Explanation of the TN CAFR Review Spreadsheets
Summary
When questions about state spending arise, everyone tends to focus on the state budget, which only tells us how much the government plans to spend. When taxpayers insist that their legislators cut the budget, the answer is frequently, “You look at the budget and tell me where we can cut!” While we may be able to identify some ridiculous line items to cut from the budget - things like budgeting money to bring a professional basketball team to Memphis in the midst of a budget crisis, the fact that for every 100 poor people in the state there are 151 TennCare recipients, etc. - there is another place to go to identify where cuts can be made. That document is the Consolidated Annual Financial Report (CAFR). Every state must publish an audited CAFR at the end of every fiscal year. While the budget reveals spending plans, the CAFR reveals actual spending levels. It shows how much is left over at the end of the fiscal year.
Would you be interested to know that at the end of fiscal year 1997, the state of Tennessee had $2.313 billion in un-spent tax revenue? That number was $2.108 billion at the end of 1998, $2.572 billion at the end of 1999, and $2.598 billion at the end of fiscal year 2000. Would you be interested to know that in recent years the state has demanded enough revenue to fund 100% of the budget, but they typically only actually spend 87-88% of that amount? Read on for more details.
Background
Former Tennessee Governor Don Sundquist (R) nearly created an income tax in Tennessee. Tennessee taxpayers just couldn’t pay taxes fast enough to fund his massive spending increase plans. The leadership of the executive and legislative branches of our state government conspired to force an income tax on the taxpayers of the state because it was allegedly the only way to solve the budget crisis. After overwhelming public outcry, with horn-honking angry taxpayers swarming the state capitol, the attempts to create an income tax were unsuccessful. The legislature did go on to raise our state sales tax by 1%, making the total sales tax rate in some counties as high as 9.75%. In spite of all Governor Sundquist’s crying about how rough things would be in the future without an income tax, the state of Tennessee is finding itself with a budget SURPLUS as we near the end of the 2003-2004 fiscal year.
In the middle of this time frame, I was asked to tackle this project after some fellow-Libertarians had seen some information published by Walter J. Burien and a man named Gerald Klatt (a high-level federal auditor for over 30-years) who frequently uses the nickname CAFRMan. The following is by no means a full application of all of their suggestions, but it does provide some fascinating data.
Nitty Gritty – The Spreadsheets
This document accompanies two Excel spreadsheets. The first is a CAFR Review for fiscal years 1997 – 2000, which contains selected historical data from the State of Tennessee CAFR’s for those years, and it is divided into several sections. Each section has its own commentary below.
The Theory
Sections 1 and 2 of this review are based on the CAFRMan theory, which is basically this: The state budget process gives each fund a certain amount of money to use each year. They have one year to use that money. If they have money left over in the fund at the end of the year, it is excess that they did not need in that year’s budget. So if we identify all the funds that get their revenues from taxes, and we then go through the balance sheets of those funds and total up the liquid assets in those funds at the end of the budget year, the result is the amount of potential surplus tax money the government has left over from the budgeted-but-not-spent funds. I took this concept and applied it to the State of Tennessee CAFR’s that cover fiscal years 1997 – 2000, and the results are detailed in sections 1 and 2 of the first spreadsheet.. Sections 3 and 4 of the first spreadsheet and the second spreadsheet of growth projections are my own observations.
CAFR Review - Section 1 – Liquid Assets
Section 1 is simply a listing of the balance sheet categories that are designated as liquid assets/investments. It shows the balance sheet entry for each category at the end of each fiscal year, and it references the page number of the CAFR from which that number was obtained. Note that Section 1 includes all governmental funds, including the pension fund, and not just the ones that are directly funded by taxation. Some of these funds have come from contributions for specific purposes, from college tuition payments, etc, so they cannot all be declared to be excess tax revenue.
CAFR Review - Section 2 – Potential Tax Surplus
Section 2 is a subset of Section 1. It takes the numbers from Section 1 and filters them down to only include excess tax revenue sitting in the bank. Section 2 lists each fund itemized in the CAFR. If the fund’s revenues come from taxpayer wallets, there is an “x” in the column titled “Incl.”, and the total of the balance sheet items listed in Section 1 are included for that fund. A reference is made to the page number of the CAFR from which those numbers were obtained.
