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MONDAY
JUNE 14
1999
         
     



WND Exclusive
The government's
secret slush funds

'Trillions of dollars hidden,'
finance crusader charges



Editor's note: This is part one of a two-part series.



By Sarah Foster
© 1999 WorldNetDaily.com

At a time when Americans are forced to dig deeper than ever in their pockets to pay the high cost of government, politicians and bureaucrats at all levels of government -- local, state, and federal -- are sitting on tens of trillions of public dollars stashed away in secret "slush funds," a WorldNetDaily investigation reveals.

All levels of government conceal the existence of these vast sums of money by keeping and filing what amounts to two sets of financial books -- one for the general public, which shows a very limited revenue stream, and the second, for political insiders, bond brokers, investors and the like, which reveals the money hoards and gives an accurate account of a government's income.

There's enough money in these hoards -- largely the result of aggressive investing on the part of government -- to pay off the $5.6 trillion national debt and the accumulated state and local debt many times over, plus cut everyone's taxes for years to come, according to Walter Burien, a former Wall Street commodities trader, whose revelations -- on talk radio and the Internet -- about government finance practices have sparked a nationwide firestorm of public outrage over an arcane, hitherto all-but-ignored subject.

The first set of government books, the budget, projects the flow of tax money into the general fund for the coming year and directs how it will be spent. The second is the Comprehensive Annual Financial Report (CAFR), and not one City Hall watcher in a thousand has ever heard of it.

"Everyone knows about budgets," says Burien. "Politicians use the budget to ask for more money, to try and show that a city or county is poorer than it is. They're playing the public for dupes on the budgetary basis -- that is, they only mention the budgetary basis and never mention the comprehensive annual report that's the real set of books."

CAFRs (pronounced "cay-fers") are financial documents that show, among other things, the balances of all the funds for a given entity -- e.g., city, a county, school board. CAFRs, says Burien, report a government's total income, which is exponentially greater -- millions and even billions of dollars greater -- than is shown by the budget.

Burien is essentially charging that many, if not all, governments, from the lowliest water district to the state legislature to Congress are significantly underreporting their incomes and overcharging for their services -- and nobody's calling them on it. The press won't, he says, because they're part of the cover-up.

But is he right?

Reached by telephone at his Arizona home, Burien described how in 1989 he came face to face with a CAFR for the first time. At the time he had just helped set up a tax protest group called Hands Across New Jersey, the state in which he was living.

"A governor -- Jim Florio -- had just been elected on an anti-tax platform," said Burien, "but as soon as he gets into office there's a $2.2 billion tax increase -- the largest in the state's history -- and the proverbial whatever hit the fan. One local radio station was doing some rabble rousing and asking people to call in with examples of waste in government spending. Most examples involved $5,000, $15,000. The highest was $85,000. And the callers were all furious and foaming at the mouth at these examples."

Aware that the state of New Jersey handles billions of dollars, Burien figured that if there were any waste it would be in the millions, not thousands, of dollars. He checked the state Annual Budget Report, which showed the costs of all services to be $17 billion, with the "net available" (for paying bills) at $24.6 billion.

"Then I asked the question the IRS asks, where are the cash gross receipts? I added up to at least $44 billion for annual income."

Burien noticed that certain state agencies -- the so-called profit centers -- like the New Jersey Turnpike and the Newark Port Authority weren't mentioned, and he called the Office of the Budget for more information. Posing as a low-level bureaucrat, he said he was preparing a report for the director and needed figures on the autonomous agency accounts, interest accounts and investment accounts.

"Oh, you need the comprehensive annual financial report," he was told.

"Bingo! That's the first time I had heard of that," said Burien, emphasizing that he had been involved with finances and accounting for years and knew his way around state and local government agencies -- yet had never heard of a such a report. He arranged for one to be sent to him.

A self-described "bottom-line kind of guy," Burien "crunched" some numbers and came up with some astonishing figures.

"Are you ready for this?" he asked. "Here's the statement of the service budget -- $17 billion. Yet they brought in $86.799 billion for the year. New Jersey was charging $87 billion and providing $17 billion in public services."

Worse, the CAFR for the fiscal year showed New Jersey had liquid investment funds of $188 billion; common stocks worth $70 billion; $10 billion due from loans to public and private corporations; and $14 billion in insurance company equity participation. New Jersey, which claimed less than $25 million in annual income on its budget, was sitting on $300 billion in cash, stocks, loans and insurance equity, according to the CAFR.

