Introduction

The State of Indiana at the State-level has approximately $11.73 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,904 for every man, woman and child in Indiana or $7,615 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Indiana.

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 Indiana Special Revenue Funds (Governmental Funds), considered part of the budget, have fund balances of $1.15 billion that probably will not be considered in the next year's budget. The total cash and investments, funds that were not used during the current year, was $1.67 billion (surplus) and should be part of the next year's budget. So if next year 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.

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 $11.73 billion.

Here is what happens when the $11.73 billion is returned to the taxpayers (the private economy).

In addition, 234,512 jobs are created. In FY 2002 there was 163,000 unemployed. This means there would be a labor shortage in Indiana. 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 $11.73 billion in surpluses to the people the State economy would grow by $3,808 per capita. That is 9 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

Toll Roads, an Enterprise Fund and not part of the budget, made a profit of $16 million. It also had reserves (cash and investments) of $195 million.

State Revolving Fund, also an Enterprise Fund and not part of the budget, made a profit of $17 million. But it also had cash and investment reserves of $871 million.

Adminstrative Services Revolving Fund had net expenditures of $555 thousand. It also had cash reserves of $25 million. That equals 46 years of reserves.

Other Non-Major Special Revenue Funds, not individually itemized and part of the budget, made a profit of $105 million . These funds had reserves of $1.1 billion. I bet you these reserves will not be included in the next year's budget.

These only represent four of the 53 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 willl 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.state.in.us/auditor/publications/

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 Indiana CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses	Notes
	Governmental Funds:
26	General Fund	2,544,137
26	Motor Vehicle Highway Fund
26	Medicaid Assistance	42,555
26	Build Indiana Fund	16,896
26	State Highway Department	229,241
26	Property Tax Replacement Fund
26	Tobacco Settlement Fund	336,486
	Non-Major Special Revenue Funds:
112	County Welfare Administration
112	State Gaming Fund	61,738
112	State and Federal Welfare Assistance	50,467
112	Bureau of Motor Vehicles Commission	9,722
112	Health and Environmental Programs	29,741
113	Patients Compensation	74,002
113	Student Loan Program	17,626
113	Primary Road and Street	4,242
113	Federal Food Stamp Program	1
113	Bureau of Motor Vehicles Holding Account	8,745
113	Medicaid Indigent Care Trust	270,296
113	Other Non-Major Special Revenue Funds	1,133,470
	Non-Major Capital Projects Funds:
116	Army National Guard Construction	63
116	Post War Construction	50,208
116	Other Non-Major Capital Project Funds:	36,160
	Non-Major Permanent Funds:
118	Common School Principal	223,206
118	Veterans' Memorial School Construction	1,034
118	Other Non-Major Permanent Funds	3,034
	Proprietary Funds:
	Enterprise Funds:
34	Toll Roads	194,801
34	Transportation Finance Authority Aviation Technology       Bonds	373
34	Transporation Finance Authority Airport Facilities Bonds	1,311
34	State Revolving Fund	870,667
35	Unemployment Compensation Fund	968,375
35	State Lottery Commission	125,478
35	Other Enterprise Funds:	32,968
	Internal Service Funds:
130	Institutional Industries	1,814
130	Administrative Service Revolving	25,348
130	Transportation Finance Authority Highway Bonds	54,833
130	State Office Building Commission	157,957
131	Recreational Development Commission	7,394
131	State Police Health Insurance Funds	4,422
131	State Employee Disability Fund	1,985
131	State Employee Health Insurance Fund	45,729
	Fiduciary Funds:
	Pension Trust Funds
140	Private-Purpose Trust Funds:
142	Property Custody Fund
142	Abandoned Property Fund	6,117
142	Unclaimed Funds Fund
	Agency Funds
142	Employee Payroll, Withholding and Benefit Funds
144	Local Distribution Fund
144	Child Support Fund
144	Department of Insurance Fund
144	Other Agency Funds	14,299
	Component Units:
	Government:
44	Indiana Development Finance Authority	44,940
	Proprietary:
44	Indiana Bond Bank	108,336
44	Indiana Housing Finance Authority	324,174
	Non-major Component Units:
	Propriety Funds:
148	Secondary Market for Education Loans, Inc.	60,214
148	Board for Public Depositories	609,098
	Colleges and Universities:
46	Indiana University	844,180	1
46	Purdue University	1,637,306	1
	Non-major Colleges and Universities:
150	Vincennes University	68,146	1
150	Indiana State University	87,916	1
150	Ball State University	163,114	1
150	Ivy Tech State College	68,535	1
150	University of Southern Indiana	40,896	1
	Total Surplus…	11,725,602
	Per Capita…	1,904
	Family of 4…	7,615
Note
1	The surpluses in the college and universities area may contain endowment and similar funds. These should be excluded from the 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.

---

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

BACK TO TOP

This report can be copied, reprinted, and/or electronically transmitted to others and/or printed in the news media. This report should not be used for commercial purposes.