CAFRMAN'S REVIEW GUIDE | ||
Introduction |
This guide provides a very simple method to determine whether potential surpluses exist in your State; county; and city governments; school districts; and/or private corporations, non-profit organizations, commissions, authorities and foundations established by governments.
Most people will look at this guide and the forms listed below and immediately reach the conclusion that this process is very complicated and that it takes a Certified Public Accountant (CPA) and Ph.D. economist in order to understand what to do. If this is your first impression, then you have made up your mind in advance and probably should leave this program, delete all the files, and forget about the issue.
Actually, a high school student could read and conduct a review in about three to four hours. It would be one to two hours of reading time and a two hour assignment to do the review. For most people that is far too much effort on their part regardless of the reward. They prefer someone else to think, do it, and tell them where they can pick up their refund check.
However, if it is too much effort then please don't complain about high taxes or any new taxes imposed by your government(s), because you don't have the right to complain unless you plan to do something about it. Just pay the taxes. Some day when Tax Day goes from June 17th (in 2000) to July, August, September, etc., there will be a point, when it is too late, that you may decide to do something.
Even providing this guide and program to others in your community who are the "doers" in your community is doing something. Later, you may be able to help in the campaign to promote the return of your money, even if it is only signing a petition or two.
Here is a list of the files that are used in this Guide, not the computer program, but just this guide. They all need to be in the same directory .
MainMenu.htm | ||
Introduction.htm | Introduction.jpg | |
Rev1.htm | Rev1.jpg | |
Rev2.htm | Rev2.jpg | |
Ret1.htm | Ret1.jpg | |
Ret2.htm | Ret2.jpg | |
Sum1.htm | Sum1.jpg | |
Econ1.htm | Econ1.jpg | |
Econ2A.htm | Econ2A.jpg | |
Econ2B.htm | Econ2B.jpg | |
Econ2C.htm | Econ2C.jpg | |
Econ2D.htm | Econ2D.jpg | |
ESC.htm | ESC.jpg | |
RefundPlan.htm | ||
SampleReport.htm | ||
ComputerProgram.htm |
In the past in order to use one of our two methods of conducting a review, a person had to have on their computer Microsoft Excel. Not many people have that spread sheet program.
Therefore, we wrote our own program which is referred to as an .exe stand-alone program. This means almost any computer with Microsoft Windows can run the program, compile the results of data entered, and print out the results of the review(s) and economic impact analyses for inclusion in a report(s).
However, if you do not like computers, then you can still use the program to print out the blank forms. With the blank forms (approximately 5-6 pieces of paper), a copy of the CAFR, a pencil and a calculator, a person can manually prepare the forms. The explanations in this guide provide detail instructions and what should be entered in each blank and how to complete the formulas (if necessary) for each blank on the forms.
Government operations, except for retirement/pension funds and a few other smaller funds, should be on a pay-as-you-go system. Governments should be non-profit organizations. Government surpluses, as used in this guide, 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. If the government is a non-profit entity and uses pay-as-you-go budgeting techniques, then why does a government have huge investments of the taxpayers money at the end of the fiscal year? This review guide identifies those investments.
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. On Page 175 of the Texas 1999 CAFR we have a ten (10) year history of Revenues by Source and Expenditures by Function. Since 1990, Texas had excess revenues every year. The ten year total is $21.07 billion. Now when the excess revenues each year are compounded at 6% (interest income), the $21.07 increases to $28.42 billion. The 1999 excesses (profits) alone amounted to $5.11 billion. This is not the budget surplus often reported in the news media.
With Texas having potential surpluses of $46.33 billion in our review of their 1999 CAFR, where did the remaining $19.91 billion come from. Many States changed the laws/Constitution that allowed them to hold excesses of the taxpayers money. The original laws, some 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 revenues 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.
