Here are some excuses stated by various State and local government officials regarding the surplus issue and our responses to these issues. The list will grow as more excuses are provided.

We had a reserve or rainy-day funds but we used these to balance the budget and surpluses do not exist?

Response: False

Except for the General Fund which may include a reserve or rain-day fund, all of the other funds listed are neither the reserves nor "rainy-day funds". What are all of these excesses? [Note: All the funds shown on the Exhibit A of each report.]

The surpluses include fixed assets that cannot be returned to the taxpayer.

Response: False

The surpluses do not include:

Fixed assets such as buildings, roads, equipment, and land held not for resale;

Endowments, gifts, donations, contributions , bequests, etc.;

Trust and agency funds held for other individuals or other governments;

Employee deferred compensation or similar type funds; and

Employee retirement system actuarially determined requirements.

The basic actuarially determined requirements are excluded. That is the amounts necessary to pay off all the employees their determined amount of vested interest in the funds. Any amount in excess of that amount is determined to be surplus with 1/2 for the taxpayer and 1/2 for the employee.

The surpluses do not exist. We have a budget deficit/shortfall.

Response: True.

If one speaks of the budget, then he probably is stating the truth. There may not be little or no surpluses but my experience has been that even claimed budget deficits really have financial surpluses. .

If the government includes the CAFR then it is not telling the truth unless the government believes it has a right and need to hold excesses of the taxpayers money for an "emergency, rainy-day, etc." If one actually believes in the reserves concept then he/she is stating that he is intellectually challenged on elementary economics. Alan Greenspan said it and we prove it.

In the private sector (you, me and businesses), the holding of reserves for whatever reason is prudent money management because the private sector has only one place to go when funds run out - to borrow the money.

But for governments this is not the case. If the government runs out of money it can go to the taxpayer for more money. It has the power to tax. If the taxpayers disapprove of the request, then governments must do with what the taxpayers provide. In almost every instance when there are emergencies, etc., and the government has a legitimate reason for the request for additional funds, the taxpayers approve of the governments request. You and I do not have that option of asking the taxpayer for more money. So the holding of reserves is not a non-profit/pay-as-you-go system.

Most are restricted funds or other funds that have to be used for specific voter approved projects.

Response: False.

First, the funds are not mostly restricted funds. They are all kinds of funds.

Second, governments are nonprofit and should use a pay-as-you-go system of meeting its obligations with a few exceptions. If an obligation is paid then the excess should be considered surpluses.

If the funds cannot be used because it is designated for a specific purposes then when the elected officials ask for a pay raise or additional perks, then just tell them that there is a law that says what the amount will be and pay raise is denied. Or when there is a budget proposal that says that taxes need to be increased, then just tell them there is a law that says it cannot be changed.

Do you see how ridiculous this idea is. Man made the laws. Man can change the laws. When there is more than what is needed to meet the obligations of a fund, then the excess should be returned to the people.

If these are restricted funds that can only be used for certain purposes then why are there excesses (reserves) in these funds. Could it be that the taxpayers were taxed too much for these restricted projects and that is why the reserves are being held and invested?

The strategic reserve protects our bond rating which saves money for the taxpayers.

Response: True

But the returning of the reserves to the people will provide more revenue for the government and a host of other economic benefits. These benefits far exceed the bond rating protection differential between what interest rate the city would pay with a good or a bad rating. This has been shown in the economic impact analysis both economically and mathematically.

We challenge the government and any other individual to demonstrate that holding reserves (surpluses) of the taxpayers' money for bond ratings will equal or exceed the benefits outlined above. If they can, then we will reconsider our position.

Some of the "fund balances" are actually capital assets which would have to be liquidated to be used.

Response: False.

That is probably true for "fund balances", but "fund balances" are not included in our analysis because they are not germane to the reserves issue. The accounts used for potential reserves were liquid asset accounts, such as Cash/Deposits/Pooled Investments; Investments; Cash/Investments with Fiscal Agents; Restricted Assets: Cash and Cash Equivalents; Restricted Assets: Other Restricted Assets; Assets; Amount; and Other Assets. It is true that these assets would have to be liquidated to provide refunds to the taxpayer. The liquidation would be very simple.

The amount shown do not include the liabilities.

Response: False

There are two kinds of liabilities, current and long-term.

The best way to understand this concept is to think of a mortgage on a residence. The total outstanding mortgage (say $100,000) is a long-term liability. The monthly payments made (say $6,000 for the year) are the current liability.

In the budget process, whether for a government or an individual, is the current liability ($6,000) or the long-term liability ($100,000) included? Does any individual say I have a $100,000 outstanding mortgage therefore next year I need $100,000 in income in order to balance my budget for the year? No, the individual and a government use the current liability amount ($6,000) for budgeting and operating purposes.

In my cash/investment approach I assume the following: The government has paid all of its obligations (including current liability payments) for the year because the CAFR is prepared as of the end of the governments fiscal year. Other words the government did not default on any obligations. If a government has paid all its obligations for each program/project/service that it provides, then any cash/investments still remaining were not needed to properly fund/operate the programs/projects/service. Hence, these are considered potential surpluses of funds that should be returned to the people in one form or another.

