Introduction

The State of Alaska at the State-level has approximately $7.76 billion of the taxpayer's money it is not using, i. e. surpluses equal to $11,888 for every man, woman and child in Alaska or $47,552 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Alaska.

These surpluses do not include the Alaska Permanent Fund which has a total fund balance of $24.2 billion.

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 Alaska Special Revenue Funds (Governmental Funds), considered part of the budget, have fund balances of $96 million that probably will not be considered in the next year's budget. The total cash and investments, funds that were not used during the current year, was $102 million (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 $7.76 billion.

Here is what happens when the $7.76 billion is returned to the taxpayers (the private economy).

In addition, 155,108 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 $7.76 billion in surpluses to the people the State economy would grow by $23,776 per capita. That is 56 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 International Airport, an Enterprise Fund, had net expenditures of $5 million. It also had reserves (cash and investments) of $331 million. That represents 67 years of reserves.

The Alaska Industrial Development and Export Authority, a Component Unit, had net expenditures of $10 million. But it also had cash and investment reserves of $582 million. The reserves represent almost 61 years of net expenditures.

Commercial Assistance, an Enterprise Fund, made a profit of $2.2 million . It had reserves of $47 million.

Alaska Clean Water, an Enterprise Fund, made a profit of $2 million and had cash/investment reserves of $64 million. It only had expenditures of $386 thousand. The reserves represent 165 years of expenditures, not net expenditures.

Governments should be non-profit organizations and use pay-as-you-go systems. Having 165 years of reserves is definitely not pay-as-you-go.

These only represent four of the 52 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 created. 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://fin.admin.state.ak.us/dof/financial_reports/cafr_toc.jsp

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 Alaska CAFR- FY 2003

CAFR Page	List of Investments By Fund (In Thousands)	Potential Surpluses	Notes
	Governmental Funds:
	General:
108	Constitutional Budget Reserve Subfund	2,092,417
108	General and all Other Subfunds	720,798
	Alaska Permanent Fund
	Special Revenue:
120	Second Injury	3,048
120	Fishermen's	11,637
120	School	7,371
120	Fish and Game	9,994
120	National Petroleum Reserve	50,440
121	Reclamation Bonding Pool	1,059
121	Clean Air Protection	279
121	Exxon Valdez Oil Spill Restoration	4,310
121	Alyeska Settlement Trust	7,976
121	Exxon Valdez Settlement Trust	6,503
121	Northern Tobacco Securitization Corporation	401
	Debt Service:
134	General Obligation Bond Redemption	39,211
134	Northern Tobacco Securitization Corporation	28,786
	Capital Projects:
138	Accelerated Alaska Transportation Projects	103,142
138	Transportation Project	124,184
138	Educational and Museum Facility Design,       Construction, and Major Maintenance	231,837
	Permanent Fund
138	Public School Trust Fund	268,361
	Proprietary Funds
	Enterprise:
	Commercial Assistance:
146	World Ware II Veterans' Revolving Loan	222
146	Small Business Revolving Loan	340
146	Commercial Fishing Revolving Loan	26,179
147	Child Care Facilities Loan	124
147	Historical Districts Revolving Loan	137
147	Fisheries Enhancement Revolving Loan	19,582
147	Mining Revolving Loan	257
	Energy Assistance:
152	Alternative Energy Revolving Loan	339
152	Residential Energy Conservation	1
	Other Agencies:
156	Alcoholism and Drug Abuse Revolving Loan	184
156	Agricultural Revolving Loan	4,187
28	International Airports	330,984
157	Unemployment Compensation	202,681
157	Alaska Clean Water	63,878
157	Alaska Drinking Water	14,196
	Internal Service:
164	Group Health and Life Benefits	15,807
164	Alaska Public Building	5,390
165	Information Services	3,593
165	Highways Equipment Working Capital	5,687
165	Correctional Industries	504
	Fiduciary Funds:
	Pension (1/2 the actuarial determined surpluses)
	Public Employees Retirement System (PERS)
	Retiree Health and Life Benefits
	Deferred Compensation
	Supplemental Benefits
	Agency:
	Deposits, Suspense, and Miscellaneous
	Wage and Hour
	Public Advocacy
178	Exxon Valdez Oil Spill Investment	157,991
	Impact Aid PL 103-382
	Component Units
39	University of Alaska	192,533
39	Alaska Housing Finance Corporation	1,578,373
39	Alaska Industrial Development and Export Authority	581,853
	Nonmajor:
182	Alaska Municipal Bond Bank Authority	50,022
182	Alaska Student Loan Corporation	30,882
182	Alaska Railroad Corporation	31,599
183	Alaska Energy Authority	256,995
183	Alaska Aerospace Development Corporation	32,568
183	Alaska Science and Technology Foundation	102,405
183	Alaska Mental Health Trust Authority	337,759
	Total Potential Surpluses…	7,759,006
	Per Capita…	11,888
	Family of 4…	47,552

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 Contact

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