Universities and the Component Units.

Budgeted expenditures (for the budget) should be last year's expenditures (from the CAFR) adjusted for demonstrated requirement changes in project, program or services. An increase in requirements should include the costs of these additional requirements. Conversely, a decrease in requirements should result in a decrease in costs associated with the decreased requirements.

The Governor and legislators should take into consideration the entire financial condition/status of the State in the budgetary process by including all of the funds in the CAFR as being a part of the budget.

This system is covered in the CAFR Budget System. This system needs to be implemented in all governments.

If the State holds the excesses/surplus, it will earn 4% to 5% on that money. If the State returns the money to the people it will receive 20% in revenue because of the increased economic activity. This is elementary economics.

Laws need to be changed.

Every thing done by governments is by law. There are laws that state this or that regarding the use of some of the funds. Man made the laws, man can change the laws. How much effort would it be to include at the end of every law "...or if considered excess or not needed for the current operation that the funds will be refunded to the taxpayers?" See how easy it is.

At one time every law had its place, but things change. The laws need to be reviewed for change to meet the current needs of the government and the people to release these funds for use/refunded.

If this were accomplished, the State would have a huge surplus to refund (rebate or tax reductions) to the taxpayers. Such a refund would create considerable wealth and jobs, increase wages, increase State and local government revenues, dramatically increase the economy, and create the greatest economic expansion in the history of the State. Everyone wins.

If you want to know the financial condition of your government(s), do not look at the budget. Get the CAFR.

The Synergistic Magic of Economics.

What happens when the government holds the $59.83 billion.

Here is what happens when the $59.83 billion is returned to the taxpayers (the private economy).

In FY 2002 there 1,163,000 unemployed in Caifornia. If the surpluses were returned to the people, 1,196,599 jobs would be created. There would be no unemployment in California which means an addtional $10.5 billion in unemployment savings.This is why it is disastrous for governments to hold excesses/reserves of the taxpayers money.

Note: The economic impact analysis is further explained at Economic Impact Analysis.

The business community suffers the most.

Before the 9-11 tragedy, President Bush and Congress provided tax rebates which averaged $427 for every American. This was to create an additional $60 billion in consumer (economic) spending, turn the economy around and create jobs for the unemployed. However, 9-11 change that.

As the above economic impact chart shows, if the State returned the $59.83 billion in surpluses to the people the State economy would grow by $3,390 per capita. That is 8 times the amount the Federal government used to stimulate the U.S. economy. Businesses net incomes could double or triple. This is elementary economics.

Examples

The State Compensation Fund, a Component Unit, and not part of the budget, had net expenses of $829 million. It also had reserves (cash and investments) of $11.4 billion. That represents 14 years of reserves.

Water Resources, an Enterprise Fund and not part of the budget, made a profit of $133 million. But it also had cash and investment reserves of $454 million.

Transportation Safety, a Special Revenue Fund and part of the budget, had net expenses of $84 million . It had reserves of $402 million. Let's see that represents about 5 years of reserves.

Other Special Revenue Programs, not further identified, had net expenses of $503 million and had cash/investment reserves of $1.48 billion. That is reserves of 3 years.

These only represent four of the 58 funds shown below that had cash and investment reserves not being used.

What to do?

Unless the budget flaws are corrected and the entire State finances are used in the budget process, the problems that created the surpluses will continue to exist. The budget deficits reported by the Governor and legislatures will be used year after year for the excuses for tax increases and/or to reduce needed services.

Just stopping a tax increase or a reduction in services will not solve the problems. The problems will come back the next year.

I have provided the details of the surpluses and explained the ways the surpluses are accumulated. The data is accurate because it comes directly from the government's own financial statement, the CAFR. You must provide the where-with-all to convince the Governor and legislatures that the surpluses exist and what should be done about it. I live in Arizona. It is not my money that is at stake.

Exhibit A

The 2003 CAFR is located at:

http://www.sco.ca.gov/ard/state/

Items not Included

The following items are not included in the amount of surplus shown:

-Buildings, roads, bridges, land (not for sale), and equipment.

-Deferred compensation plans for employees. These are plans in which the employee contributes to his/her retirement over and above the normal employee retirement contribution.

-Any fund that is 100% supported by donations, bequests, gifts, endowments, etc. These are not taxpayers money.

-For Colleges and Universities. All endowment and similar-type funds should not be included as surpluses. Sometimes these funds are combined with other college/university funds. We are interested in surpluses, so in these cases the total amount should not be included.

