Introduction

The State of Washington at the State-level has approximately $20.28 billion of the taxpayer's money it is not using, i. e. surpluses equal to $3,326 for every man, woman and child in Washington or $13,304 for a family of 4. This does not include all the additional surpluses that exist in the school districts, cities, or counties in Washington.

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. Normally, 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.

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 Washington does use the balance brought forward in their budgeting process. But there are the other reasons that they have surpluses.

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.

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 $20.28 billion.

Here is what happens when the $20.28 billion is returned to the taxpayers (the private economy).

In addition, 405,655 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 $20.28 billion in surpluses to the people the State economy would grow by $6,652 per capita. That is 16 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 fund showing surpluses is the Workers' Compensation Fund, an Enterprise Fund and not part of the budget. It has net expenses of $1.3 billion and cash/investment reserves of $10.74 billion. That is 8 years of reserves.

The State of Washington is running the Workers' Compensation Fund on a reserve-type operation and not on a pay-as-you-go system which governments should use. What the State does is to set up a reserve immediately, collect the funds, and hold the money for future years claims.

Governments should be non-profit and use pay-as-you-go systems. A reverse is not needed. When was the last time that a State went bankrupt and ceased to exist. The State's Workers' Compensation Fund is set up in case the State goes bankrupt and goes out of business.

It is sort like a mortgage on a home. You have a mortgage of $100,000 on a home. Your yearly payments are $6,000. What do you set aside in your next year's budget? You set aside $6,000 because that is what your payments will be. The State of Washington collects and sets aside the discounted $100,000. This is ridiculous.

The States of California, Texas, New York and most States all use the pay-as-you-go system of workers' compensation. So should the State of Washington. The State created the workers' compensation fund and if can dissolve it or do what it wants with the fund.

The $10.74 billion equals $1,761 for every man, woman, and child in the State of Washington. Or $7,044 for a family of 4.

Wildlife and Natural Resources Fund, a Special Revenue Fund and part of the budget had net expenditures of $56 million. But it also had cash and investment reserves of $540 million The reserves represent 10 years of expenditures.

Higher Education Student Services, an Enterprise Fund and not part of the budget, made a profit of $38 million . It had reserves of $433 million.

Other Activities, other Enterprise Funds and not part of the budget and not further identified, made a profit of $8 million and had cash/investment reserves of $565 million.

These only represent four of the 37 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.ofm.wa.gov/accounting/financial.htm

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 Washington CAFR- FY 2003

CAFR Page	List of Investments By Fund (In thousands)	Surpluses
	Governmental Funds:
40	General	711,017
40	Higher Education Special Revenue	985,523
40	Higher Education Endowment	2,186,465
	Special Revenue Funds:
134	Motor Vehicle Fund	346,669
134	Multimodal Transportation Fund	66,601
134	Common School Construction Fund	193,735
134	The Central Administrative & Regulatory Fund	327,502
134	The Human Services Fund	337,579
135	The Wildlife and Natural Resources Fund	539,764
135	The Local Construction and Loan Fund	97,587
	Debt Service Funds:
144	General Obligation Bond Fund	23,822
144	Transportation Bond Fund	84,205
	Capital Projects Funds:
150	State Facilities Fund	145,245
150	Higher Education Facilities Fund	112,430
	Permanent Funds:
156	Common School Permanent Fund	188,064
	Proprietary Funds:
	Enterprise:
44	Workers' Compensation	10,739,179
44	Unemployment Compensation	1,071,228
160	Liquor Fund	10,317
160	Convention & Trade Fund	36,204
160	Lottery Fund	650,500
160	Institutional Fund	14,818
161	Higher Education Student Services Fund	433,163
161	Health Insurance Fund	139,870
161	Other Activities Fund	564,533
	Internal Services:
168	General Services Fund	51,531
168	Data Processing Revolving Fund	33,771
168	Printing Services Fund	308
168	Higher Education Revolving Fund	82,481
168	Risk Management Fund	14,344
	Fiduciary Funds
	Private Purpose:
178	Human Services Trust Fund
178	Higher Education Trust Fund
178	Miscellaneous Trust Fund
	Pension:
112	Public Employees' Retirement System
112	Teachers' Retirement System
113	Law Enforcement Officers' and Fire Fighters' Retirement       System	418
113	Judicial Retirement System
114	Volunteer Fire Fighters' Relief and Pension Fund	7
112	Judges Retirement Fund
	Agency Funds
180	Clearing
180	Suspense
180	Local Government Distribution
180	Pooled Investments	15,312
	Component Units:
50	Public Stadium	25,163
184	Washington State Housing Finance Commission	48,298
184	Washington Health Care Facilities Authority	3,768
184	Washington Higher Education Facilities Authority	765
184	Washington Economic Development Finance Authority	130
	Total Surpluses…	20,282,316
	Per Capita…	3,326
	Family of 4…	13,304

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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