Tennessee Has At Least $4.74 Billion In Potential Surpluses of the Taxpayers Money

by the CAFR Network

A recent article in the Wall Street Journal stated:

“…Meanwhile, state budget analysts estimate Tennessee faces a $350 million shortfall in the current fiscal year ending June 30, and a gap that could potentially approach $800 million in the next fiscal year… Even if a tax increase can be avoided, the candidates are bracing for a volatile first term in office because deep cuts in state
spending seem inevitable…”


This report demonstrates that the State of Tennessee at the State-level has approximately $4.74 billion of the taxpayer’s money it is not using, i. e. potential surpluses equal to $792 for every man, women and child in Tennessee or $3,169 for a family of 4. This does not include all the additional potential surpluses that exist in the school districts, cities, or counties in Tennessee.

So how can the State have a budget shortfall?

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 years budget process, which would result in huge tax reductions, and/or returned to the people as rebates.
The State should implement the CAFR Budget System to prevent surpluses from accumulating in the future.

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 report concerns itself solely with the CAFR.

The Tennessee review is shown in  Exhibit A below in this report.

Then what is this CAFR thing?

Think of the CAFR as the government’s version of a company’s annual financial statement. The CAFR does not include what the government is planing to do (the budget), but describes what it did; what actually was spent and the status of assets and liabilities at the end of the
fiscal year.

Each year all States and local governments prepare a report that provides the status on all assets and liabilities and what the revenues and expenditures were for the fiscal year. The report is prepared in more or less in a standardized format using the Government Accounting Standards Board (GASB) accounting and reporting standards. This is where the potential surpluses are disclosed. They are not in a category called “surpluses”. The potential surpluses have to be found and identified.

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 and condition.

What are these surpluses you have been talking about?

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 and the income and amounts keep increasing.

Potential surpluses are just the beginning

As stated above Tennessee’s potential surpluses at the State-level for FY 2001 had reached $4.74 billion But the $792 per capita is just the tip of the iceberg. It is what happens if that $4.74 billion is returned to each Tennessee taxpayer on an equal basis that makes history. Using elementary economic principles found in every Econ 101 text book, after one year the refunds turn into total benefits of $1,616 per capita or $6,465 for a family of 4 and much more.

Here is a chart that tells the whole story, but only for the major portion of State-level government, not the potential surpluses at the school districts, cities, or counties in Tennessee. Their potential surpluses would be added to the amounts indicated below.
Economic Impact Analysis Summary – Tennessee CAFR Review – FY 2001


FIRST YEAR
BENEFITS PER CAPITA


Economic
Principle

 


Explanation

 

Amount

(In Thousands)

Per
Capita

Family of
4

Actual Refund

  Total Potential
Surpluses

$ 4,741,535

$ 792

$ 3,169

Economic Output
Multiplier (EOM)

For every $1 of refund
to the people the economic activity increases by $2. This is the
increase in Gross State Product (GSP). Results in increased sales for
local businesses.

$ 9,483,070

Increase in GSP – Sales

5.27%

   

Economic Earnings
Multiplier (EEM)

For every $1 of refund
to the people the wages paid to each household wage earner increases by
$.50.

$ 2,370,768

$ 396

$ 1,584

Employment Ratio (ER)

For each $100,000 in
increased economic activity, one additional job is created

94,831 jobs created

Increase in State
Revenues means a Reduction in Taxes

All governments earn
revenue based on the economic activity in their respective taxing
jurisdiction. For every $1 of economic activity, the State receives
revenue of approximately $.10. This increase in revenue should result in
reduced taxes.

$ 663,815

$ 111

$ 444

Increase in Federal
Revenues

The Federal government
earns $.20 on every $1 in economic activity.

$ 1,896,614

$ 317

$ 1,268

 

   

 

TOTAL BENEFITS THE
FIRST YEAR…

   

$ 1,616

$ 6,465


When governments lower taxes, government revenues increase

Yes, this is true. Why does President Bush want to lower taxes – to stimulate the economy so the Federal government can earn more revenue. There are those in Congress who say lowering taxes will result in deficit spending. This is absolutely false. If anyone is interested in the proof
for this principle, here is where it can be found –  http://www.cafrman.com/EconomicImpact.htm

If the cities of Memphis, Nashville, Chattanooga, and Knoxville were required to return their surpluses to the taxpayers in their jurisdiction, the State revenues would increase substantially. For every $1 the local governments and school districts returned to their taxpayers, the
State-level government would receive an additional $.20. It is the magic of elementary economics.

