Introduction

The State of Minnesota at the State-level has approximately $10.53 billion of the taxpayer's money it is not using, i. e. surpluses equal to $2,078 for every man, woman and child in Minnesota or $8,311 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Minnesota.

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.

Note: Although there are other reasons the State of Washington has surpluses, they still use the balance brought forward in their budget process.

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 Minnesota Special Revenue Funds (Governmental Funds), considered part of the budget and not all the Special Revenue Funds, have budgeted fund balances of $358 million that probably will not be considered in the next year's budget. The total cash and investments for all Special Revenue Funds, funds that were not used during the current year, was $3.66 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 $10.53 billion.

Here is what happens when the $10.53 billion is returned to the taxpayers (the private economy).

In addition, 211,120 jobs are created. 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 $10.53 billion in surpluses to the people the State economy would grow by $4,166 per capita. That is 10 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 Environment and Natural Resources Trust, a Special Revenue Fund, had net expenditures of $2.8 million. It also had reserves (cash and investments) of $314 million. It's actual expenditures were only $15.6 million. This means that without any revenue this fund has 20 years of reserves.

The Medical Education and Research, a Special Revenue Fund, made a profit of $4.4 million. But it also had cash and investment reserves of $622 million

Minnesota Partnership For Action Against Tobacco, a Component Unit, had net expenditures of $9.6 million . It had reserves of $125 million. Let's see that represents about 13 years of reserves.

State Operated Community Services, an Enterprise Funds and a non-budgeted item, made a profit of $697 thousand and had cash/investment reserves of $20 million.

These only represent four of the 55 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.finance.state.mn.us/accounting/index.html

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 Minnesota CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Potential Surpluses	Notes
	Governmental Funds:
30	General	863,158
30	Federal
	Special Revenue:
124	Trunk Highway	276,518
124	Highway User Tax Distribution	54,309
124	State Airports	21,667
124	Municipal State-Aid Street	151,278
124	County State-Aid Highway	394,711
125	Petroleum Tank Cleanup	29,524
125	Solid Waste	66,137
125	Health Care Access	202,403
125	Minnesota Resources	7,333
125	Natural Resources	29,456
125	Game and Fish	30,128
125	Environmental and Natural Resources	314,094
125	Environmental	52,046
126	Iron Range Resources & Rehabilitation	35,409
126	Northeast Minnesota Economic Protection	102,429
126	Endowment
126	Maximum Effort School Loan	454
127	Special Compensation	38,797
127	Medical Education and Research	622,079
127	Tobacco Use Prevention	928,833
127	Miscellaneous Special Revenue	299,236
	Capital Projects:
140	General Projects	20,600
140	Transportation	14,364
140	Building	38,327
30	Debt Service:	901,762
120	Permanent School Funds	539,846
120	Capital Projects	73,291
	Proprietary Funds:
	Enterprise:
36	State Colleges & Unversities	456,939
36	Unemployment Insurance	48
	Nonmajor Enterprise Funds:
145	State Lottery	22,909
144	Minnesota Correctional Industries	5,899
144	Enterprise Activities	4,475
144	Public Employees Insurance
144	Behavioral Services	13,344
144	State Operated Community Service	24,225
144	Giants Ridge	6,551
	Internal Service:
153	Intertechnologies	8,228
152	Central Stores	750
153	State Printer	200
152	Central Motor Pool	551
153	Plant Management	8,527
152	Employee Insurance	135,639
153	Risk Management	13,493
152	Central Services	917
	Fiducary Funds:
	Pension (1/2 the actuarialy determined    surpluses)
113	State Employees Retirement Fund	Unknown
113	State Teachers Retirement Fund	Unknown
113	State Patrol Retirment Fund (SPRF)	26,271
113	Correctional Employees Retirement Fund       (CERF)
113	Legislative Retirement Fund (LRF)
113	Judicial Retirement Fund (JRF)
	Investment Trust - Supplemental Retirement
168	Agency Funds
	Conponent Units:
46	Metropolitan Council	460,504
46	House Finance Agency	1,297,550
46	University of Minnesota	1,162,600	1
	Nonmajor Component Units:
171	Public Facilities Authority	275,936
171	Workers' Compensation Assigned Risk Plan	244,481
170	National Sports Center Foundation	383
170	Higher Education Services Office	96,015
170	Minnesota Technology, Incorporated	1,955
170	Agricultural and Economic Development Board	11,710
171	Rural Finance Authority	16,712
170	Minnesota Partnership for Action Against       Tobacco	124,744
	Total Potential Surpluses…	10,529,745
	Per Capital…	2,078
	Family of 4…	8,311
Note
1	If the University of Minnestoa amount contains endowments or similar funds, these should be deducted from 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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