Conclusion: The liabilities were properly considered.

Almost $1 billion is listed under the Unemployment Compensation Fund as a "surplus". This is money held by the State in a trustee capacity for the benefit of the participants (employers in the State whose employees may become unemployed and need to collect unemployment benefits).

Response: True.

I agree with the above statement; however, it does not justify the government holding excess funds in this area.

The revenues for the Unemployment Compensation Fund are taxes, intergovernmental, earnings on investments and fines, forfeitures and penalties.

Governments hold between 2 to 6 years of expenditures for the unemployment expenditures. In a pay-as-you-go system the amount needed is the payment of the current years unemployment because the funds are being received on a regular basis.

As far as paying the tax, the consumers pay the tax because if the consumers did not pay the tax then a business would go bankrupt. The business writes the checks for the tax but the consumers pay the tax. Initially, the surpluses should be returned to the people and thereafter the tax should be adjusted on a pay-as-you-go system.

The Workers Compensation Fund should not be included as a surplus because it represents funds designated for those who are injured on the job and they are entitled to receive these funds.

Response: False.

First, the workers compensation funding should be on a pay-as-you-go system which means that the amounts should be close the zero at the end of the fiscal year. However, this is not the case. In those States that use the pay-as-you-go system there are excesses over and above the amounts to make the payments.

It is assumed that if the State goes bankrupt and ceases to exist that the money would be available to pay off these claims. When was the last time a State went bankrupt and ceased to exist? The States have the power to tax, unlike an insurance company.

Second, for those States that use the solvency/reserve method of handling workers compensation the situation is a disaster for the taxpayer. In fact most States have even more reserves than what an insuance company would be required to maintain. California, Texas, and New York, three of our largest States, use the pay-as-you-go method of handling workers compensations. But States like Washington and Ohio are a disaster and growing each year.

Ohio has over $20 billion and Washington over $9 billion in workers compensation funds not being used.

Again, the businesses write the checks for workers compensation but the consumers pay for workers compensation. It is in the price of the products and services they buy.

Almost $3 billion is listed as Treasurer Custodial Securities Fund. These are securities deposited by private corporations (most of it with the Insurance Department) with the state to ensure performance of their business. The money belongs to the private sector.

Response: True

Normally a fund like the Treasurer Custodial Securities Fund is not included as surpluses. But the $3.0 billion is rather high for a State the size as Arizona. It could be that the amount necessary is based on an actuarial-type evaluation/analysis and the amounts collected are reasonable. However, this requires more analysis that cannot be done from a review of the CAFR. I would like to see an actuarial study of the necessity for the $3 billion.

However, if it is determined that amounts collected from these firms are reasonable, then the $3.0 billion should not be included as surpluses. But remember this would deduct $3.0 billion from the $14.08 billion, leaving $10.07 billion in other potential surpluses, or approximately $2,000 per capita, $8,000 for a family of 4.

The State Compensation Fund is legally a separate entity whose assets belong to its policyholders.

Response: True

Page 54 of the CAFR:

"The State Compensation Fund was established by the Legislature for the purpose of insuring employers against liability for workers' compensation; occupational disease compensation; and medical, surgical and hospital benefits. The State Compensation Fund is governed by a board of directors that consists of five members appointed by the Governor for staggered terms of five years. Annually the Governor appoints a chairman from among the board members. The State is required by statute to review and approve the operating and capital outlay budget of the State Compensation Fund."

Although legally separated, there is little doubt that the State Compensation Fund is a State agency. The Government Accounting Standards Board (GASB) refer to these type entities as "Special Governments."

"The [activity] is legally separate from the government." This is a favorite excuse that the government has no responsibility of what takes place with that activity. If the activity is included in the CAFR the activity is part of the government. In most cases it is a "public corporation" or similar entity. Although it may not make the basic day-to-day decisions of the major government it was created by the major government and has a major say in its activities. Utilities are one of the favorites of this type of activity.

Conclusion:

There are a few things you should understand.

1. Governments are not going to confess that they have been overtaxing the people and have accumulated reserves (surpluses). Such a confession would be political suicide.

2. To protect their actions, governments will use any excuse to justify their position/actions. This is not only human nature, but survival.

3. Getting involved with a government in this type of dialogue is a waste of time.

4. This issue is so important that if the politicians do not understand it and take appropriate action, their challengers during the next election will.

5. With using many excuses, the government is hoping that one item will stick and then demand that the baby be thrown out with the bath water.

Key Response

This is the key response to all excuses raised by governments/politicians regarding reasons they should hold reserves of the taxpayers money.

If a government official/politician can demonstrate that holding and investing the surpluses individually or in total, for any reason including "it is the law", is equal to or greater than the amounts demonstrated in my economic impact analysis when reserves are returned to the people, then we will gladly reconsider our position.

Until that is proven to our and the public's satisfaction, the maximum benefits to the taxpayers are when the excesses are returned to the people (elementary economics). When governments hold reserves, the taxpayers pay dearly. (See Economic Impact Section)

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