For budget purposes revenues minus expenditures equals surplus (deficit). That is simple. However, when expenditures are to funds/projects/programs that do not need the money, this usually does not show up in the budget reports, but it does show up in the Comprehensive Annual Financial Report (CAFR). If the Facilities Improvement Fund receives $100 from the budget (expenditure for the budget process) and only spends $60, the $40 not needed is usually not included in the budget process as a surplus of funds, but is included in the CAFR as an asset, which is invested. If each year the Facilities Improvement Fund continues to receive $100 and spends less than that amount, the accumulative, plus interest, surpluses grow pretty fast. The budget shows no surpluses, but the CAFR shows an asset that has been invested.
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 usually 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.
The CAFR:
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 State funds including those held outside the State treasury.
Presents information on the accrual basis recognizing amounts owed by the State but not paid at the end of the fiscal year, as well as amounts due to the State 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 State treasury; and
Includes statistical and and some economic data.
Potential Surpluses Not Actual Surpluses
The basic objective of reviewing the governments CAFR in this guide is not to arrive at an exact amount of surpluses that a government may or may not have. Only an on-site audit/detailed review specifically directed to determine what are surpluses and the amounts will provide an exact figure. The objective of this review guide and the methods outlined are to determine whether there are sufficient potential surpluses to warrant some kind of action. Usually, the action should be to have an independent audit/detailed review determine the amount of actual surpluses and the amount that should be returned to the people. However, it may also be to just stop the government from imposing new taxes or collecting more revenues until such time as the surplus issue is resolved.
In order to better understand the types of CAFRs in existence we have prepared a schematic that shows our designations for the types, e.g. S1, C2, CY2, etc. These type designations are used extensively in this review guide.
The Comprehensive Annual Financial Report (CAFR)
Schematic State/Commonwealth Governments |
State-Level CAFR (S1) Other CAFRs Associated with State-Level Governments( S2) |
County/Parish Governments | City/Village Governments | |
County-Level CAFR (C1) Other CAFRs Associated w/County-Level CAFR (C2) School System (C3) |
City-Level CAFR (CY1) Other CAFRs Associated w/City-Level CAFR (CY2) School System (CY3) |
What are Other CAFRs (S2, C2, and CY2)?
There are approximately 83,000 CAFRs that are prepared annually. Some are duplicates of data already contained in the S1, C1, and CY1 government CAFRs. Many entities are not included in the S1, C1, and CY1 government CAFRs. Here is a partial list of the types of entities that are "quasi-government" entities created by S1, C1, and CY1 governments that may not be part of the basic governments CAFR. Some are monopolistic type entities that collect fees, tuition, etc./receive revenues from the public, directly or indirectly. Others receive direct funding from governments.
Fire Districts Irrigation Districts/Commissions Conservation District Transit Insurance Pool Reclamation District Community Colleges Sewer District School District Insurance Group Water District |
Power Resource Managers Medical Center Stadium Authority Commissioners Association Hospital District Housing Authority Airport District/Authority Transit System/Authority Public Utilities |
Insurance Association Convention Center Authority Housing Improvement District Communication Center Cities Insurance Authority Counties Insurance Fund Water Resources District Lighting Districts etc., etc., etc. |
The Economic Impact Principles
These are economic principles used in this program which can be found in almost any elementary economics textbook. In addition, some of them are explained in the Department of Commerce, Bureau of Economic Analysis (BEA); especially in their RIMS II Economic Model.
Economic Output Multiplier (EOM)
"Basic to all theories of business-cycle fluctuations and their causes is the relationship between investment and consumption. New investments have what is called a multiplier effect: that is, investment money paid to wage earners and suppliers becomes income to them and then, in turn, becomes income to others as the wage earners or suppliers spend most of their earnings. An expanding ripple effect is thus set into motion.
Similarly, an increasing level of income spent by consumers has an accelerating influence on investment. Higher demand creates greater incentive to increase investment in production, in order to meet that demand..." ("Business Cycle," Encarta® 1998 Encyclopedia © 1993-1997)
Another explanation: The EOM estimates the change in output for a given change in demand, i.e., a certain demand (returning surpluses) increases the output of all industries in the government's economic area after all "rounds" of spending are totaled.
