Kenneth B. Kay

A Navy veteran of the tumultuous Vietnam and Nixon years, he served his country from inside that chaotic White House. I cannot sing his praises enough! As a writer and a brother, a mentor and a friend, this man has had a life-long effect on me and so many others. Enjoy the spell he weaves with his mastery of prose and attention to detail that only his style surpasses.

BLUE SMOKE AND MIRRORS

Ken Kay

08/05/03

Which does more damage – an outright lie or a half-truth? Numbers used to mean things, especially if they had dollar signs in front of them. Take a deep breath now and come with me on a short journey into the shadowy realm of governmental accounting. There is an old saying that figures never lie but liars always figure. Keep that in mind. It just might help you understand the reason you are having trouble understanding.

Let me say this at the outset - I am not an accountant nor do I profess to be well educated in finance. I do have a degree in business management from Arizona State University and was required to take a basic accounting course in order to complete my degree program. As a result, I can identify a liability from an asset correctly at least three times out of five. I am probably as vulnerable as the next person to having the fiscal wool pulled over my eyes. However; having said that, I was born at night but not last night.

What I want to try and accomplish here is to give you a thumbnail sketch of the government’s budget process and the development of a document called a Comprehensive Annual Financial Report or CAFR and contrast how each is developed for public consumption and why.

Before I start pontificating let me reassure you that I have some personal experience in the basics of developing inputs and data for a governmental budget. I spent eight years in the Navy - three and a little over a half attached to the White House Communications Agency during the Nixon administration and no I did not have anything to do with Rosemary’s tape recorder.

I received the worst ass-chewing I ever got the entire time I was in the military for turning in a budget estimate for the section I was in charge of that was less than the previous year’s estimate. It was a mistake of innocence within three months of taking over the section and that is the only thing that saved me. I was given the chance to right my wrong after being told that my estimate total was to exceed the previous year total by at least 10%. What really disillusioned me about the whole thing was that this could occur during a Republican administration. Talk about getting your bubble burst!

As a result of this experience and at the risk of sounding a tiny bit skeptical, as far as I am concerned the governmental budget process the way they do it these days don’t mean diddly. It is a PR tool used to try and justify increasing taxes pure and simple. Deficits and surpluses are creations of political whimsy more than reflections of the managerial skill of those currently in office. Oh sure circumstances and events can cause impact but they reflect policy and political leaning far more accurately. Their most useful value is historical in my humble opinion. In short the process is of more value than the product.

In simplest terms a budget is a plan of how a person or organization intends to use and/or allocate financial resources. It involves estimating income and expenditures over a specified length of time and developing alternatives or contingencies based on any foreseeable circumstances. The key word here is estimating. Those with their own agendas and motives within an organization can too easily skew the resultant figures making the entire exercise meaningless in so far as the planning objectives of the organization are concerned. One thing is always constant though – the trend is always up.

The process of making a budget is fairly basic and easy enough to understand and appreciate by most prudent individuals but it has become something else as practiced by those to whom we have entrusted with the reins of government.

Governmental bureaucracies rise and fall by the budget. The budget authorizes actual spending. Budgets are therefore vitally important to bureaucrats. God help the bureaucrat who fails to totally spend or commit his budgeted funds. Sometimes it can be a real chore especially if the political spotlight is focused in his or her direction. This is called being in a position of high visibility. That usually means that your cross is taller than anyone else’s.

The CAFR; on the other hand, can be thought of as an annual statement similar to those developed for private companies outlining in exact detail all income and expenditures of the government entity for the fiscal year. Since it is mandated by law as the name implies it is comprehensive and is supposed to be legally pristine, accurate, and binding. It includes inputs from all agencies, bureaus, and service centers, from courts to dog pounds. It is a public document supposedly available to all interested persons or organizations.

If you have a little time on your hands try and access a hard copy directly from any government entity you wish. There can even be a little entertainment value associated with the process – dumb looks and obvious bureaucratic distress not withstanding. Better yet go to the following web sites: http://www.hometown.aol.com/cafr and http://www.cafrman.com/; but before you do, prepare yourself for some real revelations in so far as government’s use of your tax money. I recommend a cold shower before, during, and after.

The budget is supposed to focus on the fiscal future and the CAFR is supposed to document the fiscal past. To put it in understandable terms, think of the budget as school work and the CAFR as the report card. That is the way it should work in theory anyway.

But here is where the blue smoke and mirrors come into play. The tax base does not provide all government revenues. On average, taxes yield about 25% of the total income as documented in the most current CAFRs.

A case in point - the federal government owns more land than any one individual or organization in the nation. These lands generate tax free income in all sorts of ways - mining, timber, and oil leases just to name a few. Grazing rights, usage fees for parks, rental payments, and other income streams above and below the board not to mention the natural appreciation in value of the land itself over time - all in aggregate add up to astronomical sums. We are talking trillions here folks.

State and local governments have their teats on this cash cow too. According to the latest research done by Mr. Gerald R. Klatt, better known as CAFR Man, state and local governments nationwide have over 611 trillion dollars under their control. Hard to believe isn’t it? Makes one wonder what the Federal Government’s sum is.

Now before we raise a hew and cry against all politicians and bureaucrats and run the dirty little so-and-sos in, lets stop a minute and analyze the situation. This did not develop overnight. Current day public officials did not set it up. If anything they are only guilty of perpetuating the problem passed on to them by their predecessors who have long since passed on to their just reward. The whole thing may well have begun even before the institution of the income tax. Something like this develops it own momentum especially if the voting public is not vigilant or is apathetic. The fact that the beast exists compels the less scrupulous among us to feed it right or wrong.

