The Budget and Only the Budget
Individuals believe that “the budget” and “governments” are one. In this site we will not be discussing “the budget”, or the budget process but we will be discussing “governments” and a different government document and process completely unrelated to the budget, the Comprehensive Annual Financial Report (CAFR). The budget is a planning and monitoring document.
Simultaneous Budget Deficits/Shortfalls AND Financial Surpluses
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.
A budget is an estimate of the amount of money to be received and the amounts to be spent for various purposes in a given time. It is a planning and monitoring document. It matches revenues (income) and expenditures (expenses) for a given period of time which is usually one year for most governments. It does NOT demonstrate the financial condition of a government.
You continually hear the phrase “budget shortfall” or “budget deficit.” What this means is that projected (planned) expenditures will probably exceed projected (planned) revenues. When this happens, governments immediately want to raise taxes and/or reduce services regardless of the financial condition of the government. It works every time.
A Simple Example to Understand the Surplus Problem.
Let’s take a moment to understand the half-truth that the public is told.
Let’s assume a government has $1 million in cash and investments at the end of the fiscal year. When the government prepares its budget it is not required to include that $1 million in the the budget process because that $1 million is considered an asset and not revenue. The income (interest and/or dividends) received from the $1 million cash and investments are included as revenues in the budget process.
Next, if the budget process discloses that expenditures are probably going to exceed revenues (including the income generated from the $1 million in cash and investments) by $100,000, then the government, politicians, and news media say that the government has a “budget shortfall” or ‘budget deficit”. Next step is to raise taxes or cut services by $100,000.
But I say hold on a minute. If governments are non-profit organizations that operate mostly on a pay-as-you-go system, then why is there $1 million in cash and investments being held. Also, why not use $100,000 of the $1 million in cash and investments to makeup for the budget shortfall.
The fact that the government has not used the $1 million at the end of the year means it is excess to the operation of the government.
The excess of $1 million will not be included in the next budget, only the income from that $1 million.
The $1 million is surplus and should either be considered in the next budget process, which would result in huge tax reductions, and/or returned to the people as rebates.
The $1 million in cash and investments are not shown in the budget. These assets are included in a publicly available document called the Comprehensive Annual Financial Report (CAFR). This site concerns itself solely with the CAFR.
If you decide to invest in a company’s stock and you go to a stock broker and ask about the company’s financial condition, does the broker give you a copy of the company’s budget? NO! He/she will give you a copy of the company’s annual financial report which shows the financial condition of the company. The CAFR is a governments annual financial report.
If you want to know the financial condition of your government(s), do not look in the budget. Get the CAFR.
What is the Comprehensive Annual Financial Report (CAFR)?
Each year all State and local governments prepare a financial report on assets, liabilities, revenues and expenditures in more or less in a standardized format that must conform to the Government Accounting Standards Board (GASB) accounting and financial reporting standards. This financial report is called the Comprehensive Annual Financial Report (CAFR, pronounced “cay-fer”). Most people have heard of the budget, which is the document that plans and authorizes the spending of money. The CAFR describes what actually was spent and the status of assets and liabilities at the end of the fiscal year.
Presents a comprehensive picture of a government’s financial condition by combining the annual financial reports of all government agencies and universities.
Provides information on all government funds including those held outside the government treasury.
Presents information on the accrual basis recognizing amounts owed by the government but not paid at the end of the fiscal year, as well as amounts due to the government but not received by the end of the fiscal year.
Contains information on real property and other fixed assets, long-term obligations or investments held outside the government treasury; and
Includes statistical and some economic data.
Comprehensive Annual Financial Reports provide information which is used by investment companies such as Moody’s Investors Services and Standard and Poors Corporation to determine the state’s fiscal integrity and set bond rates. It includes a comprehensive presentation of the state’s financial and operating activities.
What are Surpluses?
Government operations, except for retirement/pension funds should be on a pay-as-you-go system. Governments should be non-profit organizations. Government surpluses, as used in this site, 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 to two years.
How Were the Surpluses Created?
There are two major ways that these surpluses are created. Although there are other “creative accounting” techniques that are used.
The first way is to take in more revenue than expenditures; that is the government made a profit.
Many States changed the laws/Constitution that allowed them to hold excesses of the taxpayers money. The original laws in being for over a 100 years stated that all excess funds, either in the budget or in other activities/entities of the government at the end of a fiscal year had to revert back to the general fund for inclusion in the next year’s budget. When the laws were changed, governments could and can hold and invest these excess funds for “future use”. So what governments did was to allocate/spend all budgeted items so that the public would think that there were no surpluses. In reality, many of the allocations (expenditures) were to funds/projects/programs that did not spend all of the funds allocated and excesses were allowed to accumulate.