After researching EOM data from the Department of Commerce, Bureau of Economic Analysis (BEA), and other sources, it was decided that an EOM of 2.00 is about the average that can be used for all governments.
This means that for every $1 of surpluses returned to the people, the economy expands by a certain number of dollars. For example if the economic multiplier is 2.0:1, this means that for every $1.00 returned to the people in a certain taxing jurisdiction, the economy in that jurisdiction will increase by $2.00.
Economic Earnings Multiplier (EEM)
Increased demand (surpluses) increases labor demand in all industries, resulting in increased wages paid for everyone in the government's economic area.
This is the total dollar change in earnings of households that results from a $1 change in output delivered to final demand.
Again, research indicated that an EEM of .50 should be used.
Government Revenue Rate (GRR)
This is the amount of revenue collected by a government per dollar of economic activity in the government's area of jurisdiction. This will provide the percent of return the government is receiving per dollar of economic activity.
We use a GRR of 10.00% for States and 8.00% for local governments. This means for every $1 of additional economic activity a State government receives 10.00 cents and a local government receives 8.00 cents in revenue.
For the Federal government we use 20% although there are a number of economic reports that state the Federal government receives $0.20 to $0.24 on every dollar of Gross Domestic Product (GDP).
Government Rate of Return on Investments (GRI)
This is the interest rate that the government receives on its investments excluding the return on retirement/pension plans investments which can vary considerably because of the type of investment.
The current GRI for the average government is between 5-6%. Most of the potential surpluses are in the government funds that receive this GRI. However, the retirement funds, universities, and a few smaller funds/entities are allowed to use the "prudent person rule". This means they can invest in stocks, bonds, foreign currencies, foreign stock, etc., which the normal government funds cannot. However, usually a much smaller amount of the potential surpluses are from excesses in these funds/activities.
In this program a 6% rate of return on investments is used in computing the economic impact analysis., even though this can be a conservative rate of return. In future updates of this program we will provide a data entry for providing the actuall rate of return if known.
Increase in Tax Revenues
As has been stated above returning potential surpluses increases the economic activity in the government's economy . With the government receiving 10.00 or 8.00 cents on every $1 of economic activity, the government will receive considerably more (from about 10% to about 14%) above what the government would receive if the surpluses were invested by the government (GRI).
Reduction in Taxes
Because of the increased revenues the government can reduce future taxes.
In addition, the activities/taxes/etc. that created the surpluses in the first place could be changed so that surpluses could not build again. This in itself will reduce taxes even further.
Employment Multiplier (EM)
This is the job creation amount. It is the amount of additional economic activity necessary to create one additional job. Although research disclosed that the range was between $45,000 and $75,000, we decided to use $100,000 as the amount needed to create one additional job.
Summary of Economic Impact Data (EM)
Here is a summary of what the above eonomic impact indicators mean.
1. Economic Output Multiplier (EOM) For every $1 of refund to the people the economy grows by $2.2. Economic Earnings Multiplier (EEM) For every $1 of refund the wages increase by $.50.3. Increase in Federal revenues For every $1 increase in economic activity the Federal government receives $.20-$.24 in additional revenues.4. Increase in State revenues For every $1 increase in economic activity the State governments receive $.10 in additional revenues.5. Increase in Local revenues (City and County) For every $1 increase in economic activity the local governments receive $.08 in additional revenues.6. Employment Ratio (ER) For every $100,000 in increased economic activity, 1 job is created.Unemployment and Welfare
Because of the increase in employment, unemployment and the costs of unemployment would be drastically reduced thereby reducing the tax burden for these costs. Likewise, with the increase in employment opportunities and wage increases, the welfare recipient may decide it is more profitable and easier to get a job than remain on welfare. This also will decrease the welfare costs to the taxpayers.
Here are a list of the forms used in this guide.
Although it looks like there are a lot of forms in reality there are only the following forms and not all are used with each type of government. You can click on the form name to go to a picture and full explanation of how to complete each item on the form.
