Introduction

The CAFR Budget System (CBS) is a method of combining certain data from the Comprehensive Annual Financial Report (CAFR) with the budget process.

The fund data in the CAFR is first analyzed and arranged in a certain manner so that fund balances for each fund are used in the subsequent year's budget process.

After budget expenditures are determined through the normal budget process, the expenditures are used in the CBS to determine the amount of revenues required by type of revenue in order to arrive at a projected (budgeted) zero fund balance at the end of the fiscal year. This is often referred to as zero-based budgeting.

Revenue requirements are backed into in the CBS. Revenue requirements are determined by the proportionate share the revenues were allocated in the most current CAFR for each fund. By adding up all the revenues by types of revenue for each fund, the total revenue requirements are determined. The revenue requirements are then compared with the projected revenues based on existing laws.

Any revenue adjustments would be initiated (change the laws to increase or decrease revenue by type of revenue) as part of the final budget. Increases or decreases in various revenue sources would be automatic and eliminating much in the way of political discretion.

A provision often associated with zero-based budgeting is that expenditures will equal last year's expenditures except that:

1. If a new requirement is placed on the use of money in a particular fund, the costs associated with that new requirement can be added as additional expenditures.

2. Conversely, a reduction in requirements would result in a reduction in the expenditures to the extent of the costs associated with the reduction.

The items to budget for include all funds and component units in the Comprehensive Annual Financial Report (CAFR). The component units would be also required to use the CBS in their budgeting process.

The Problems

1. The funds not spent in one year are seldom recycled and considered in the next years budget, and tend to increase and accumulate year after year. The potential surpluses disclosed in the State and local government reports on this site clearly proves that surpluses are allowed to accumulate, and do not receive adequate consideration in the budget process.

The main problem with including previous year's fund balances (surpluses) in the next year's budget is an accounting definition.

When revenues are allocated to a particular fund, these revenues are considered as revenues in the budget process during that year. However, at the end of the fiscal year these revenues are classified as part of the fund balance and converted to cash and investments. In other words, these revenues are no longer classified as revenues, but become "assets".

In almost all State and local governments the budget process is described/proclaimed/decreed in laws, charters and constitutions as matching "Current Revenues" with "Current Expenditures". Since fund balances are no longer considered revenues, but assets, only the income from the fund balances (interest and dividends) is classified as revenue in the next budget process. Hence excesses/surpluses are allowed to exist and accumulate. You will notice in the schedules below that "Investment Income" is considered a revenue source, but not the asset that generated the income.

At one time there were three components of a budget, 1) balance brought forward (money not spent the previous year); 2) current revenues; and 3) current expenditures. Somewhere along the line 1) balance brought forward was eliminated. The reason for this is unknown.

2. Governments do not use what is commonly called Zero-based budgeting procedures. The revenues will equal, not exceed, expenditures. What happens is that governments budget for a fund balance at the end of the fiscal year and do not adjust revenues to equal expenditures.

3. If an adjustment is made in the budget process requiring revenue increases or decreases, the adjustment(s) too often are made at the general fund level and not at the level that caused the need for an adjustment.

With a budget surplus there is a tendency to place the surplus in the general fund and then allocate the surplus as tax reductions/rebates to the more traditional taxes that benefit mostly the wealthy regardless of the revenue source that created the surplus. Also, there is a tendency by government to want to spend the General Funds immediately and indiscriminately.

The CBS addresses these problems and improves a government's money management system.

The CAFR Budget System Overview

Timing is Important

The budget and CAFR are prepared at different times and this can cause a problem unless there is a system in place to prepare these documents in a particular order.

The budget for the next fiscal year is usually prepared and approved before the end of a government's current fiscal year (FY). For example, if the fiscal year ends on June 30th, then the budget for FY 2003 is usually prepared and approved by June 30th 2002.

The CAFR is prepared at the end of the fiscal year. Before there were computers, the CAFR was usually prepared, audited and published within three to six months after the close of the fiscal year. However, now with computers it now takes six to nine months and in a few cases a full year for a government to publish the CAFR.

