Introduction

The State of Michigan at the State-level has approximately $10.13 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,009 for every man, woman and child in Michigan or $4,034 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Michigan.

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 $10.13 billion.

Here is what happens when the $10.13 billion is returned to the taxpayers (the private economy).

In FY 2002 there were 310,000 unemployed in Michigan, If the $10.13 billion is returned to the people 203,395 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 $10.13 billion in surpluses to the people the State economy would grow by $2,025 per capita. That is 5 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

Game and Fish Protection Fund, a Special Revenue Fund and part of the budget, had net expenditures of $8.5 million. It also had reserves (cash and investments) of $37 million. That represents 4 years of reserves.

Bottle Deposits Fund, another Special Revenue Fund had net expenditures of $3.3 million. But it also had cash and investment reserves of $125 million. The reserves represent almost 37 years of expenditures.

Michigan Natural Resources Trust Fund, a Permanent Fund and not part of the budget, made a profit of $37 million . It had reserves of $321 million.

Michigan Unemployment Compensation Fund, an Enterprise Fund, had net expenses of $665 million. It also had reserves of $1.7 billion. That represents 3 years of reserves.

These only represent four of the 81 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.michigan.gov/budget/0,1607,7-157-13406_13419-56728--,00.html

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 Michigan CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses
	Governmental Funds:
20	General	431,032
20	Counter-Cyclical Budget and Economic Stabilization Fund
20	School Aid Fund	405
	Special Revenue Funds:
	Transportation Related:
100	State Aeronautics Fund	14,279
100	State Truckline Fund	111,558
100	Michigan Transportation Fund	193,577
100	Comprehensive Transportation Fund	57,354
101	Combined State Truckline Bond Proceeds Fund	203,393
101	Combined Comprehensive Transportation Bond Proceeds          Fund	106,488
101	Transportation Related Trust Funds	3,787
	Conservational, Environment, and Recreation Related:
102	Game and Fish Protection Fund	37,216
102	Michigan State Waterways Fund	46,471
102	Marine Safety Fund	2,854
102	Game and Fish Protection Trust Fund	41,792
102	State Park Improvement Fund	11,806
103	Combined Recreation Bond Fund - Local Projects	14,678
103	Combined Environmental Protection Bond Fund	75,522
103	Michigan Nongame Fish and Wildlife Fund	6,611
103	Forest Development Fund	8,901
103	Michigan Underground Storage Tank Finance Assurance          Fund	583
103	Bottle Deposits Fund	124,665
	Regulated and Administrative Related:
120	Michigan Employment Security Act - Administration Fund	70
120	Safety Education and Training Fund	5,074
120	State Construction Code Fund	9,871
120	Homeowner Constructions Lien Recovery Fund	1,082
121	State Casino Gaming Fund	9,225
121	Second Injury Fund	15,720
121	Silicosis, Dust Disease, and Logging Industry Compensation          Fund	5,468
121	Self-Insurers' Security Fund	15,111
121	Utility Consumer Representation Fund	3,081
	Other States Funds:
122	School Bond Loan Fund	4,170
122	Tobacco Settlement Trust Fund	16,541
122	Michigan Merit Award Trust Fund	88,751
123	Assigned Claims Facility and Plan Fund	17,370
123	Miscellaneous Special Revenue Funds	1,333
	Debt Service Funds:
138	Combined State Truckline Bond and Interest Redemption Fund	347
138	Combined Comprehensive Transportation Bond and Interest       Redemption Fund
138	Recreation and Environmental Protection Bond Redemption       Fund	1,092
139	School Loan Bond Redemption Fund
139	State Building Authority	204,801
139	Michigan Underground Storage Tank Financial Assurance       Finance Authority	166,037
	Capital Projects Funds:
144	Combined Recreation Bond Fund - State Projects	13,723
144	Advance Financing Funds	15
144	State Building Authority	56,296
	Permanent Funds:
148	Michigan Natural Resources Trust Fund	321,263
148	Michigan State Parks Endowment Fund	141,594
148	Michigan Civilian Conservation Corps Endowment Fund	20,578
148	Michigan Veterans' Trust Fund	5,265
148	Children's Trust Fund
	Proprietary Funds:
	Enterprise Funds:
26	State Lottery Fund	489,399
26	Michigan Unemployment Compensation Funds	1,711,822
26	Liquor Purchase Revolving Fund	59,143
	Internal Services:
155	Correctional Industries Revolving Fund	1,772
155	Motor Transportation Fund	13,725
155	Office Services Revolving Fund	5,329
156	Information Technology Fund	34,402
156	Risk Management Fund	2,343
156	State Sponsored Group Insurance Fund	250,974
	Fiduciary Funds
	Private-Purpose Funds:
170	Escheats Fund
170	Gifts, Bequests, and Deposits Investment Fund
170	Hospital Patients Trust Fund
171	Michigan Educations Savings Program
	Pension: (1/2 the actuarial excesses)
164	Legislative Retirement System (LRS) (9/30/03)	8,750
164	State Police Retirement System (SPRS) (9/30/02)	2,850
164	State Employees' Retirement System (SERS) (9/30/02)
164	Public School Employees' Retirement System (PSERS)       (9/30/02)
164	Judges' Retirement System (JRS) (9/30/03)	28,500
164	Military Retirement Plan (MRP) (9/30/03)
164	State Employees' Deferred Compensation Funds
	Agency Funds:
175	Environmental Quality Deposits Fund
175	Insurance Carrier Deposits Fund
175	State Treasurer's Escrow and Paying Agent Fund
175	Child Support Collection Fund
	Component Units:
	Authorities:
180	Michigan Education Trust	960,817
180	Michigan State Housing Development Authority	1,012,984
180	Michigan Municipal Bond Authority	395,444
181	Mackinac Bridge Authority	21,541
181	Mackinac Island State Park Commission	5,492
181	Michigan Broadband Development Authority	45,764
181	Michigan Economic Development Corporation	203,540
181	Michigan Higher Education Assistance Authority	16,959
182	Michigan Higher Education Facilities Authority	29
182	Michigan Higher Education Student Loan Authority	1,485,802
182	Michigan Public Education Facilities Authority	10,212
182	Michigan State Hospital Finance Authority	5,807
182	Michigan Strategic Fund	6,852
182	State Bar of Michigan	5,609
	State Universities:
183	Central Michigan University	149,974
183	Western Michigan University	87,424
184	Eastern Michigan University	114,732
184	Ferris State University	71,464
184	Grand Valley State University	116,523
184	Lake Superior State University	6,100
185	Michigan Technological University	26,374
185	Northern Michigan University	52,606
185	Oakland University	81,344
185	Saginaw Valley State University	20,386
	Not Included in this CAFR:
	University of Michigan	Unknown
	Michigan State University	Unknown
	Wayne State University	Unknown
	Related Organizations: Financial Data Not Provided
	Michigan Catastrophic Claims Association
	Michigan Property and Casualty Guaranty Association
	Total Surpluses…	10,129,638
	Per Capita…	1,009
	Family of 4…	4,034

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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