Rev1 |
Basic Review Form. This is the basic review form of the review process and is used for all reviews. If Rev2 is not required, then this is the complete review process, one form - one piece of paper. |
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Rev2 |
Continuation Sheet for Basic Review Form. In some cases the Basic Review Form does not have enough rows to cover the necessary funds/subfunds in the CAFR. This form continues on from review from Rev1. |
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Ret1 |
Surplus Retirement Distribution Form. This is the distribution form if surpluses are identified in the government that manages the retirement system AND if there are more than one retirement system involved. Usually, this is at the State-level retirement system although this form can be used if there is more than one retirement system managed by a city, county, and/or other government-type entity. |
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Ret2 |
Secondary Surplus Retirement Distribution Form. Usually this form is used for a city, county, or other government entity when the retirement system is managed by a government other than the government being reviewed. |
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Sum1 |
Basic Summary Form of Potential Surpluses. This form is used to summarize the potential surpluses of a government. If only a government-level review is conducted then this form is not necessary. Other words, if S2, C2 , or CY2 reviews are not conducted then this form is not necessary. |
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Econ1 |
Basic Summary Form of Increased Economic Activity. This form is used to summarize the increase in economic activity if the surpluses were returned to the people (the economy). |
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Econ2A |
Economic Impact Analysis. State-Level. This form only requires 4 data entries but the complete impact analysis, 15 items, are automatically computed and derived from these 4 entries. |
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Econ2B |
Economic Impact Analysis. County-Level. This form only requires 4 data entries but the complete impact analysis, 17 items, are automatically computed and derived from these 4 entries. |
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Econ2C |
Economic Impact Analysis. City-Level. This form only requires 3 data entries but the complete impact analysis, 17 items, are automatically computed and derived from these 3 entries. |
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Econ2D |
Economic Impact Analysis. School-Level. This form only requires 3 data entries but the complete impact analysis, 17 items, are automatically computed and derived from these 3 entries. |
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ESC |
Economic Summary of Combined Governments. If reviews are conducted of more than one government, then the economic impact results of these governments can be added together to provide a total economic impact. |
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Project Mgmt |
Project Management. This form is to help in keeping track of your work on the various governments and activities within each government. |
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Forms List |
Forms Used by Government. This form is a list of the forms segregated by government review and analysis, State, city, county and/or school district/system. |
Each form is explained in detail with a picture of the form and the data entries (by each cell) required to complete each form and where the data is located in the CAFR or transferred from another form.
For example: To review a State CAFR and prepare an economic impact analysis, without reviewing any other CAFRs (S2) associated with the State government, only requires the following forms (pieces of paper):
Form Name | Form Title | Comments | ||
Rev1 | Basic Review Form | Required for all reviews | ||
Rev2 | Continuation Sheet for Basic Review Form | Optional-Used only when required. | ||
Ret1 | Surplus Retirement Distribution Form | Optional-Not required but amounts add to the overall potential surpluses. | ||
Econ1 | Basic Summary Form of Increased Economic Activity | Required to get total economic impact data. | ||
Econ2A | Economic Impact Analysis. State-Level | Required for economic impact analysis for the report. |
That's it, 5 pieces of paper (forms) and you have conducted a review and prepared an economic impact analysis of a State-level CAFR (S1). Look at the nine State reviews on the www.cafrman.com site. The review in Exhibit A are Forms Rev1 and Rev2. The economic impact analysis is an Econ2A form. With these two items you are ready to prepare a report and start your campaign.
A review is conducted in the following order:
Rev1 - Basic Revew Form
Rev2 - Continuation Sheet for Basic Review Form [Only if needed]
Ret1 - Surplus Retirement Distribution Form [Optional] OR
Ret 2 - Secondary Surplus Retirement Distribution Form
Sum1 - Basic Summary Form of Potential Surpluses
Econ1 - Basic Summary Form of Increased in Economic Activity
One of the following:
Econ2A - Economic Impact Analysis - State-Level
Econ2B - Economic Impact Analysis - County-Level
Econ2C - Economic Impact Analysis - City-Level
Econ2D - Economic Impoact Analysis - School District/System
ESC - Economic Summary of Combined Governments [Optional]