This is utterly ridiculous. What this tells me is that governments do not want the public to know about the CAFR and what it contains. This is very disturbing because with computers and the programs are already available, the CAFR could be prepared, audited and published within 60 days or less after the close of the fiscal year. Governments are able to prepare monthly budget statements in great detail for every section of the government to know where each section stands in relation to the approved budget. Yet, the CAFR takes months and months.

CBS Requirements and Steps

One of the requirements of the CBS is that the government prepare a final CAFR within sixty days after the close of the fiscal year. Old data is useless and elected officials know this.

There are four basic steps in the CBS. Years are included in the example so that the timing can be understood.

1. The FY 2001 CAFR is used to prepare the Initial FY 2003 Budget.

2. The Initial FY 2003 Budget is prepared prior to the close of FY 2002.

3. The FY 2002 CAFR is prepared within sixty days after the close of FY 2002.

4. The FY 2003 Final Budget is prepared seventy-five days after the close of FY 2002 using the data contained in the FY 2002 CAFR.

Example: If the fiscal year ends June 30th, then the Initial FY 2003 Budget will be approved by June 30th. The FY 2002 CAFR will be prepared by September 1. The Final FY 2003 Budget would be approved by September 15th.

Application

The CBS should be applied as follows based on the funds listed in the CAFR:

Included

Special Revenue Funds
Enterprise Funds
Internal Service Funds
Expendable and Nonexpendable Trust Funds
Some Fiduciary/Proprietary/Agency Funds
Debt Service Funds (Special criteria)
Capital Project Funds (Special criteria)
Component Units (Same requirements as major government)
Colleges and Universities (Same requirements as major government)
Workers Compensation Funds (See below)
Unemployment Compensation Funds (See below)
Special Governments-authorities/commissions/etc. not included in the major government CAFR.

Exceptions

Pension/Retirement funds
Employee Deferred compensation funds
Any funds composed of donations, contributions, gifts, bequests, etc.
College and University endowment and similar funds
Funds held in trust for other governments
Investment pooled funds for other governments, individuals, or private organizations/groups

An Example

This example consists of three schedules and deals with the Highway Fund, a Special Revenue Fund.

The designations for a particular cell (area) within a schedule include the schedule, the row and the column. For example, in Schedule A (A-), Taxes-Retail Sales of $24,148 (Row 4) in the 2001 CAFR column (A) would be designated [A-4-A].

Schedule A - Preparing the Initial FY 2003 Budget

Column A represents the amounts taken from the FY 2001 CAFR for the Highway Fund. Rows 4 through 7 [A-4-A to A-7-A] only show a couple of the taxes that could be listed. In an actual preparation, all taxes would be itemized. The same is true for Licenses, Fees and Permits [A-9-A] and Charges for Services [A-10-A].

The FY 2001 CAFR data begins at Row 4 and goes to Row 33.

Take a moment to review this schedule.

Schedule A
Combining State of Revenues, Expenditures, and Changes in Fund Balances
Special Revenue Funds - Highway Fund
For the Year Ended June 30, 2001
(Dollars in Thousands)

