Introduction

The State of Alabama at the State-level has approximately $9.0 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,999 for every man, woman and child in Alabama or $7,996 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Alabama.

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	4,290,592	953	3,813
Proprietary Funds	865,501	192	769
Fiduciary Funds
Component Units	3,841,585	853	3,414
Total...	8,997,678	1,999	7,996

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.

For example, in FY 2003 the State of Alabama Nonmajor Special Revenue Funds (Governmental Funds), considered part of the budget, had fund balances of $604 million that probably will not be considered in the budget. So during the next budget process ask about these funds that are 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.

"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 $9.0 billion.

Here is what happens when the $9.0 billion is returned to the taxpayers (the private economy).

In addition, 179,954 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 Alabama Trust Fund

What you will hear as an excuse regarding the Alabama Trust Fund is that it was created by Constitutional Amendment and therefore cannot be changed. It was created by Constitutional Amendment and it can be dissolved by Constitutional Amendment. The State makes more money if it is returned to the people and not held and invested.

The Fund has reached $2.2 billion. If this money was returned to the people here is what would happen.

Here is what happens when the $2.2 billion is returned to the taxpayers (the private economy).

About 44,221 jobs would also be created.

What is important about the above is that if the State holds and invests the money it will receive $99 million a year in income. But if it returns the money to the people the State will receive $442 million in revenue every year. That is almost 4.5 times as much money than holding and investing the money. Other words almost 4.5 more funds would be available to use for education or other programs.

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 $9.0 billion in surpluses to the people the State economy would grow by $2,900 per capita. That is 7 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 Public Road and Bridge Fund, a Governmental Fund and part of the budget, had net expenses of $962 thousand. It also had reserves (cash and investments) of $508 million. That is 528 years of reserves.

The Water Pollution Control Authority, a Component Unit and not part of the budget, made a profit of $7.3 million as a net change in net assets. But it also had cash and investment reserves of $332 million.

Unemployment Compensation Trust, an Enterprise Fund and not part of the budget, had net expenses of $175 million. It had reserves of $285 million. That represents 2 years of reserves.

The University of Alabama, a Component Unit and not part of the budget, made a profit of $261 million and had cash/investment reserves of $2.0 billion.

These only represent four of the 103 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://comptroller.state.al.us/cafr.htm

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 Alabama CAFR- FY 2003

CAFR Page	List of Investments By Fund (In Thousands)	Surpluses
	Governmental Funds:
32	General Fund	151,635
32	Education Trust Fund	74,944
32	Alabama Trust	2,211,054
32	Medicaid Fund	11,696
32	Public Road and Bridge Fund	507,594
33	Public Welfare Trust Fund	67,082
	Nonmjor Special Revenue Funds:
134	Public Health Department	45,325
134	Education Department	26,903
134	Economic and Community Affairs	18,938
134	Revenues Allocated to Local Governments	66,969
134	Other Medicaid Funds	984
135	Rehabilitation Services	18,867
135	Public School Fund	9,578
135	Children First Trust	74,363
135	Revenue Administration	10,572
135	Industrial Relations	15,461
135	Conservation and Natural Resources	58,422
138	Corrections	4,283
138	Environmental Management	14,096
138	Senior Services	1,066
138	Professional and Occupational Boards	36,845
138	Emergency Management	1,112
139	Educational Television Foundation Authority	4,058
139	Public Health Care Authority	375
139	Forever Wild Trust	17,227
139	State Parks Improvement Corporation	5,508
139	Miscellaneous Special Revenue Funds	326,517
	Debt Service Funds:
144	Industrial Access Road and Bridge Authority
144	Corrections Institution Finance Authority	713
144	Judicial Building Authority	3,721
144	Public Health Care Authority	4,568
144	General Obligations Bonds
145	Federal Aid Highway Finance Authority
	Capital Project Funds:
150	General Obligations Bonds Project	155,248
150	State Parks Improvement Corporation	103,078
150	Federal Aid Highway Finance Authority	206,497
150	Other Capital Project Funds	4,189
	Permanent Funds:
154	Marine, Game, and Fish Endowment	11,764
154	Alabama Research Institute	12,323
154	Other Permanent Funds	7,017
	Proprietary Funds:
	Enterprise Funds:
40	Unemployment Compensation Trust	284,716
40	State Port Authority	54,423
40	Alabama College System	251,072
40	Alcoholic Beverage Control Board	22,241
40	Public Education Employees' Health Insurance	69,930
	Nonmajor Enterprise Funds:
158	Alabama Health Insurance Plan	9,656
158	Local Government Employees' Health Insurance	15,981
158	Surplus Property	1,180
158	Other Enterprise Funds	10,934
	Internal Service Funds:
164	Information Services Fund	15,046
164	Telecommunications Fund	4,631
164	Service Division	2,775
164	Printing and Publications	326
164	State Employees' Health Insurance	62,352
165	Correctional Industries	6,093
165	Building Renovation Finance Authority	19,776
165	Risk Management	33,995
165	Other Internal Service Funds	374
	Fiduciary Funds:
180	Private Purpose Trust
180	Pension and Other Employee Benefit Trust (1/2 actuarial    surplus)
184	Agency
	Component Units
50	Public School and College Authority	275,749
50	Mental Health	52,323
50	Housing Finance Authority	11,738
50	Water Pollution Control Authority	331,521
50	University of Alabama	1,975,008
51	Auburn University	519,905
51	University of South Alabama	109,593
	Nonmajor Component Units:
190	Higher Education Loan Corporation	47,129
190	Drinking Water Finance Authority	68,657
190	Alabama Agricultural and Mechanical University	27,457
190	Alabama State University	51,869
190	Jacksonville State University	54,679
191	University of North Alabama	35,357
191	Troy State University	55,535
191	Space Science Exhibit Commission	2,959
191	Historical Commission	9,143
191	Incentives Finance Authority	30,054
191	Twenty-first Century Authority	105,831
194	Supercomputer Authority	755
194	U.S.S. Alabama Battleship Commission	1,754
194	Historical Ironworks Commission	286
194	University of West Alabama	7,311
194	University of Montevallo	30,298
195	Alabama Institute for the Deaf and Blind	18,450
195	Marine Environmental Services Commission	1,458
195	Tennessee Valley Exhibit Commission	562
195	State Industrial Development Authority	5,286
195	Revolving Loan Fund Authority
195	Music Hall of Fame	73
195	Miscellaneous Component Units	10,845
	Related Organizations:
	Private Colleges and Universities Facilities Authority
	Alabama Shakespeare Festival Finance Authority
	Total Surpluses…	8,997,678
	Per Capita…	1,999
	Family of 4…	7,996

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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