Introduction

The State of North Carolina at the State-level has approximately $12.99 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,537 for every man, woman and child in North Carolina or $6,146 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in North Carolina.

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 North Carolina Special Revenue Funds (Governmental Funds), most of them considered part of the budget, total cash and investments, funds that were not used during the current year, was $2.1 billion (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 $12.99 billion.

Here is what happens when the $12.99 billion is returned to the taxpayers (the private economy).

In addition, 293,784 jobs are created. In FY 2003 the unemployment was only 270,217. There would be a labor shortage in North Carolina. 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 $12.99 billion in surpluses to the people the State economy would grow by $3,474 per capita. That is 8 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 EPA Revolving Loan Fund, an Enterprise Fund and not a budget item, made a profit of $8.5 million. It also had reserves (cash and investments) of $306 million. It only had expenses of $4 million. If there was no longer any revenue the fund could function for 76 years.

Golden LEAF Foundation, a Component Unit and not a budget item, made a profit of $80 million. But it also had cash and investment reserves of $325 million.

State Education Assistance Authority, a Component Unit and not a budget item, made a profit of $17 million . It had reserves of $547 million and expenses of $112 million. With no more revenue the fund could operate for 5 years.

Health and Wellness Trust, a Special Revenue Fund, had net expenditures of $324 thousand and had cash/investment reserves of $165 million. That is 510 years of reserves. Even with the actual expenses of $5.8 million with no further revenue it has 28 years of reserves.

These only represent four of the 62 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.osc.state.nc.us/financial/03_cafr/index.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 North Carolina CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses
	Governmental Funds:
52	General Fund	3,149,738
52	Highway Fund	768,008
52	Highway Trust Fund	343,274
	Special Revenue Funds
156	Escheat Fund
156	Health and Wellness Trust	165,364
156	Tobacco Trust	15,590
156	Higher Education Bonds	28,557
156	Public School Bond Fund	31,788
156	Non-State Public Improvement Bonds	624,190
156	Public School Building Capital Fund	95,683
156	Clean Water Management Trust Fund	216,580
157	NC Infrastructure Finance Corporation	18,222
157	Prison Enterprises	18,624
157	Educational Materials and School Buses Fund	61,442
157	Employment Security Commission Funds	10,385
157	Natural Gas Funds	134,635
157	Highway Patrol Fund	11,696
157	Employment and Training Administration Fund	126
157	Leaking Petroleum Underground Storage Tank Cleanup Fund	8,769
157	Clean Water Funds	87,222
158	Wildlife Resources Commission Fund	30,136
158	Natural Heritage Trust Fund	17,183
158	Wireless 911 Fund	102,590
158	Departmental Funds	431,571
	Capital Projects:
170	Capital Projects Fund	118,444
170	State Capital Facilities Legislative Bond Fund of 1991	3
170	State Prison and Youth Services Bond Fund	2,825
170	State Parks Bond Fund
170	NC Infrastructure Finance Corporation	211
	Permanent Funds:
174	Wildlife Endowment Fund	184
174	Departmental Funds	235
	Proprietary Funds:
56	Unemployment Compensation Fund	71,600
56	EPA Revolving Loan Fund	306,207
	Nonmajor Enterprise Funds:
180	Public School Insurance	49,438
180	Town of Butner Water and Sewer	13,746
180	North Carolina State Fair	5,882
180	USS North Carolina Battleship Commission	3,823
180	Agricultural Farmers Market	976
180	Workers' Compensation	37,674
180	Departmental Enterprise Funds	1,298
	Internal Service:
184	Workers' Compensation Program	1,321
184	State Property Fire Insurance	55,153
184	Motor Fleet Management	9,084
184	Courier Service
184	Temporary Solutions	1,550
185	Centralized Computer Services	30,865
185	State Telecommunications Services	4,978
185	Surplus Property	2,185
	Fiduciary Funds:
	Pension (1/2 surplus based on actuarial surplus)
142	Teachers' and State Employees' (12/31/02)	1,681,427
142	Consolidated Judicial (12/31/02)	11,177
142	Legislative (12/31/02)	3,031
142	Firemen's Rescue Squad Workers'
142	National Guard
142	Register of Deeds' (12/31/02)	2,326
142	Local Government
	Private-Purpose Trust Funds
194	Deposits of Insurance Carriers Fund
194	Administrative Office of the Courts Trust Fund
194	Departmental Funds	586
193	Investment Trust Funds
193	Agency Funds:
193	Local Sales Tax Collections
193	Clerk of Courts
193	Intra-Equity Investment Fund Deposits
193	Other Agency Funds
	Component Units:
129	Golden LEAF Foundation	325,275
129	University of North Carolina System	2,782,360
129	Community Colleges	133,149
129	N.C. Housing Finance Agency	353,022
129	State Education Assistance Authority	547,494
	Nonmajor Component Units:
202	NC State Ports Authority	7,954
202	NC Agricultural Finance Authority	3,848
202	NC Global TransPark Authority	23,217
202	NC Partnership for Children, Inc.	7,432
202	Regional Economic Development Commissions	3,492
202	NC Railroad Company	17,872
202	NC Phase II Tobacco Certification Entity, Inc.	861
	Related Organization: (Financial data not provided)
	MCNC (formerly Microelectronics Center of North Carolina)
	Total Potential Surpluses…	12,993,577
	Per Capita…	1,537
	Family of 4…	6,146

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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