Besides that, governments have administered for some time, quite legally I might add, specific fund pools for specific purposes such as pensions for government workers and citizen groups. Where the problem comes into play is that the reporting of the results of these funds have been shall we say less than realistic. The main reason for that is that for the most part government officials have maintained control over these funds instead of releasing control to private firms. There are some, perhaps even a majority, of them that are on the up and up but even those can be subject to let us say non-standard accounting rules or principles.

The main source of growth for these funds has been faulty accounting in general. Neither the budget nor the CAFR as currently set up record a carryover of the previous year’s bottom line. Let us say a government entity ends up with a reportable surplus of a million dollars in one fiscal year. Any income produced from that million dollars is addressed quite properly in the next year’s budget and CAFR. However the next year the million dollars and its income stream are left out of both. The money is still there capable of producing even more income. It doesn’t just de-materialize because the government official fails to record it in the next fiscal period - intentionally or not.

One can almost feel sorry for the government types. Covering this thing up until now must have seemed like trying to hide an elephant in the living room. The problem with an elephant in the living room though is that sooner or later the damn thing is liable to sit on you - or worse.

So what do we do with this elephant now that it has become so visible? We could just shoot it but what problems would that create? We would still have to get it out of the house before it started to stink up the whole place. Besides whom among us do we trust to properly dispose of the carcass considering that its form is really all that lovely money? Who is wise enough to disperse the money so that it doesn’t upset everyone’s economic applecart?

Well let’s at least housebreak it you say. Quit feeding it and it might just go away. Declare a permanent tax holiday and see what happens. After all, the Founding Fathers did not envision the government as a profit making institution. Well the cold hard fact of the matter is that it functions as one now and has for some time. Create a vacuum too quickly and you may find yourself in a worse situation than before. No one can predict exactly what would happen or what impact such an action would have not just here but worldwide as well.

Better to coax the elephant out of the house and put it to useful work. Walter J. Burian has formulated a plan entitled the CAFR1 plan that addresses what I think is a workable and reasonable approach. He presented it at a breakfast meeting of local leaders in the Phoenix area and - guess what – it was pretty well received.

Basically he proposes that starting at say the county level of government that a team of independent auditors establish the real current value of all the county government’s holdings. These assets are then transferred to private control responsible to the government for creating a level of income that can sustain the county’s operations. A simple sales tax could replace or adjust any temporary shortfalls if they occur. Otherwise collection of all taxes at the county level could be suspended.

Once the process is demonstrated and any kinks worked out then it can be expanded on to cover all other government entities. The key element is to get the control of the money out of the elected official’s hands. No foxes in the henhouse so to speak. Besides, too much time in this kind of henhouse can turn the most well intentioned public official into a fox.

There may be those who think this whole scheme was set up by an evil syndicate or some nefarious organization foreign or domestic to bring down our democracy. Personally, I tend to think not. The main reason is that any such group would have sought to accelerate the process far beyond its current or past growth rate so that they might have enjoyed the proceeds during their lifetime. That of course does not preclude some such organization from forming now and attempting to rustle this cash cow for their purposes. That possibility must be considered in any future decisions we make of course but I personally think this situation evolved due to the underlying philosophy of the governmental bureaucracy and, as I have already mentioned, an apathetic and poorly informed public.

They say knowledge is power. That may be true but possession of either or both does not guan tee that the possessor knows how to make proper and wise use of either or both. Elected officials have no business trying to administer such sums. They are not trained for it for the most part and it is too easy for them to be corrupted and so corrupt any viable process that we might come up with for managing the money. Control needs to be held in the private sector where the money can be more efficiently and honestly handled. Accountability of those in charge must be a matter of open public concern and maintained by a sizeable accounting organization that is above reproach. Exactly how we do that I have no idea. As I said, I recognize and admit my own limits.

In conclusion, where do we go from here? We who now posses the knowledge of the situation I have described need to make the rest of the public aware of the existence of these mega-funds and help responsible men of good will formulate a plan and process that will relieve the tax paying public of its onerous burden while setting up a stable financial plan that will assure a sufficient level of income to meet all the legitimate needs of all levels of our government.

Can such a thing really be done? I honestly don’t know. I do know that business as usual is probably the worst thing we can do. It can continue to make criminals out of good public officials and, at the very least, distract them from their real duties of public service. If we keep on going the same way we are now we make ourselves vulnerable to the next truly evil person or organization who can figure out a way to use these funds in a truly destructive way other than for the public good.

Public apathy had a major role in allowing this to happen. It will take considerable public action to correct it. We must start soon if we wish to save our children’s future. We each must ask ourselves two questions: If not me, who? And if not now, when?

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Ken’s Page Archives

A Common Sense Foreign Policy – “Judging from today’s headlines this title probably qualifies as a four-word oxymoron.”

This Dixie Chick Thing – “You girls don’t look stupid and you clean up real nice.”

War Correspondents – “Alright, alright enough already!!”

The True Cost Of Political Proctology – “It would be nice if fear of public exposure kept the cruel, stupid and inept out of public life and power but it hasn’t seemed to deter them in the past.”

Cancer Patience – “Experience is of no value unless it is shared.”

My Rant – “Ok boys and girls, fasten your seat belts, put your seats and tray tables in the full upright position, and get ready. I am going to try my hand at this “rant” business.”

Negro Mattie – “Perhaps the greatest testament to Mattie’s capacity to love was the fact that we were not the only white family to pass by her casket with tears in our eyes.”

Doc – “To say our family respected and trusted our family doctor is an understatement.”

Little Sisters - “I was her foil and scapegoat . . .”