-Funds in which the revenues/contributions are 100% held for other individuals, organizations or another government.

-Funds that are required by law in which a bank, financial institution, insurance companies, etc. are required to deposit with the government a certain amount for insurance against the entity going bankrupt. These are not taxpayers' money.

-Retirement/Pension Funds - only included are 1/2 of the actuarially determined excesses, the taxpayers portion. The other 1/2 is the government employees portion.

  Review of The State of California CAFR- FY 2003

CAFR Page	List of Investments By Fund (In Thousands)	Surpluses	Notes
	Governmental Activities:
36	General Fund	3,825,522
36	Federal
36	Transportation Construction	1,130,291
	Special Revenue:
166	Transportation Safety Fund	402,392
166	Business & Professions Regulatory & License Fund	539,016
166	Environmental and Natural Resources Fund	1,705,394
166	Financing to Local Government Fund and Public Fund	1,129,281
167	Cigarette and Tobacco Tax Fund	740,236
167	Local Revenue Fund	303,147
167	Unemployment Programs Fund	234,497
167	California State University Programs Fund	715,778
167	Trial Courts Fund	889,775
167	Golden State Tobacco Securitization Corporation	352,150
168	Other Special Revenue Program Funds	1,480,168
	Capital Project Funds:
168	Prison Construction	2,027
168	Higher Education Construction	170,690
169	Natural Resources Acquisition & Construction	61,811
	Building Authorities:
169	California State University	5,589
169	East Bay	16,836
169	Los Angeles	39,845
169	San Francisco	51,798
169	Oakland	17,722
169	Riverside	1,050
170	San Bernardino	7,691
170	Other Capital Projects	77,783
	Proprietary Funds:
	Enterprise Funds:
40	Housing Loan	1,060,963
40	Electric Power	3,387,000
40	Water Resources	454,223
41	Public Building Construction	281,744
41	State Lottery	3,044,827
41	Unemployment Programs	3,533,716
	Nonmajor Enterprise:
190	High Technology Education Fund	91,914
190	Toll Facilities Fund	41,992
191	State University Dormitory Building Maintenance and Equipment          Fund	675,910
191	State Water Pollution Control	438,426
191	Public Employees' Benefits Fund	1,329,503	1
191	Other Enterprise Programs Fund	334,240
	Internal Service Funds:
180	Architecture Revolving Fund	138,717
180	Service Revolving Fund	64,930
180	Prison Industries Fund	57,181
181	Stephen P. Teale Data Center Fund	45,180
181	Health and Human Services Agency Data Center Fund	87,493
181	Water Resources Revolving Fund	16,294
181	Equipment Service Fund	92,252
181	Other Internal Service Funds	116,342
	Fiduciary Funds:
50	Private Purpose Trust
	Pension and Other Employee Benefit Trust (1/2 actuarial surplus)
152	Public Employees' Retirement
152	Judges' Retirement Fund II
152	State Teachers' Retirement Defined Benefit Program
153	University of California Retirement Plan	4,237
50	Investment Trust - Local Agency Investment
	Agency:
214	Receipting and Disbursing Fund
215	Deposit Fund
215	Departmental Trust Fund
215	Other Agency Activities Fund
	Discretely Presented Component Units
	Enterprise Activity:
54	University of California	15,281,373	2
54	State Compensation Insurance Fund	11,420,089
54	California Housing Finance Agency	3,346,098
	Nonmajor Component Units:
220	California Alternative Energy and Advanced Transportation          Financing Authority	227
220	California Infrastructure and Economic Development Bank	154,680
220	California Pollution Control Financing Authority	24,823
220	California Health Facilities Authority	24,777
221	California Educational Facilities Authority	264,939
221	California School Finance Authority	42
221	District Agricultural Associations	100,967
221	San Joaquin River Conservancy	93
221	California Urban Waterfront Area Restoration Financing          Authority	152
221	California Consumer Power and Conservation Financing          Authority	9,861
	Total Surpluses…	59,825,694
	Per Capita…	1,695
	Family of 4…	6,779
Note:
1	Some of these funds, deferred compensation funds, are not potential surpluses and must be deducted from the total.
2	Some of these funds may be endowments funds and should not be considered potential surpluses.

Note: For those familiar with governmental accounting, for surpluses we basically used GFOA Balance Sheet Account Classification Codes 101, 102, 103, 151, 153, and 170.

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This report was prepared by: Gerald R. Klatt Lieutenant Colonel, USAF, Retired www.cafrman.com Qualifications

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