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 and an additional 1 million jobs were lost and the economy, already in a recession, continues to deteriorate.

As the above economic impact chart shows, if the State of Tennessee returned the $4.74 billion in surpluses to the people the Tennessee economy would grow by $1,584 per capita. That is 2 times the amount the Federal government used to stimulate the U.S. economy. Tennessee’ businesses net incomes could double or triple. This is elementary economics.

There is no need for an economic recession or unemployment in Tennessee.

What should be done with these surpluses?

Well, 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 significant 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 prove in our site beyond a reasonable doubt and is shown above.

The potential surpluses should be returned to the people NOW before governments spend it.

Potential vs Actual Surpluses

What are identified are potential surpluses, not actual surpluses. This is because only an on-site audit will determine the actual surpluses. The public does not have the liberty to conduct an audit. But a citizens committee could establish an initiative to force governments to
accept a citizens’ on-site audit for the sole purpose of turning potential surpluses into actual surpluses and determine how the surpluses will be handled.

A rose by another name is still a rose

For these potential surpluses, the government’s and politician’s response will be “These are required by law to be used only for the purposes designated.” or “These are Federal funds and can only be used for a specific purpose.” or “These are restricted funds controlled by law.” Our response is Federal funds are  taxpayers’ money; State funds are taxpayers’ money; restricted funds are taxpayers’ money.

We don’t care what governments/politicians call it, the potential surpluses are “taxpayers’ money”and the people should get it back. No tax cuts or paying off debt. These never work for the average citizen. The only way to get the most economic benefit is for the potential surpluses to be returned in total to the people.

For a list and response to the various excuses provided by governments for holding excesses of the taxpayers money, please go to this link.

Three strikes and your out.

The Tennessee Governor has been trying for a couple years to force a State income tax.

Here are two reports on Tennessee that Volunteers should find very interesting. These reports are strikes one and two.

http://www.cato.org/pubs/briefs/bp-053es.html

http://www.tennesseefamily.org/tnincometax.htm

This report is strike three. Or at least, it should be with $4.74 billion in potential surpluses. Don’t let the Governor and politicians talk about the budget. Force them to talk about the CAFR.

What you can do

There are tax watchdog organizations in almost every community and State that purport to represent the people on government tax matters. In TN there have been protestors against a State income tax.

A person should ask these organizations and others that represent taxpayers whether they consider the Comprehensive Annual Financial Report (CAFR) in their analysis of the government’s financial condition and whether tax increases are justified. If they do not consider the CAFR, then the organization is not equipped to represent the people. Actually, in Tennessee they should be working to get tax refunds.

Send them an email, send them a copy of this report, and ask them to provide you with their results of analyzing the CAFR. If you only want to provide a link to this report, the link is

http://www.cafrman.com/Articles/Art-TN-S1.htm.

Ask Your Representative About this report

If you want to send your government officials a copy of this report, then go to  this site to obtain their email address.

Exhibit A

The 2001 CAFR is located at:

http://www.state.tn.us/finance/act/cafr01/table.html


  Review of The
State of Tennessee CAFR- FY 2001


CAFR
Page



Investments From the Combined Balance Sheet


Amount
(In Thousands)


Notes


Pages

Cash and cash
equivalents…

5,041,820



Nrs

Cash on deposit with
fiscal agents…

818,787



Not

Investments…

25,361,883



Provided

Restricted Assets:

 



Cash and cash
equivalents…

3,344



Investments…

22,191




Total
Investments…



31,248,025


 


List of
Investments By Fund



Potential Surpluses


Notes



Governmental Fund Types:

 




General

616,034




Special Revenue:

 




Education

10




Highway

239,827




Wildlife Resources Agency

34,302




Criminal Injuries Compensation

82,553




Solid Waste

11,301




Job Skills

36,260




Environmental Protection

9,358




Hazardous Waste

10,160




Parks Acquisition

20,852




Supreme Court Boards

2,655




Underground Storage Tanks

8,527




Enhanced Emergency 911 Service

21,696




Other

36,171




Debt Service:

1,217




Capital Projects:

214,502




Proprietary Fund Types:

 




Enterprise:

 




State Loan Program

3,739




Sewer Treatment Loan

72,957




Energy Loan Program

16,879




Teacher Group Insurance

14,789




Local Government Group Insurance

 




