State government has kept billions of dollars out of the Kansas economy, accumulating enormous unencumbered cash balances across 1,658 state government funds.

Unencumbered year-end cash, sometimes called "carryover," is money with no claims against it for unpaid bills or other obligations.

The state government's struggles to balance the budget have been focused on the general fund, but it is just one of more than 1,600 funds under the control of state agencies. The general fund had a June 30, 2009, unencumbered ending balance of $39.9 million, but the total for all state funds was $1.96 billion.

The Flint Hills Center for Public Policy mined data from 3,717 pages of year-end state government financial reports from 2003 to 2009 to discover these surprising numbers.  Total unencumbered cash totaled $943 million as of June 30, 2003, and grew rapidly each year, peaking at $3.2 billion a year ago.

The study also estimates the amount of carryover unencumbered cash that could have been returned to taxpayers over the last seven years. Funds held by the Pooled Money Investment Board and state funds with negative balance were excluded from the calculations.

A conservative estimate, which presumes that the fiscal year 2003 balances were appropriate and allows them to grow by inflation and population changes each year, says $1.3 billion could have been returned from state funds and possibly another $674 million from the Municipal Pooled Investment fund.

A more aggressive approach is based on existing state law, which requires the ending balance in the state general fund to be no less than 7.5 percent of the fund's authorized expenditures each year.  This estimate, which presumes that any amount in excess of the minimum required balance should be returned to taxpayers and that no other funds should have carryover balances, says $2.4 billion should have been returned to taxpayers from state funds and possibly $674 million more from the Municipal Pooled Investment fund.

Both the conservative and the more aggressive estimates preserve very large ending balances and assume that there was no wasteful spending.

Categories of funds

The report segregates funds into several categories to make meaningful calculations.

Federal funds may not be carried over by the state. Most years this category of funds had negative ending balances, possibly as a result of having made spending commitments in anticipation of future federal funding.  To assure federal funds aren't banked by the state, any interest earned must be returned to the federal treasury.

State law does, however, permit accumulating unencumbered cash balances in funds holding revenue generated by state taxes or fees without returning the money or interest to the source of those funds.

The state's general fund is the largest and most flexible state operating fund. Its year-end cash balance grew 634 percent, from $122.7 million in 2003 to $911.7 million in 2007. Over the last two years, general fund spending exceeded income by $871.8 million. At the end of fiscal year 2008, the general fund cash balance fell to $512.6 million, mostly because of increased spending for education and other government programs.

By June 30, 2009, tax revenues had fallen well short of budget projections and the unencumbered cash balance had been reduced to $39.9 million.

Fee funds are intended to cover the costs of various state-provided services and licenses. The money comes from fees collected from individuals and organizations and are not generally considered to be taxes. When unencumbered balances in these funds grow, it's generally an indication that collections exceed costs and at least a portion of the fee is in reality a back-door tax, according to the analysis.

Another group of state funds have negative balances and are broken out separately because netting negative balances against positive-balance funds would mask excess buildup in those positive-balance funds.

About half of the total 2009 unencumbered cash, $1.1 billion, is in the Municipal Investment Pool. The pool is controlled by the state's Pooled Money Investment Board and serves as an investment tool for non-state governments and a few state agencies. The state collects fees from participants in the pool. Currently only Wichita State, Kansas State and Emporia State Universities participate in the Municipal Pooled Investment fund, with a total investment of $3.6 million. The rest of the fund is money from local governments.

Cash in the Pooled Money Investment Board is shown separately in the report because any excess buildup in this fund would be the responsibility of municipalities.

The Pooled Money Investment Board monitors investment of Municipal Pooled Investment funds and idle cash in the state treasury. "Any money not spent today gets rolled into PMIB for tomorrow, some overnight others longer term," says Elizabeth Miller, director of investments at the Pooled Money Investment Board. "We invest every bit of cash we have on hand."

Fund examples

Elaine Frisbie, deputy director of the Kansas Division of the Budget, doesn't see much value in looking at unencumbered cash totals. The Department of the Budget focuses its attention on individual agencies. "Agencies are so different. Some take in money every other year to carry them through the off year. There are also variances across the different fee boards."

One example Frisbie cited is the Board of Healing Arts. She said licensing fees are paid to the board in May or June but the money isn't spent until after the next fiscal year starts. "So it would make it look like they're carrying a large balance but it's just happenstance."

Frisbie said there are no overarching rules governing cash balances but the Division of the Budget tries to limit them by negotiating with organizations and making recommendations. "It's something we try to do but we're not always successful."