		A	B	C	D	E
Row		2001 CAFR Highway Fund	Adjustable Revenue	% of Total	Set Amounts	June 30th FY 2003 Initial Budget
1	Previous CAFR Balance - FY 2001				149,286	149,286
2	Revenues:
3	Taxes:
4	Retail Sales	24,148	24,148	5.0%		17,191
5	Fuel	142,141	142,141	29.3%		101,188
6	Vehicle Ad Valorem	225,410	225,410	46.5%		160,467
7	Etc.	12,014	12,014	2.5%		8,553
8	Federal Grants and    Contracts	176,664			176,664	176,664
9	Licenses, Fees and    Permits	60,272	60,272	12.4%		42,907
10	Charges for Services	16,477	16,477	3.4%		11,730
11	Investment Income	8,891			3,732	3,732
12	Rents and Royalties	387	387	0.1%		276
13	Other	4,225	4,225	0.9%		3,008
14	Total Revenues…	670,629	485,074	100%	329,682	675,000
15
16	Expenditures:
17	Transportation	652,686			675,000	675,000
18
19	Total Expenditures…	652,686			675,000	675,000
20
21	Excess of Revenues Over (Under) Expenditures…	17,943			(345,318)	0
22
23	Other Financing Sources (Uses):
24	Operating Transfers In	10,412
25	Operating Transfers Out	(6,864)
26	Proceeds from Other    Financing Arrangements
27	Proceeds fro Capital    Leases
28	Total Other Financing Sources (Uses)..	3,548
29
30	Excess of Revenues and Other Sources Over (Under) Expenditures and Other Uses..........	21,491			(315,318)	0
31
32	Fund Balances, July 1, 2000......	131,343
33	Fund Balances, June 30, 2001...	152,834
34	Fund Balances, July 1, 2003......					0
35
36	Previous CAFR Balance:
37	Operating Transfers In	(10,412)
38	Operating Transfers Out	6,864
39	Fund Balance, June 30,    2001	152,834
40	Take to Column D…	149,286

Explanation of Schedule A Items

Column A [A-2-A to A-33-A] represents the results shown in the FY 2001 CAFR.

Under Taxes only three taxes were listed [A-4-A to A-6-A]. All taxes applied to this fund should be included and applied as shown.

The FY 2001 Fund Balance should be adjusted for Operating Transfers In [A-37-A] and Operating Transfers Out [A-38-A]. This is because we do not know whether these transfers truly represent a transfer applicable to the Highway Fund. So often, excesses in one fund are transferred to other funds and this distorts the equitable distribution of taxes/revenues.

For example, these transfers could be to an arts program, a convention center in a large city, etc. and those who pay the taxes/charges for services for the Highway Fund should not be burdened with also paying for other programs from that fund.

The adjusted Fund Balance for FY 2001 is $149,286 [A-40-A]. Note: That is $149.286 million because all dollar amounts are in thousands.

The Fund Balance is taken to Column D [A-1-D] and becomes part of the the funds available for inclusion in the next budget computations of funds available (previous CAFR fund balance plus revenues).

Column B [A-4-B to B-14-B]- This column represents Adjustable Revenues.

The Adjustable Revenues are those revenues that the government has discretionary control over and can adjust based on need. A government has little direct control over Federal Grants and Contracts [A-8-B] and these funds should be considered a set amount. The same is true for Investment Income [A-11-B]. This amount is set based on the rate of return and the amount of funds to invest. This will be covered in Column D.

So the amount of Adjustable Revenue in this example is $485,074 [A-14-B]

Column C - The % of Total Adjusted Revenues

These percentages represent the percent that each of the Adjustable Revenue items [A-4-C to A-13-C] are of the Total Adjustable Revenues [A-14-B]. For example, Retail Sales percentage of 5.0% is derived by dividing $24,148 [A-4-B] by $485,074 [A-14-B].

These percentages are used to equitably distribute the required taxes/revenues based on the original allocation of these taxes/revenues. This distribution method will become more clear when the final computation of required taxes and revenues are made which is explained below.

Column D - Set Amounts and Projected Expenditures

The $149,286 [A-1-D] is a Set Amount determined in Column A above.

The Federal Grants and Contracts amount of $176,664 [A-8-D] was discussed in Column B above.

The Investment Income amount of $3,732 [A-10-D] was computed based on a 5% rate of return and the amount to apply this to is the fund balance of $149,286 [A-1-D]. Since these funds are scheduled to be used up during the fiscal year to arrive at a zero fund balance, the computation for this amount is $149,286 times 5% divided by 2.

This means that the total Set Amounts are $329,682 [A-14-D].

The Initial Budget states that the amount of expenditures needed for the Highway Fund for FY 2003 is $675,000 [A-19-D]. With Set Amount of revenues of $329,682 the necessary additional Adjustable Revenue required is $345,318 [A-21-D].

