Introduction

The State of South Carolina at the State-level has approximately $5.62 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,358 for every man, woman and child in South Carolina or $5,433 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in South Carolina.

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.

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 $5.62 billion.

Here is what happens when the $5.62 billion is returned to the taxpayers (the private economy).

In addition, 112,348 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 $5.62 billion in surpluses to the people the State economy would grow by $2,716 per capita. That is 6 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

Department General Operating Fund, a Governmental Fund, had net expenditures of $32 million. It also had cash/investment reserves of $257 million. That represents 8 years of reserves.

Unemployment Compensation Fund, an Enterprise Fund and a not a budget fund, had net expenses of $138 million. It also had cash and investment reserves of $503 million. The reserves represent 4 years of expenditures.

Education Assistance Authority, another Enterprise Fund and not part of the budget, made a profit of $5 million . It had reserves of $381 million.

Public Service Authority, a Component Unit and not part of the budget, made a profit of $72 million and had cash/investment reserves of $419 million.

These only represent four of the 50 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.cg.state.sc.us/

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 South Carolina CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses
	Governmental Funds:
40	General	45,810
40	Department General Operating	256,555
40	Local Government Infrastructure	950,273
40	Department of Transportation Special Revenue	236,677
41	State Tobacco Settlement	545,543
	Special Revenue Funds:
140	Education Improvement Act	62,628
140	Children's Education Endowment	44,185
140	Waste Management	111,899
140	Accommodations and Local Option Sales Tax	44,491
140	Medicaid Expansion	11,353
140	Tobacco Settlement Revenue Management Authority	117,652
141	Education Lottery	132,378
141	Jobs-Economic Development Authority	4,672
141	Public Telecommunications	23,018
141	Other Special Revenue	76,874
141	Capital Projects Funds:	139,097
	Permanent Funds:
141	Bequests
141	Wildlife Endowment	1,673
	Proprietary Funds:
	Enterprise:
48	Higher Education	588,661
48	Unemployment Compensation	503,224
48	Housing Authority	96,096
49	Education Assistance Authority	381,379
148	Patients Compensation	4,638
148	Patriots Point Development Authority	6,222
148	Second Injury	107,908
148	State Housing Corporation	4,890
148	Tuition Prepayment Program
149	The Citadel Trust, Inc.	9,120
149	Pharmaceutical Education and Development       Foundation	327
149	Medical University Hospital Authority	29,921
149	Medical University Facilities Corporation	14,759
149	University of South Carolina Trust	6,464
149	University Medical Associates	40,691
149	Other Enterprise	16,136
	Internal Services:
158	Insurance Reserve	339,873
158	Employee Insurance Programs	97,352
158	State Accident Fund	18,854
158	General Services	33,452
158	Central Supplies and Equipment	854
159	Motor Pool	9,166
159	Pension Administration	1,433
159	Prison Industries	2,669
159	Governors' School for the Arts Foundation, Inc.	1,829
159	Other Internal Service	236
	Fiduciary Funds
169	Pension:
	Private-Purpose Trust:
171	Tuition Programs Fund
171	Other Private-Purpose Trust
	Agency Funds
173	Insurance Company Deposits
173	Payroll Clearing
173	Other Agency
	Component Units:
64	Public Service Authority	419,072
64	State Ports Authority	20,833
64	Connector 2000 Association, Inc.	1,688
64	Lottery Commission	14,569
177	Medical Malpractice Joint Underwriting Association	37,173
177	First Steps to School Readiness Board of Trustees	1,859
177	The Children's Trust Fund of South Carolina, Inc.	764
177	The Savannah Lakes Regional Load Fund	518
	Related Organizations: - Financial data not provided.
	South Carolina Reinsurance Facility
	Associated Auto Insurers Plan
	Rural Crossroads Institute
	Enterprise Development, Inc. of South Carolina
	Total Surpluses…	5,617,408
	Per Capita…	1,358
	Family of 4…	5,433

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.