Introduction

The Commonwealth of Virginia at the Commonwealth-level has approximately $10.85 billion of the taxpayer's money it is not using, i. e. surpluses equal to $1,492 for every man, woman and child in Virginia or $5,968 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Virginia.

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 Commonwealth'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 Commonwealth. 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 Commonwealth. 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 Commonwealth 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, there are two of the Commonwealth of Virginia Special Revenue Funds (Governmental Funds), part of the budget, that illustrate the problem. Dedicated and Other are the two.

Dedicated budgeted for a fund balance of $115,123 (in thousands). It had an actual fund balance at year end of $181,309. The $181,309 will probably not be considered in the next year's budget.

Other budgeted for a fund balance of $110,222 but had an actual fund balance of $308,697.

Both of these fund balances, $181,309 and $308,697, will probably not be considered in the next year's budget. If 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 Commonwealth, 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 Commonwealth 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 Commonwealth 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 Commonwealth holds the excesses/surplus, it will earn 4% to 5% on that money. If the Commonwealth 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 Commonwealth 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 Commonwealth and local government revenues, dramatically increase the economy, and create the greatest economic expansion in the history of the Commonwealth. 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 $10.85 billion.

Here is what happens when the $10.85 billion is returned to the taxpayers (the private economy).

In addition, 217,079 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 Commonwealth returned the $10.85 billion in surpluses to the people the Commonwealth economy would grow by $2,984 per capita. That is 7 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 Commonwealth Transportation, a Special Revenue Fund, made a profit of $24 million. It also had reserves (cash and investments) of $1.3 billion.

The Dedicated Fund, a Special Revenue Fund, had net expenses equal to 71 years of cash/investment reserves. Other Fund, a Special Revenue Fund, had net expenses equal to 257 years in reserves.

Commonwealth Health Research Board, a Permanent Fund, made a profit of $295 thousand. But it also had cash and investment reserves of $25 million and actual expenditures of $1.2 million. The reserves represent almost 21 years of expenditures.

These only represent four of the 77 funds shown below that had cash and investment reserves not being used.

What to do?

Unless the budget flaws are corrected and the entire Commonwealth 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.doa.state.va.us/docs/Publications/CAFR/cafr.htm#2002%20Annual%20Report

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 Commonwealth of Virginia CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses	Notes
	Governmental Funds:
50	General	718,072
	Special Revenue
50	Commonwealth Transportation	1,302,232
50	Federal Trust	207,515
50	Literary	62,134
172	The Dedicated Special Revenue Fund	188,581
172	The Other Special Revenue Fund	254,825
172	VA Land Conservation Foundation Fund	2,307
172	VA Historic Preservation Foundation
172	VA State Parks Foundation	350
	Debt Service:
173	Primary Government	85,780
173	VA Public Building Authority	92
	Capital Projects
173	Primary Government	59,133
173	VA Public Building Authority	54,611
	Permanent Funds
174	Commonwealth Health Research Board	24,505
174	Mental Health Endowment Funds
174	Virginia Arts Foundation Fund
	Proprietary Funds:
	Enterprise:
58	State Lottery	660,896
58	The Virginia College Savings Plan
58	Pocahontas Parkway	60,735
58	Unemployment Compensation	396,471
	Nonmajor:
186	The Department of Alcoholic Beverage Control	801
186	Risk Management	36,965
186	The Local Choice Health Care Program	11,954
186	The Virginia Industries for the Blind	1,956
187	The Consolidated Laboratory	2,038
187	eVA Procurement System	266
187	The Department of Environmental Quality	11,366
187	Wireless E-911 Service Board	28,334
187	The Virginia Museum of Fine Arts	685
187	The Science Museum of Virginia	181
187	Mental Health Local Funds	422
188	The Division of Legislative Service	6
188	The Virginia School for Deaf and Blind	2
	Internal Service:
202	Department of Information Technology	14,069
202	Virginia Correctional Enterprises	5,827
202	Health Care	43,290
202	Division of Fleet Management	45
203	Maintenance and Repair	6,632
203	Virginia Distribution Center	762
203	Risk Management	96,222
203	Consolidated Laboratory	280
203	Federal Surplus Property	397
203	State Surplus Property	263
203	Graphic Communications	179
203	Property Disposal	134
204	Engineering Services	173
	Fiduciary Funds:
162	Pension (1/2 actuarial surplus - June 30, 2002)
216	Private Purpose:
216	Investment Trust:
217	Agency Funds
	Component Units:
72	The Virginia Housing Development Authority	1,320,594
72	The Virginia Public School Authority	2,246,354
72	University of Virginia	892,094
72	Virginia Polytechnic Institute and State University	161,755
72	Virginia Commonwealth University	393,622
	Nonmajor:
240	Virginia Economic Development Partnership	2,136
240	Virginia Outdoors Foundation	1,278
240	Virginia Port Authority	252,357
240	Virginia Resources Authority	341,441
241	Virginia Tourism Authority	1,150
241	Virginia Tobacco Settlement Authority	13,475
241	Tobacco Indemnification and Community       Revitalization Commission	82,881
241	Hampton Roads Sanitation District Commission	96,306
241	Virginia Biotechnology Research Park Authority	6,989
241	Virginia Small Business Financing Authority	26,159
241	Virginia School for the Deaf and Blind	2,151
242	A.L. Phipott Manufacturing Extension Partnership	689
242	Virginia Equine Center Foundation	2,208
242	Certified Nursing Facility Education Initiative	337
	Higher Education Institutions:
242	College of William and Mary	79,388	1
243	Virginia Military Institute	26,853	1
243	Virginia State University	29,263	1
243	Norfolk State University	7,878	1
243	Mary Washington College	20,806	1
243	James Madison University	57,409	1
243	Radford University	40,871	1
243	Old Dominion University	45,555	1
244	George Mason University	65,846	1
244	Virginia Commonwealth University	85,425	1
244	Christopher Newport University	62,721	1
244	Longwood University	16,635	1
245	Southwest VA Higher Education Training Center	413
245	Roanoke Higher Education Authority	310
245	Innovative Technology Authority	7,448
245	VA College Building Authority	121,659
	Total Surpluses…	10,853,944
	Per Capita….	1,492
	Family of 4…	5,968
Notes
1	The amounts contained in the universities may contain Endowment and similar funds. These should be deducted from the potential surpluses.

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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