The conclusion suggested here by the CAFRMan’s theory is that at the end of fiscal year 1997, the state of Tennessee had $2.313 billion in un-spent tax revenue. That number was $2.108 billion at the end of 1998, $2.572 billion at the end of 1999, and $2.598 billion at the end of fiscal year 2000.
CAFR Review - Section 3 – Budgeted vs. Actual Revenue/Expenditure Statements
The CAFR’s provide a partial comparison of budgeted expenditures versus actual expenditures. Tennessee state CAFR’s reveal that in the General Fund and Special Revenue Funds (which represented $17.3 billion of the $18.5 billion FY2000 budget) ACTUAL expenditures have been 12-13% LESS than BUDGETED expenditures for each of fiscal years 1997 – 2000. Yet our legislators say there is nothing they can cut! Apparently they can cut 12-13% right off the top. Cutting this money from the budget would not take money away from any programs because they’re not actually spending what we’re already budgeting for them!
Anyone that sells products/services to government institutions knows that these organizations go on spending sprees at the end of the budget year (June) to try to burn off their unused funds so they won’t lose the same unneeded funding in the next round of budgeting. Apparently the government can’t even spend our tax money as fast as they collect it at the present taxation levels, yet when asked to cut the budget, our representatives claim to have no choice but to raise our taxes.
CAFR Review - Section 4 – Growth Rates
We do not have a state revenue problem. We have a state spending problem. In the 12-fiscal-year period from 1988 to 1999, Tennessee taxpayers’ per capita personal income grew by 73%. In the same time frame, the state’s budget revenues grew 131%, and the state’s expenditures grew by 161%.
In 1977 our state tried to prevent this outrageous disparity from happening. The state constitution was amended to limit the growth of the state budget to the economic growth of the state, as measured by personal income levels. What makes that law ineffective is the fact that it allows the legislature to exceed that limit simply by passing a bill that specifically states the amount by which they have chosen to exceed the limit, which they do every year.
Consider the following percent increases in the given budget areas from fiscal year 1990 to fiscal year 2000 (from Tennessee General Assembly Fact Books, FY 1989-90 and FY 1999-2000):
K-12 Education - 83% increase
Higher Education - 82% increase
Health and Social Services - 213% increase
Resources and Regulation - 178% increase
Debt Service - 118% increase
General Government - 119% increase
Keep in mind that these increases were during a time when inflation was averaging about 3 percent per year. Clearly this is why we find ourselves with budget problems.
Note also that even with the 83% growth in education, Tennessee students are doing poorly enough that Governor Sundquist thought we needed a reading initiative program, which would have added another $95 million to the budget. If an 83% increase in spending still can’t teach our kids to read, then money isn’t the problem, and throwing more money into the same black hole won’t help.
Growth Projections Spreadsheet
Because of formatting issues, the future growth projections were placed in a second accompanying spreadsheet, separate from the CAFR Review data discussed above. Section A of this spreadsheet takes actual historical data from the Tennessee CAFR’s and calculates a percent growth per year for the given time period. Section B takes this percent growth per year and projects it into the future. If spending in the future continues at the recent historical rates, these are the projected comparisons of personal income, state revenue, and state expenditures up to the point that state spending is more than the entire personal income of the Tennessee population.
Tennessee’s legislature is on a dangerous and costly spending spree. If things continue on the current path where state expenditure growth out-paces personal income growth, Tennessee taxpayers are in big trouble. With current growth patterns, Tennessee state expenditures would exceed 15% of Tennessee personal income in 2015, 20% in 2028, 30% in 2045, 40% in 2057, 50% in 2066, and 100% in 2096. This is only the state spending, and it does not factor federal spending into the equation.
Conclusion
At what point will Tennessee voters say that enough is enough? The Democrats and Republicans have tried their methods and theories, and it’s been a failed experiment. Some would define insanity as trying the same thing over and over and over again, but expecting a different result. Stop the insanity! Vote Libertarian!
Note About the Author: Alicia Mattson has Bachelor of Computer Science and Master of Business Adminstration (MBA) degrees, both from Tennessee Technological University. Since 2000 she has been responsible for all financial reporting (including balance sheets) for her own 8-employee business as well as for three other organizations. She is simply a mathematically-minded concerned citizen who has applied the theories of other professionals who do have government auditing experience.
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