Column E - The June 30th Initial Budget

Including the Previous CAFR Balance of $149,286 [A-1-E] is the basis for the CAFR Budget System. Currently, The Previous CAFR Balance (Fund Balance) is usually not considered in the next years budget because the fund balances are not considered revenue under accounting classification standards.

The amount of adjustable revenue required was determined to be $345,318 [A-21-D]. To determine the amount for each adjustable revenue that is required to generate the $345,318, the percentages in Column C are multiplied by $345,318. For example, the amount of Retail Sales taxes needed are $17,191 [A-4-E] which is derived by multiplying $345,318 by 5.5% [A-4-C]. The same computations are made for all of the Adjustable Revenue items.

This result is that the budgeted revenues, including the previous CAFR computed balance, will equal the budgeted expenditures of $67,000 [A-14-E] leaving a zero (0) fund balance.

Schedule B - The Final FY 2003 Budget

Before the Final FY 2003 Budget can be prepared, the FY 2002 CAFR must be prepared. This is because the FY 2002 CAFR data is used to determine the final and most current data available. The FY 2002 CAFR would be required to be prepared 60 days after the close of the fiscal year.

Explanation of Schedule B

The Schedule B is shown below. However, the explanation is not shown because the explanation for the Schedule B is exactly the same as for Schedule A. The only difference is that the FY 2002 CAFR data is used instead of the FY 2001 data.

Schedule B
Combining State of Revenues, Expenditures, and Changes in Fund Balances
Special Revenue Funds - Highway Fund
For the Year Ended June 30, 2002
(Dollars in Thousands)

		A	B	C	D	E
Row		2002 CAFR Highway Fund	Adjustable Revenue	% of Total	Set Amounts	Final FY 2003 Budget
1	Previous CAFR Balance - FY 2002				140,176	140,176
2	Revenues:
3	Taxes:
4	Retail Sales	22,737	22,737	4.9%		17,606
5	Fuel	133,836	133,836	28.8%		103,634
6	Vehicle Ad Valorem	212,240	212,240	45.7%		164,344
7	Etc.	11,312	11,312	2.4%		8,759
8	Federal Grants and Contracts	172,014			172,014	172,014
9	Licenses, Fees and Permits	61,727	61,727	13.3%		47,797
10	Charges for Services	17,542	17,542	3.8%		13,583
11	Investment Income	7,542			3,504	3,504
12	Rents and Royalties	401	401	0.1%		311
13	Other	4,225	4,225	0.9%		3,272
14	Total Revenues…	643,576	464,020	100%	315,694	675,000
15
16	Expenditures:
17	Transportation	652,686			675,000	675,000
18
19	Total Expenditures…	652,686			675,000	675,000
20
21	Excess of Revenues Over (Under) Expenditures…	(9,110)			(359,306)	0
22
23	Other Financing Sources (Uses):
24	Operating Transfers In	9,781
25	Operating Transfers    Out	(5,541)
26	Proceeds from Other    Financing Arrangements
27	Proceeds from Capital    Leases
28	Total Other Financing Sources (Uses)..	4,240
29
30	Excess of Revenues and Other Sources Over (Under) Expenditures and Other Uses	(4,870)				0
31
32	Fund Balances, July 1, 2001.......	149,286
33	Fund Balances, June 30, 2002.....	144,416
34	Fund Balance, June 30, 2003......					0
35
36	Previous CAFR Balance:
37	Operating Transfers In	(9,781)
38	Operating Transfers    Out	5,541
39	Fund Balance, June 30,    2001	144,416
40	Take to Column D…	140,176

Schedule C - Results for the Highway Fund

The results are that the Highway Fund revenues requirements were reduced by $104.714 million [C-12-C]. But more importantly each of the revenue requirements were reduced in direct proportion to how they were originally applied.

For example the Retail Sales amount shown in the FY 2002 CAFR was $22,737 [C-2-A]; however, for the FY 2003 Final Budget the amount needed was only $17,606 [C-2-B]. This means that Retail Sales tax requirements are reduced by $5.131 million [C-2-C].

Schedule C - Reductions by Revenue Source