Introduction

The State of Pennsylvania at the State-level has approximately $21.07 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,715 for every man, woman and child in Pennsylvania or $6,860 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Pennsylvania.

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	8,438,008	687	2,747
Proprietary Funds	4,738,043	386	1,542
Fiduciary Funds	3,004,645	245	978
Component Units	4,891,475	398	1,592
Total...	21,072,171	1,715	6,860

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.

"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 $21.07 billion.

Here is what happens when the $21.07 billion is returned to the taxpayers (the private economy).

In addition, 464,913 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 $21.07 billion in surpluses to the people the State economy would grow by $3,784 per capita. That is 9 times the amount the Federal government used to stimulate the U.S.A. economy. Businesses net incomes could double or triple. This is elementary economics.

Examples

The Motor License Fund, a Governmental Fund, made a profit of $240 million. It also had reserves (cash and investments) of $1.15 billion.

The Tobacco Settlement Fund, another Governmental Fund, had net expenses of $82 million. But it also had cash and investment reserves of $959 million. The reserves represent almost 12 years of expenditures.

State Workmen's' Insurance Fund, a Proprietary Fund and not part of the budget, made a profit of $52 million. It had reserves of $1.9 billion.

PA Turnpike Commission, a Component Unit and not part of the budget, had net expenses of $17 million .It also had cash and reserves of $1.04 billion. That figures out to 59 years of reserves.

These only represent four of the 57 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.budget.state.pa.us/budget/cwp/view.asp?a=3&q=167632

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 Pennsylvania CAFR- FY 2003

CAFR Page	List of Investments By Fund (In Thousands)	Surpluses	Notes
	Governmental Funds:
42	General	4,133,636
42	Motor License Fund	1,151,437
42	Tobacco Settlement Fund	958,691
	Special Revenue Funds:
131	Banking Department Fund	29,454
131	Milk Marketing Fund	3,010
131	Workmen's Compensation Administration Fund	50,677
131	Workmen's Compensation Security	553,537
131	Catastrophic Loss Benefits Fund	125,532
131	Pharmaceutical Assistance Fund	181,770
131	Recycling Fund	89,543
131	Fish and Boat Fund	42,944
131	Game Fund	32,410
131	Hazardous Site Cleanup Fund	101,241
131	Other	452,012
	Debt Service Funds:
135	Disaster Relief Redemption Fund
135	PA Infrastructure Investment Authority Redemption       Fund	3,906
135	Capital Debt Fund	35,846
135	PA Economic Revitalization Sinking Fund	6
135	Water Facilities Loan Redemption Fund
135	Land and Water Development Sinking Fund	10
135	Other
	Capital Projects Funds:
139	Capital Facilities Fund	362,653
139	Keystone Recreation, Park and Conversation Fund	128,441
139	Local Criminal Justice Fund	1,252
	Proprietary Funds:
46	Unemployment Compensation Fund	1,378,941
46	State Workmen's Insurance Fund (Dec 31,2001)	1,904,628
46	State Lottery Fund	419,877
46	Tuition Payment Fund	698,225
	Enterprise Funds:
143	State Stores Fund	67,943
143	Small Business First Fund	62,301
143	Volunteer Companies Loan Fund	7,565
143	Machinery and Equipment Loan Fund	37,551
143	Coal and Clay Mine Subsidence Insurance Fund	49,415
143	PA Infrastructure Bank	27,077
143	Minority Business Development Fund	5,215
143	Other	18,291
	Internal Services:
149	Purchasing Fund	28,400
149	Manufacturing Fund	32,614
	Fiduciary Funds
	Pension: (1/2 actuarial surplus)
	State Employees' Retirement System (Dec 31, 2002)	923,538	1
155	Deferred Compensation Fund (Dec 31, 2002)
	Public School Employees' Retirement System	1,249,950	2
	Investment Trust Fund:
	INVEST Program for Local Governments (Dec 31, 2001)
	Agency Funds:
	Discretely Presented Component Units:
159	PA Life and Health Insurance Guaranty Association (Dec    31,2002)	250,274
159	PA Property and Casualty Insurance Guaranty Association    (Dec 31, 2002)	138,217
	Primary Governmenal Agency Funds:
159	Statutory Liquidator Fund
159	Medical Care Availability & Reduction of Error Fund	32,479
159	Medical Prof. Liability Catastrophe Loss Fund	789
159	Underground Storage Tank Indemnification Fund	128,618
159	Municipal Pension Aid Fund	195,557
159	Fire Insurance Tax Fund	85,223
159	Agency Custodial Accounts
159	Other
	Component Units:
52	State Public School Building Authority	26,490
52	Philadelphia Shipyard Development Corporation (Dec 31,    2002)	26,702
52	Ben Franklin TRC Partnership
52	Ben Franklin Technology Development Fund	19,661
52	Insurance Fraud Prevention Authority	3,245
52	PA Higher Educational Facilities Authority
52	Patient Safety Trust Authority	5,832
53	Port of Pittsburgh Commission	1,814
53	PA Turnpike Commission (Dec 31, 2002)	1,037,937
53	PA Industrial Development Authority	295,690
53	PA Housing Finance Agency	1,375,030
53	PA Higher Education Assistance Agency	710,741
53	PA Infrastructure Investment Authority	410,006
53	State System of Higher Education	965,411
53	Philadelphia Regional Port Authority	12,916
	Related Organizations: (Financial Data not provided)
	PA Municipal Retirement System (PMRS)
	Automotive Theft Prevention Authority
	Philadelphia Parking Authority
	Philadelphia School District
	Total Potential Surpluses…	21,072,171
	Per Capita…	1,715
	Family of 4…	6,860
Notes
1	Data taken from the State Employees Retirement System FY 2002 CAFR.
2	Data taken from the Public School Retirement System 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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