Steve Anderson, a certified public accountant and author of the analysis, includes several examples of agency-fund growth. He cites the Board of Accountancy because it's typical of many fee-funded agencies. "The board's unencumbered fund balances from 2006 thru 2009, which include the current economic decline, reveals a 38 percent increase.  Clearly, any fee that exceeds the cost of providing the service is simply a backdoor tax, which in this case is imposed on CPAs and their clients. The nearly half million dollars that sit in the coffers of the Accountancy Board represent monies that could be circulating through the economy."

Another example in the report is the amount retained in the State's Economic Development Initiatives Fund. It grew 377 percent, from $1.4 million in 2003 to $6.7 million by the end of fiscal year 2009.  Anderson: "One has to wonder how much economic development is stimulated by holding these funds in the government's hands instead of returning them to the economy."

Agencies and departments vary in the number of funds and the amount of unencumbered cash balances as of June 30, 2009.

• Kansas Health Policy: 23 funds, $151 million
• Kansas Department of Health and Environment: 116 funds, $188.4 million
• Kansas Department of Labor: 28 funds, $345 million
• Kansas Department of Transportation: 15 funds, -$669.5 million
• Kansas Highway Patrol: 34 funds, $14.6 million

A list of all 1,658 fund balances and a summary by agency is available at www.flinthills.org.

Stimulus without strings

If the unencumbered cash had been in the economy, it may have provided economic stimulus without the strings attached to the federal stimulus, said Anderson. And it wouldn't require tax increases to pay for it or come with federal government strings.

"I'm not sure the unencumbered funds are not part of the problem," Anderson continued.  "You have separated income from taxpayers, holding it in what is a marginally interest-bearing account. If you put it back in the economy, people and businesses would spend it and continue to stimulate the economy."

Finding the treasure

Knowing the money exists is a step in the right direction. Putting it back in the economy is more difficult.

The report says, "Legislators by and large do not have the expertise or the time to spend investigating these agency program funds so they largely fly under the radar. They tend to be large in the number of accounts, often governed by complicated statutory authority and/or are a result of a revenue source over which legislators feel they have little control."

Director of the Budget Duane Goossen said he supports government transparency and that budget data is generally accessible but he's not so sure legislators or the public are generally familiar with the totality of state unencumbered funds. "I would guess the Legislature, at least people dealing closely with budgets, would know about the key or larger funds."

Several legislators familiar with the study were surprised at the number of funds and total unencumbered cash. When asked if he's seen any reports on total unencumbered cash reports reflecting what Flint Hills found, House Appropriations Committee Chairman Kevin Yoder, R-Overland park, said, "They have not taken any steps that I'm aware of to provide us in any manageable form data like you're talking about. We've not received a summary of encumbered balances.”

"Unencumbered cash growth is a symptom of a government financial system that is basically unmanaged from a taxpayer's point of view," Anderson said in a recent phone interview.

"This a problem with bureaucracy," Yoder said. "Bureaucrats are year round and have intimate knowledge about their department. Government bureaucracy grows so much that it's impossible for budget policy makers to know what's going on in every department."

State bureaucrats view agency, department or program funds as a savings account, according to Anderson. They justify them as a “float” to deal with disbursement delays between fiscal years and a cushion from revenue shortfalls.

Anderson said agencies should live within their means. "What the bureaucrats don't mention is that their state general fund revenue allocations are disbursed in 12-month increments. Just as citizens are paid on a regular basis and must budget within those parameters, we should expect our state agencies to be able to live within their allocations."

Anderson's report also says these funds have a "snowball" effect over the years, rolling forward unsupervised to collect ever-increasing amounts of unencumbered funds.  "Typically the amount of the unencumbered funds (and for that matter encumbered funds) will increase in accordance with the baseline operating budget of the agency that controls the fund.  The baseline operating budgets include whatever waste and inefficiencies that exist within the agency and then are reflected in the 'snowball' as it rolls forward from fiscal year to fiscal year.

For example, if an agency has $100,000 of inefficiency in one year and gets an increase in funding of 5 percent, the amount of inefficiency increases to $105,000.  This constant compounding effect can grow fund balances at amazing rates."

Part of the challenge in combating fund growth is the daunting task of monitoring 1,658 distinct funds, many created by the same legislators who are overwhelmed by the complexity of government finances.

Examining such a large number of funds is an inhibition to transparency, according to Ken Schermann of the Government Accounting Standards Board, the source of Generally Accepted Accounting Principles used by state and local governments. "One of the principles of Generally Accepted Accounting Principles is using the minimum number of funds consistent with effective management. That way it's more transparent, easier to read. It's easier to digest five funds than 55 funds."

Frisbie said control of the number of funds is up to the Legislature. Legislators often create funds to track spending in a government program, but Schermann said Generally Accepted Accounting Principles standards generally don't require creation of specific funds. Some government bureaucrats claim money can't be moved out of a fund once it's in there, but Schermann disagrees. "A lot of funds may have no strings attached other than what the creator intended. But those aren't legal requirements."

