Introduction

The State of Ohio at the State-level has approximately $32.09 billion of the taxpayer's money it is not using, i. e. surpluses equal to $2,809 for every man, woman and child in Ohio or $11,238 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Ohio.

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.

For example, the State of Ohio Enterprise Funds are funds that charge the public for goods and services and are not considered part of the budget. They had an unused fund balances of $1.78 billion. This $1.78 billion should be returned to the people.

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 $32.09 billion.

Here is what happens when the $32.09 billion is returned to the taxpayers (the private economy).

In addition, 641,738 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 $32.09 billion in surpluses to the people the State economy would grow by $5,619 per capita. That is 13 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 most important item in the CAFR is Workers' Compensation, an Enterprise Fund and not part of the budget. The State had been trying to operate the fund as an insurance company operates. The government is not an insurance company. The government should be non-profit and use pay-as-you-go systems for its expenditures.

The Workers' Compensation Fund has a fund balance of $18.25 billion. Its net expenses are only $1.33 billion. That represents a reserve of 14 years.

The State has provided huge premium reductions and refunds to employers. The public has been take twice in this premium reductions and refunds scheme of things.

Business do not pay taxes, fees, assessments, fines, etc. They only write the checks for these items. What is net income? It is income after all expenses, ALL EXPENSES. The customer pays for these items because it is in the price that you pay for these goods and services. If the business paid these without charging the customer, there would be no net income. So the $20+ billion last year was paid by the people but benefit the businesses. So the public is paying workers' compensation twice. This is wrong.

Community and Economic Development, a Special Revenue Fund and part of the budget, made a profit of $35.9 million. But it also had cash and investment reserves of $754 million.

Natural Resources, another Special Revenue Fund and part of the budget had net expenditures of $3.2 million. It also had cash/investment reserves of $202 million. That represents 63 years of reserves.

Clean Ohio Program, another Special Revenue Fund and part of the budget, had net expenditures of $20 million and had cash/investment reserves of $109 million. That is 5 years of reserves.

These only represent four of the 84 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.state.oh.us/obm/businesscommunitypage/businesscommunitypage.asp

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 Ohio CAFR- FY 2003

CAFR Page	List of Investments By Fund (In Thousands)	Surpluses	Notes
	Governmental Activities:
36	General Fund	1,554,628
36	Job, Family and Other Human Services	277,781
36	Education	67,433
37	Highway Operating	931,361
37	Revenue Distribution	388,159
	Special Revenue:
138	Community and Economic Development	753,717
138	Health Fund	58,111
138	Mental Health and Retardation Fund	89,264
138	Highway Safety Fund	199,286
138	Natural Resources Fund	201,947
138	Wildlife and Waterways Safety Fund	73,393
138	Local Infrastructure and Transportation Improvements       Fund	331,259
138	Tobacco Settlement Fund	611,183
138	Clean Ohio Program	109,309
139	Higher Education Improvements Fund	260,294
	Debt Service:
156	Coal Research/Development General Obligation Fund	55
156	Improvements General Obligations Fund	130
156	Highway Improvements General Obligations Fund	55
157	Development General Obligations Fund	268
157	Highway General Obligations Fund	49,825
157	Public Improvements General Obligations Fund	155
157	Vietnam Conflict Compensation General Obligations       Fund	28
157	Local Infrastructure Improvements General Obligations       Fund	133
157	State Projects General Obligations Fund	1,509
158	Highway Capital Improvements General Obligations       Fund	13,531
158	Higher Education Capital Facilities General Obligations       Fund	16,025
158	Common Schools Capital Facilities General Obligations       Fund	286
159	Conservation Projects General Obligations Fund	48
159	Economic Development Revenue Bonds Fund	6,515
159	Infrastructure Bank Revenue Bonds Fund	562
159	Revitalization Project Revenue Bonds	7,521
159	Higher Education Facilities Special Obligations Fund	919
159	Mental Health Facilities Special Obligations Fund	2,600
160	Parks and Recreation Facilities Special Obligations Fund	169
160	School Building Program Special Obligations Fund	482
160	Ohio Building Authority Special Obligations Fund	46,067
161	Transportation Certificates of Participation Fund	943
	Capital Project Funds:
176	Infrastructure Bank Obligations Fund	95,704
176	Mental Health/Mental Retardation Facilities       Improvement Funds	47,411
176	Parks and Recreation Improvements Fund	18,865
177	Administrative Service Building Improvements Fund	1,941
177	Youth Services Building Improvements Fund	26,876
177	Transportation Building Improvements Fund	93
177	Adult Correctional Building Improvements Fund	47,752
177	Highway Safety Building Improvements Fund	10,221
177	Ohio Parks and Natural Resources Fund	47,300
178	Highway Capital Improvement Fund	128,443
	Proprietary Funds:
	Enterprise Funds:
48	Workers' Compensation	18,246,527
48	Lottery Commission	514,532
48	Unemployment Compensation	1,274,163
49	Ohio Building Authority	25,564
49	Tuition Trust Authority	761,651
49	Liquor Control	42,859
49	Underground Parking Garage	2,832
49	Office of Auditor of State	6,967
	Fiduciary Funds:
	Pension and Other Employee Benefit Trust	Unknown
	Private Purpose Trust-Variable College Savings Plan
56	Investment Trust - STAR OHIO
	Agency:
194	Holding and Distribution Fund
194	Centralized Child Support Collections Fund
194	Ohio Building Authority Fund	14,292
195	Tax Refunds
195	Payroll Withholding and Fringe Benefits Fund
195	Retirement Systems Fund
195	Other Fund
	Discretely Presented Component Units
60	School Facilities Commission	414,198
60	Ohio Water Development Authority	1,103,127
60	Ohio State University	929,316
61	University of Cincinnati	383,991
202	Arts and Sports Facilities Commission Fund	33,726
214	SchoolNet Commission Fund	15,934
203	Ohio University	144,069
203	Miami University	259,994
203	University of Akron	164,887
203	Bowling Green State University	143,324
203	Kent State University	306,564
203	University of Toledo	147,319
204	Cleveland State University	107,295
204	Youngstown State University	44,451
204	Wright State University	121,066
205	Shawnee State University	19,167
205	Central State University	10,189
205	Medical College of Ohio	54,903
205	Terra State Community College	4,341
205	Columbus State Community College	69,284
205	Clark State Community College	5,883
206	Edison State Community College	2,749
206	Southern State Community College	2,613
206	Washington State Community College	1,300
207	Cincinnati State Community College	47,261
207	Northwest State Community College	4,576
207	Owens State Community College	22,100
	Related Organizations - Financial data not provided in FY 2003 Ohio CAFR
120	Ohio Turnpike Commission (Data as of 12/31/02)	154,317	1
120	Petroleum Underground Storage Tank Release    Compensation Board
120	Ohio Air Quality Development Authority
120	Higher Education Facility Commission
120	Ohio Legal Assistance Foundation
	Total Surpluses…	32,086,888
	Per Capita…	2,809
	Family of 4…	11,238
Note
1	The data was obtained from the Ohio Turnpike Commission FY 2002 CAFR.

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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