"On that day, I learned the definition of syndicated organized crime," he said. "There was a real scam going on. Costs and expenses for public services were reported on the budget where taxes and fees paid 100 percent of the bill for the services. Which in New Jersey that year was $17 billion.

"But, whenever there was a profit center -- like the turnpike or the Port Authority -- that generated non-tax revenue, the legislature had restricted that income from being reported in the budget. Income from the profit centers was shown only on the CAFR."

Having heard the wake-up call, Burien today is a man with a mission. He has been on numerous talk shows. As a result the Internet is humming with e-mails and reports by activists across the country swapping horror stories about similar discoveries of hoards of money squirreled away in obscure fund accounts by "servants of the people" at City Hall.

WorldNetDaily interviewed in depth a number of highly qualified people who are well-acquainted with CAFRs and government financing. No one would vouch for Burien's number crunching without a long, in-depth look at his data and calculations and the CAFRs they are drawn from. Trillions of dollars stashed away? Maybe, maybe not. There was some concern about whether Burien was reading the CAFRs correctly. But overall, the statements by those contacted tended to corroborate what Burien is saying. There was a general consensus that there is a lot of money lying in fund accounts doing nothing but drawing interest, maybe not as much as Burien claims, but a lot of money nonetheless.

"CAFRs and budgets are not easy to read, and Burien seems to be on to some pretty exciting stuff," said Eric Norby, an attorney in Southern California who taught himself accounting "years ago" to understand how government really works. Norby has done research for the prestigious Rose Institute of State and Local Government at Claremont McKenna College, in Southern California.

"What's exciting is he's trying to show that there's all this money out there that very few people know about -- that's really important. I'm glad he's looking at CAFRs and budgets. It's something that has to be done."

Having said that, Norby noted there were allegations on Burien's part that weren't quite accurate.

"He regards fund accounting as a criminal activity and approaches it as an illegal scam that the government is putting over on the taxpayers. As a lawyer I have to say that what they're doing is probably legal, but if people knew about it they wouldn't be very happy and maybe they'd change the law."

Moreover, the CAFR isn't a "second set of books," Norby said. Rather, a CAFR complements the budget report.

"The budget is the document that authorizes the spending of the money, and the CAFR is the historical document describing what actually got spent," he explained. "To understand a CAFR, you have to understand fund accounting -- the system used by government. That is central. If you don't understand fund accounting, you'll think the general fund is the whole government -- which it isn't. The general fund may be only 50 or 60 percent of total government expenditures, or sometimes less.

"Burien understood enterprise accounting, because if he was an investment guy he'd know how to read financial reports of companies. Then he discovered fund accounting, and it was a whole new world for him."

The world of fund accounting

"When you look at a government budget, you're not looking at a business budget where everything is combined and there's one bottom line and a profit and loss statement," said Steven Frates, fellow of the Rose Institute of State and Local Government.

"Instead, you have a whole group of independent funds, which are governed by a single governing body, usually elected officials, but not always. Each one of those funds is a separate legal and accounting entity; each one is self-balancing, with its own set of books."

Frates "paints a verbal picture" to make his point.

"Imagine a business's books as a coffee can," he said. "You have money coming in and money going out. If you have more money coming in than going out, what you have left over is your profit.

"Government accounting is different. A government entity has many coffee cans -- funds -- and money comes in and goes out. A big government entity may have hundreds, even thousands of coffee cans. What money is allowed to go into a particular coffee can is determined by law -- and you can't just take money from one and put it in another. The general fund can take money from anywhere -- taxes, fees, assessments -- and so on, but the debt service fund can only take money from certain sources, the revenue fund can only take it from certain revenues, a special assessment fund can only take it from that particular assessment."

Frates deplored the "creativity" on the part of officials to evade restrictions on how funds get money, how it is spent, and the way money is transferred between funds -- all of which makes for confusion on the part of the public if and when they learn about it.

An example: "Say a city council passes an ordinance assessing every piece of property $10 a month for a street lamp fund, to be used only for street lamps. There's a lot of creativity in how money is moved between funds. A city manager may decide to charge off some of his hours to the street lighting fund or the hours of the crew, since they change the light bulbs. So instead of money being budgeted from the general fund, it comes out of the street lamp fund.

"So you can see what starts to happen. They charge various other sorts of expenses to the street light fund, and pretty soon you have a real plate of spaghetti in the city budget," he said. "You have money flowing all over the place."

Where do CAFRs fit into this?

Budgets, CAFRs and other government financial reports are essentially "snapshots of particular moments in time," said Frates. "The whole fund accounting game is not driven so much by accounting principles as by the legal requirements mandated primarily by state legislatures and the federal government."