During the 2009 session, state legislators did transfer money out of some state funds to help fill a shortfall in the state general fund. The move generated a lively debate that's not over, according to Goossen. "It's a terribly controversial thing. It could result in some lawsuits over the fact that some of the funds were transferred."

When asked about the aggrieved party and focus of a possible suit, Goossen said it concerned oil and gas industry fees paid to a service regulation fund that was swept into the state's general fund. He said the suit may be brought not because of the transfer, but because of over-collection of fees.

Yoder said that's an ongoing tactic favored by the governor's office and government bureaucrats. "Bureaucrats will be happy to take money for another purpose to make sure they don't have to reduce spending or cut positions in their department."

Yoder says he's uncomfortable raiding fee funds to cover other budget areas. "There's something wrong with taking those fees paid for a specific purpose"

Whose money is it?

Typical government accounting is designed to serve government. Reports go from government organization to government organization and are designed to ensure procedures are followed, balance is maintained and laws are followed. Goossen, in a recent interview, proudly reported that, "you could name any fund and we could give you an expected cash flow, money in and out and an expected ending balance."

Anderson said that's part of the reason why government is such an "inefficient monster." He likens intragovernment reporting, from agency to Legislature to the functioning of a feudal economy where reports went to the king and the people had no role other than generating revenue.

Recent studies by the Oklahoma Council of Public Affairs offer important opportunities to improve state government accounting, according to Anderson. The April and July 2009 reports call for fundamental changes in state government accounting to improve citizen understanding of where the money goes, what it provides and how efficiently it is used.

Anderson's report points out the difficulty of sorting through the funds. "The process can be long and daunting. Bureaucrats and the various special interests, which may have a 'dog in the fight' for each fund, typically have very reasonable-sounding explanations for these accumulations of monies."

"The idea of using government bureaucracy to find government inefficiency is fundamentally flawed," said Yoder.

But Anderson is adamant that the money ultimately belongs to the taxpayers. "It's their money that's being held without being used. There's no reason for their money to be sitting there. It should be back in their hands,"

Recommendations

In 1802, Thomas Jefferson wrote to secretary of the treasury, Albert Gallatin, to recommend he simplify the system of government finance to improve understanding and ensure citizen control of government.

"I think it an object of great importance to be kept in view and to be undertaken at a fit season, to simplify our system of finance and bring it within the comprehension of every member of Congress. ... [W]e might hope to see the finances of the Union as clear and intelligible as a merchant's books, so that every member of Congress and every man of any mind in the union should be able to comprehend them, to investigate abuses, and consequently to control them."

Anderson's report recommends that "legislators need to start examining these unencumbered fund balances and returning excess balances to the citizens or insist that they are spent on the programs they were allocated to.  However, ultimately the citizens of the state need to be more proactive in their own investigations of these fund balances and demanding that their government leaders explain the need to remove this money from their citizens' pockets."

Yoder said, "We are constantly reviewing as much information regarding these balances as we can, but certainly we need to do a better job and know more about balances and if they've met their purpose."

In March 2009, the Government Accounting Standards Board published a new standard for local and state government accounting. According to Schermann, it will clarify fund-balance reporting. "It's a better way to help find the treasure. It will give taxpayers better information about government. The numbers on the face of the sheet is only part of the story because government will also be required to describe in the notes of the financial statement the process as well as the amount and purpose, who's responsible, the authority, how it came to be."

The new standard will be part of Generally Accepted Accounting Principles for fiscal years beginning after June 15, 2010, but governments are not required to follow it.

Anderson said the new standard is helpful but still doesn't fully serve the interests of taxpayers by addressing the issue of government efficiency. "There is no yardstick like net income, which measures the efficiency of how government spent income. In government accounting, there's only sources and uses of funds, no measure of efficiency, how well it's spent."

Kansas Statutes 75-3722 and 75-6704 give Goossen, as director of the budget, responsibility to report cash balances and Gov. Mark Parkinson authority to make adjustments in agency funds if there's a shortage of cash. Parkinson used that information and authority to make reductions in state spending in 2009.

But Goossen said state law doesn't include a statute with similar responsibility and authority to deal with too much money in cash balances. "There is broad power to make sure a fund stays balanced but not to disburse balances."

"That may be a reform idea that we should look at," said Yoder, who has asked for permission to hold meetings before the next legislative session to consider budget reform ideas.

Goossen said fund balances are an appropriate topic for legislative discussion, especially consideration of how much the state should hold in the general fund for a "rainy day."

- Paul Soutar

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Paul Soutar is an investigative reporter for the Flint Hills Center for Public Policy. For more information, visit http://flinthills.org.

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