What Should be Done With the Surpluses?
Alan Greenspan, Chairman of the Federal Reserve, Told Us:
In his testimony to the Senate Humphrey- Hawkins Committee, Alan Greenspan, Chairman of the Federal Reserve, in late July 1999 gave us a clue on what he thought should be done when he stated: “I’m of the old fiscal school that you raise revenues for basic government purposes and if you don’t have those purposes you give the money back or you don’t tax it… My experience is that private rates of return are significantly higher than the governments rates of return.”
What did he say?
If a government collects too much from the people, the government should give it back.
It is better to let the private sector have the money than governments. This we will prove in this site beyond a reasonable doubt.
Lawrence B. Lindsey, the current White House Economic Advisor and a Former Governor of the Federal Reserve, Told Us:
An August 1999 article in the Wall Street Journal is entitled “Whose Surplus Is it, Anyway?” The article is written by Lawrence B. Lindsey. This article deals with the “BUDGET” surpluses, not the “CAFR SURPLUSES” in this site.
However, this article has some interesting points to ponder.
“…Some Washington politicians play word games instead of speaking forthrightly…At the same time, this arithmetic allows Washington to return (in the above scenario) 53 cents on the dollar of the higher revenue to the taxpayer and call it a “tax cut.” The convention behind these semantic acrobatics is the belief that the money belongs to Washington and that anything they let us taxpayers keep is a token of their beneficence.”
“Gone, then, are the notions that earnings belong to those who earned them and that government should take only what it needs to fund necessary services. This is a fiscal path that will gradually sap the vitality that has made our economic success possible…But when it comes to the on-budget surplus, the best way for Congress to ‘spend’ this reserve is not to spend it at all. It is to give it back – in its entirety – to the people who earned it in the first place.”
Although the above article deals with budget surpluses and not actual surpluses as will be shown in this site, the recommendation for both are the same “…give it back – in its entirety…”
Government Surpluses are the taking of the peoples property without the right to take:
In a recent Wall Street Journal article, Mr. William P. Kucewicz, made in-depth observations and insights regarding the role of governments holding surpluses of the peoples money. We could never have said it as eloquently as he has:
“…Almost no one seems to note that a surplus at any level of government represents money that would otherwise be used for consumption or investment by those who earned the income in the first place. And to the extent that it’s squirreled away by government and isn’t used, say, to retire debt, it’s a drain on the economy.
Also missing from the discussion is a basic question: Whose money is it, anyway? Government’s moral legitimacy is derived from the people. This cornerstone of the classical liberal tradition presupposes that government’s precursor is the individual, endowed with a natural liberty as a free moral agent…
…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. Federal taxes nevertheless now absorb more than a fifth of gross domestic product – the highest level since World War II – and the percentage is bound to rise, given the new revenue estimates.
…When a government boasts of fiscal surpluses that stretch as far as the eye can see, it assumes a prerogative that supersedes the natural rights of the individual. 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.” (Emphasis added.) (Mr. Kucewicz is editor of the global investment site http://www.GeoInvestor.com )
The Local Economy Loses Out
When governments’ retain surpluses and invests these funds in the type of investments governments are allowed to invest in, very little if any of the investments are in the local economy. As shown above and elsewhere on this site, many governments have investments in foreign companies and currencies. The greatest benefit for all Americans is when the money is invested in their local economy. This is the most important aspect of returning surpluses to the people.
Determining the surpluses in State and Local Governments
An individual does not have to be an accountant or know anything about accounting to determine the amount of surpluses that exist in a State or local government. All it takes is a little reading and time using the Review Guide and downloadable computer programs in this site.
It is important to note that a complete review and the preparation of an economic impact analysis only takes 5 pieces of paper (forms in the computer program). In fact, if you do not like computers, then you can print out the blank forms. With the CAFR, the blank forms, the CAFR Review Guide, a pencil and calculator, the complete review and economic analysis can be accomplished. Naturally, the computer program makes it much easier because it does the computations automatically. (See Conducting Reviews Section)
In addition, the Exhibit A in each of the State and numerous local reports available contain the complete review of these governments. That is a lot of examples to learn from. (See Results of Reviews Section)
Silent Majority Remains Silent
Remember what Alan Greenspan said (quoted earlier) about governments taking too much money. We also believe any surpluses should be returned to the people and let the people have the money in their investment portfolios. Remember (1) He who owns the gold rules and (2) He who writes the rules wins. Today, unfortunately it appears that governments, and a few super wealthy individuals that control the governments, own the gold, write the rules and probably will win – while the silent majority (middle class), remains silent.
As always, if you have questions regarding this Section, please contact Gerald R. Klatt.
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