Drinking Water

10,576




Grain Indemnity

3,681




Property Utilization

 




Medicare Supplement Insurance

11,353




Internal Service:

 




Office for Information Resources

73,024




Claims Award

76,200




Motor Vehicle Management

4,522




General Services Printing

229




Facilities Revolving Fund

25,653




Employee Group Insurance

68,332




Food Services

1,183




Postal Services

72




Capital Print Shop

560




Purchasing

577




Central Stores

 




Records Management

154




Division of Accounts

3,420




General Fixed Assets

 




General Long-Term Debt

 




Trust and Agency Funds:

 




Expendable Trust Funds:

 




Employment Security

817,254




Employee Flexible Benefits

386




Baccalaureate Education

 




Nonexpendable Trust Funds:

 




Academic Scholars

3,430




Chairs of Excellence

220,391




Oak Ridge Monitoring

1,043




Pension Trust Funds (1/2 excess of requirements)

Unknown




Investment Trust Fund

 




Agency Funds:

 




Local Government

 




Contingent Revenue

144,761




Community Development

18,896




Component Units:

 




Governmental Fund Types:

 




Tennessee Student Assistance Corporation

 




Northeast

727




East Tennessee

747




Upper Cumberland

186




Southeast

521




Mid-Cumberland

758




South Central

490




Northwest

1,067




Southwest

655




Davidson County

40




Knox County

199




Shelby County

410




Hamilton County

305




Certified Cotton Growers’

303




Proprietary Fund Types:

 




Housing Development Agency

841,704




Local Development Authority

31,660




Veterans’ Homes Board

2,870




Child Care Facilities

685




State School Bond Authority

43,693




College and University:

 




Current Funds:

 




Unrestricted:

 




Board of Regents

153,305




University of Tennessee

177,842




Restricted:

 




Board of Regents

16,037




University of Tennessee

45,546




Loan Funds:

 




Board of Regents

3,661

 

 

      University of Tennessee

5,048

 

 

   Endowment and Similar Funds:

 

 

 

      Board of Regents

 

 

 

      University of Tennessee

 

 

 

   Annuity and Life Income Funds-University of Tennessee

54,259

 

 

   Plant Funds:

 

 

 

      Unexpended:

 

 

 

         Board of Regents

52,135

 

 

         University of Tennessee

40,666

 

 

      Renewals and Replacements:

 

 

 

         Board of Regents

81,840

 

 

   Retirement of Indebtedness

 

 

 

      Board of Regents

9,541

 

 

      University of Tennessee

122,563

 

 

   Investment in Plant

 

 

 

      Board of Regents

 

 

 

      University of Tennessee

2,950

 

 

   Agency Funds:

 

 

 

      Board of Regents

100,450

 

 

      University of Tennessee

9,186

 

 



Total Potential Surpluses…



4,741,535

 

 


Per
Capita…


792

 

 


Family
of 4…



3,169

 


Tennessee Entities not included in this report

The following Boards and Commissions may not be not included in the Tennessee CAFR and normally are considered Special Governments by the Government Accounting Standards Board (GASB). In most cases, these entities are also required to prepare CAFRs each year. A review of these CAFRs could substantially increase the potential surpluses reported here.

Boards and Commissions:

Board of Probation and Parole · Commission on Aging · Tennessee Advisory Commission on Intergovernmental Relations

Tennessee Arts Commission · Tennessee Bureau of Investigation

Tennessee Commission on Children and Youth

Tennessee Film, Entertainment and Music Commission

Tennessee Higher Education Commission

Tennessee Housing Development Agency

Tennessee Human Rights Commission

Tennessee Internet Crime Information Center

Tennessee Regulatory Authority

Also, in many government jurisdictions there are toll road/port authorities that may not be included in the primary government’s CAFR. These entities are also required to prepare a publicly available CAFR.

This report was prepared by:
Gerald R. Klatt
Lieutenant Colonel, USAF, Retired
Former:
Auditor/Commander, Air Force Audit Agency
Certified Cost Analyst (CCA) with the Institute of Cost Analysis
Federal government accountant
Member of the Association of Government Accountants (AGA)
Member of the American Society of Military Comptrollers
www.cafrman.com

This report can be copied, reprinted, and/or electronically transmitted to others and/or printed in the news media. This report should not be used for commercial purposes.

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