The budget is the financial plan for the governing entity -- what the city, county, water district, and so on wants to do in the coming year; the CAFR is a "snapshot" of all the funds at the beginning of the fiscal year and tells what happened in the preceding year.

The theory is good; the reality leaves a lot to be desired -- as Walter Burien and others have discovered. Rather than enlightenment, the use of CAFRs has resulted in obfuscation and confusion, some of it deliberate.

Though Frates finds the subject "fascinating," he realizes that "Government finance isn't the most fascinating subject in the world for most people -- their eyes glaze over -- you sort of have to have brass eyeballs to wade through something like a CAFR, with its long columns of numbers and all those funds."

It wasn't meant to be like this. It wasn't meant to be incomprehensible or a means of providing a vehicle for the questionable activities of officials.

"Fund accounting was part of a reform movement," explained John Sacco, who teaches government accounting and financing at George Mason University in Virginia.

"It was a very popular idea, intended as a way of keeping legislative control over public money," he said. "During the 'spoils era,' before the turn of the century, bonds might be sold for one purpose, but administrators could do anything they wanted with the proceeds. Legislators figured they'd put moneys into funds and they couldn't be used for any other purpose."

Governments set up funds: general funds, capital project funds for large projects, a road funds, debt service funds, and so on.

Contrary to Burien's assertion that CAFRs present a complete account of government revenues, in Sacco's view the biggest problem with CAFRs is that they give an "incomplete picture" of a government's overall fiscal health.

"A county may have a fund for a library, one for a museum -- but you only know what's in that fund and how that fund is doing -- and you only know for that year because fund accounting only keeps its data on an annual basis," he said.

According to Sacco, "The funds are never consolidated. You may have five, six, or 10 funds -- you can see how well each is doing, but that doesn't tell you how well the government as a whole is doing. You can't just add the balances of the funds, because unless you know where to compensate you'd find yourself double counting because transfers [of moneys] may be made between funds during the year and these are not shown in the CAFR.

"Fund accounting not only doesn't give a picture of the government as a whole, it only tells you what's happening in short periods of time, usually a year, and doesn't tell you about liabilities and long-term obligations like pensions -- that's a really big item -- or awards by juries in trials the government has lost or long-term debt. Say a fund borrows money from a banker -- say $10 million -- and that isn't due until five or 10 years from now. The proceeds -- the inflow of money -- are shown in the fund when it comes in, but the obligation to pay is put someplace else. That someplace else is called an 'account group.' If they don't have enough money to pay the $10 million, they force the accountant to balance the books by putting in a certain kind of number called 'amount to be provided.'"

Sacco pointed out that funds do suffer losses -- perhaps a loss in the value of stocks and bonds purchased. This shows up only with the fund.

"That loss is never factored in with the other funds," he said. It may turn out that another fund has losses or a deficit, "and if you add the two of them together you'd faint -- but you don't. Nobody adds them up. So nobody ever finds out," he observed sardonically.

"When you look at the long term liabilities the question is how do those liquid assets compare to the long term liabilities and the amount to be provided for debt obligations? There may be a lot of money, but governments have a lot of debt. And not only debt but maintenance kinds of expenses that they may or may not attend to. This kind of information is very difficult to get from a CAFR," he said.

And it shouldn't be difficult.

Snow Hume, a CPA in Southern California, who has served as a consultant for the Rose Institute, can name several reforms he'd like to see implemented which he says would bring light to a dark subject and clear up a lot of confusion. Here are two:

  1. At the top of the list: budgets and financial reports should have the same reporting formats: same level of detail, same format. A businessperson should be able to look at both the budget and the CAFR and understand them. Every inter-fund transfer should be noted, all the revenues, all the bond proceeds.

    "That would be the fundamental reform, because right now they don't match. Why? They don't want you to be able to figure it out. It's called a moving target," he said.

    This isn't some "deep plot or vast conspiracy," Hume added, "but politicians and the bureaucrats who serve them know that in order to keep the activists and reformers at bay you have to set up huge informational hurdles -- in this case, CAFRs are unnecessarily complex and convoluted, which makes it difficult for people to get to the real policy issues."

  2. The second reform, Hume advocates, would be to have the CAFRs, budgets, and all other financial records -- including those for payments and disbursements -- posted on the Internet so people can follow the money trails of every entity, from state legislature down to the water district.

"They can do that now, but it's costly and time consuming," he said.


Walter Burien can be contacted by e-mail. For more on CAFRs click here
   
   

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