Introduction

The State of Tennessee at the State-level has approximately $4.23 billion of the taxpayer's money it is not using, i. e. surpluses equal to $719 for every man, woman and child in Tennessee or $2,876 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Tennessee.

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.

The State of Tennessee does use the fund balance on a budgetary basis which is a good thing but not the best. The best is to use the fund balance as shown in the CAFR.

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 Tennessee Special Revenue Funds (Governmental Funds), considered part of the budget, have fund balances of $208 million in FY 2002 and $225 million in FY 2003, that probably will not be considered in 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 $4.23 billion.

Here is what happens when the $4.23 billion is returned to the taxpayers (the private economy).

In addition, 84,686 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 $4.23 billion in surpluses to the people the State economy would grow by $1,438 per capita. That is 3 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

Drinking Water Fund, an Enterprise Fund and not part of the budget process, had next expenses of $22 thousand. It also had cash/investment reserve of $13.3 million. That represents 603 years of reserve.

Sewer Treatment Loan Fund, another Enterprise Fund and not part of the budget made a profit of $13 million. But it also had cash and investment reserves of $144 million.

Internal Service Funds are funds that provide goods/services to other government operations. The Office of Information Resources had net expenses of $687 thousand and reserves of $80 million. That represents 117 years of reserves. This is one part of government billing another part of government. Why is a 117 year reserve required to be maintained.

This needs to be read to be understood. It deals with the income from endowments that are not being used. Page 70 of the CAFR:

"The University of Tennessee chooses to spend only a portion of the investment income (including changes in the value of investments) each year. Under the spending plan established by the University, 5 percent of the three-year moving average of the fair value of endowment investments has been authorized for expenditures. The remaining amount, if any, is retained to be used in future years when the amount computed using the spending plan exceeds the investment income."

What is being said is that they are not going to spend the income from the endowment investments. People gave the money to the University for the purpose of having the income used for scholarships, administration, and other purposes to operate the university. But the university has decided not to spend the money, but to hold it and invest it.

You say I don't have any interest in the University of Tennessee. Yes, you do. The total expenses for FY 2003 were $1.33 billion [Page 152 of CAFR]. Charges for Services (tuition, other student charges, fees, etc.) was $386 million. And $424 million was "Payments from Primary Government". The $424 million was your tax dollars.

So whether you are a student, student's parents, or taxpayer, you should be concerned about this practice. It is costing you more no matter how you look at it.

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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.

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Exhibit A

The 2003 CAFR is located at:

http://www.state.tn.us/finance/act/cafr.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.

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  Review of The State of Tennessee CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses
	Governmental Funds:
22	General	228,544
22	Education	9
22	Highway	142,706
	Special Revenue Funds:
92	Wildlife Resources Agency	39,145
92	Criminal Injuries Compensation	8,674
92	Solid Waste	14,423
92	Job Skills	25,720
92	Environmental Protection	11,241
93	Hazardous Waste	5,986
93	Parks Acquisition	19,091
93	Supreme Court Boards	2,422
93	Underground Storage Tanks	6,340
93	Enhanced Emergency 911 Service	50,600
93	Community Development	15,064
93	Driver Education	671
94	Abandoned Land Program	860
94	Agricultural Non-Point Water Pollution	1,714
94	Regulatory Boards	3,485
94	Salvage Title Enforcement	263
94	Dairy Promotion Board	6
95	Dryclearners Environmental Response	5,250
95	Agricultural Regulatory Fund	3,664
95	Tennessee Regulatory Authority	4,785
95	Small and Minority Telecommunications	11,202
95	Six Offender Treatment Program	209
95	Fraud and Economic Crime	1,979
	Debt Service Funds:	4,588
	Capital Projects Funds:	157,960
	Permanent Funds:
116	Chairs of Excellence Fund
116	Academic Scholars Fund
116	Other	19,365
	Proprietary Funds:
26	Sewer Treatment Loan	144,687
26	Employment Security Fund	595,257
	Enterprise Funds:
124	State Loan Program	3,624
124	Energy Loan Program	18,597
124	Teacher Group Insurance	30,150
124	Local Government Group Insurance
125	Drinking Water Loan	13,258
125	Grain Indemnity	3,622
125	Property Utilization	305
125	Medicare Supplement Insurance	27,388
125	Client Protection	1,661
	Internal Services:
132	Office for Information Resources	80,354
132	Claims Award	72,075
132	Motor Vehicle Management	7,887
132	General Services Printing	135
132	Facilities Revolving Fund	34,625
132	Employment Group Insurance	78,283
133	Food Services	1,095
133	Postal Services	144
133	Capitol Print Shop	398
133	Purchasing	398
133	Central Stores
133	Records Management	170
133	Division of Accounts	4,234
133	Tricor	10,791
	Fiduciary Funds
32	Pension: (1/2 actuarial surplus)
140	State Employees, Teachers, Higher Education       Employees Pension Plan
32	Investment Trust Fund
	Private-Purpose Trust Funds:
142	Baccalaureate Education
142	Children in State Custody	16,302
142	Oak Ridge Monitoring	3,131
142	Duck River Water Supply	9,670
142	Other	1,107
	Agency Funds:
144	Local Government
144	Contingent Revenue
	Component Units:
148	Tennessee Student Assistance Corporation	57,315
	Community Services Agencies:
148	Northeast	333
148	East Tennessee	1,371
148	Upper Cumberland	366
148	Southeast	866
148	Mid-Cumberland	70
149	South Central	232
149	Northwest	573
149	Southwest	648
149	Davidson County	302
149	Knox County	137
149	Shelby County	72
149	Hamilton County	237
150	Housing Development Agency	818,962
150	Board of Regents	493,671
150	University of Tennessee	833,885
150	Local Development Authority	29,108
151	Veterans Homes Board	4,141
151	Child Care Facilities	253
151	State School Bond Authority	42,420
151	Certified Cotton Growers	4,036
	Related Organizations: (Financial Data not provided)
75	Beech River Watershed Development Authority
75	Carroll County Watershed Authority
75	Goodwyn Institute Commission
75	Watkins Institute Commission
75	Tennessee Alliance for Fitness and Health
75	Tennessee Competitive Export Corporation
75	Insurance Guarantee Association
75	Tennessee Sports Hall of Fame
75	Local Neighborhood Development Corporations
75	Tennessee Holocaust Commission, Inc.
75	Sports Festival, Inc.
	Total Surpluses…	4,234,312
	Per Capita…	719
	Family of 4…	2,876

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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