Introduction

The State of Montana at the State-level has approximately $3.15 billion of the taxpayer's money it is not using, i. e. surpluses equal to $3,460 for every man, woman and child in Montana or $13,839 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Montana.

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.

Categories	Amount of Surplus(In thousands)	Per Capita Surplus	Family of Four
Governmental Funds	1,884,608	2,071	8,284
Proprietary Funds	266,587	293	1,172
Fiduciary Funds	15,612	17	69
Component Units	981,653	1,079	4,315
Total...	3,148,460	3,460	13,839

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.

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 $3.15 billion.

Here is what happens when the $3.15 billion is returned to the taxpayers (the private economy).

In FY 2003, unemployment was 21,000. If the $3.15 billion is returned, 63,280 jobs will be 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 $3.15 billion in surpluses to the people the State economy would grow by $6,954 per capita. That is 16 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 Fund, a Special Revenue Fund, had net expenses of $46 million, and reserves (cash and investments) of $578 million. That is 13 years of reserves.

The Coal Severance Tax, a Permanent Fund (Governmental Fund), made a profit of $83 million. But it also had cash and investment reserves of $704 million.

Unemployment Insurance, an Enterprise Fund (Propriety Fund) and not part of the budget, made a profit of $2.4 million . It had reserves of $190 million.

State Compensation Insurance Fund (New and Old), a Component Unit and not part of the budget, had net expenses of $95 million and had cash/investment reserves of $698 million. That is 7 years of reserves.

These only represent four of the 78 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.state.mt.us/doa/afsd/cafr/cafr03.asp

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 Montana CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses
	Governmental Funds:
34	General Fund	36,388
	Special Revenue:
34	State Special Revenue Fund	578,437
34	Federal Special Revenue Fund
	Permanent:
34	Coal Severance Tax Fund	703,622
34	Land Grant Fund	494,532
126	Resources Indemnity	7,409
126	Parks Trust	1,167
126	Cultural Trust	420
126	Real Property Trust	11,390
126	Noxious Weed Management	5,331
127	Jim Bradley Memorial
127	Thomas Teakle
127	Merritt-Wheeler Memorial
127	Historical Society Funds
127	Endowment for Children
127	Tobacco Settlement Interest	2,521
	Debt Service Funds:
116	Coal Tax Bonds	9,015
116	Long-Range Building Program	1,546
116	Water Development	5,923
116	Highway Revenue Bonds	3,799
117	Health Care Debt Service	4,203
117	Information Technology (IT) Bonds	21
117	Renewable Resources	209
117	Water Conservation Bonds
117	Energy Bonds	219
	Capital Projects Funds:
122	Long-Range Building Program	13,120
122	Information Technology (IT) Project	4,792
122	Federal/Private Construction Grants	16
122	Capital Land Grant	528
	Proprietary Funds:
	Enterprise Funds:
42	Unemployment Insurance	190,480
42	Economic Development Bonds	23,388
132	Liquor Warehouse	1,634
132	Hail Insurance	5,857
132	State Lottery	2,019
132	Prison Ranch	1,980
133	Prison Industries	1,980
133	MUS Group Insurance	11,980
133	Subsequent Injury	458
133	Montana Career Information System	44
133	Secretary of State Business Services	1,807
133	Historical Society Publications	270
133	Surplus Property	107
134	West Yellowstone Airport	498
134	Judiciary Law Library	13
134	Local Government Audits	295
134	Flexible Spending Administration	209
135	Department of Agriculture	9
135	Advanced Drivers Education	61
135	FWP Visitor Services	36
	Internal Service Funds:
154	FWP Equipment	170
154	FWP Warehouse Inventory	83
154	FWP Office Supply	19
154	Highway Equipment	1,583
154	Employment Group Benefits	12,345
155	FWP Tech Services Division	2,446
155	Admin Insurance	411
155	Admin Supply	493
155	Motor Pool	412
155	Publications & Graphics	349
155	Buildings & Grounds	569
155	Admin Central Services	145
156	Labor Central Services	527
156	Commerce Central Services	372
156	OPI Central Services	175
156	DEQ Indirect Cost Pool	875
156	Mail & Messenger	346
157	Payroll Processing	73
157	Warrant Processing	180
157	Investment Division	958
157	Aircraft Operation	181
157	Justice Legal Services	42
157	Personnel Training	54
158	Debt Collection	99
158	Statewide Fueling Network	23
158	Procurement Card Purchases	18
158	Prison Industries	514
	Fiduciary Funds:
	Pension Trust Funds(1/2 of actuarial surplus)
82	Judges Retirement System (JRS)(7/1/02)	7,041
82	Sheriffs Retirement System (SRS)(7/1/02)	8,483
	Private-Purpose Trust Funds:
184	Escheated Property
184	Labor & Industry Compensation Fund
184	Woodville Highway Replacement
185	Cisco Academies
185	Moore-Sipple Connector
185	Environmental Reclamation
	Agency Funds
190	Investment Pool
190	Performance Deposits
190	Central Payroll
190	Criminal Offender Restitution
191	Custodial Accounts
191	Child Support Collections
191	Intergovernmental
191	Debt Collection	89
191	Milk Pass-through
	Component Units:
54	Housing Authority	155,506
54	Facility Finance Authority	1,706
54	State Compensation Insurance Fund - New	605,433
54	State Compensation Insurance Fund - Old	92,744
55	Montana State University	84,038
55	University of Montana	42,226
	Total Surplus…	3,148,460
	Per Capita…	3,460
	Family of 4…	13,839

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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