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For over a decade, accountant Walter Burien has been trying to rouse the public over what he contends is a massive conspiracy and cover-up, involving trillions of dollars squirreled away in funds maintained at every level of government. His numbers may be disputed, but these funds definitely exist, as evidenced by the Comprehensive Annual Financial Reports (CAFRs) required of every government agency. If they don't represent a concerted government conspiracy, what are they for? And how can they be harnessed more efficiently to help allay the financial crises of state and local governments?
The Elusive CAFR Money
Burien is a former commodity trading adviser who has spent many years peering into government books. He notes that the government is composed of 54,000 different state, county, and local government entities, including school districts, public authorities, and the like; and that these entities all keep their financial assets in liquid investment funds, bond financing accounts and corporate stock portfolios. The only income that must be reported in government budgets is that from taxes, fines and fees; but the investments of government entities can be found in official annual reports (CAFRs), which must be filed with the federal government by local, county and state governments. These annual reports show that virtually every U.S. city, county, and state has vast amounts of money stashed away in surplus funds. Burien maintains that these slush funds have been kept concealed from taxpayers, even as taxes are being raised and citizens are being told to expect fewer government services.
It is hard to envision how all the municipal governments hording their excess money in separate funds could be complicit in a massive government conspiracy, but if that is not what is going on, why such an inefficient use of public monies?
A Simpler Explanation
I got a chance to ask that question in April, when I was invited to speak at a conference of Government Finance Officers in Missouri. The friendly public servants at the conference explained that maintaining large "rainy day" funds is simply how local governments must operate. Unlike private businesses, which have bank credit lines they can draw on if they miscalculate their expenses, local governments are required by law to balance their budgets; and if they come up short, public services and government payrolls may be frozen until the voters get around to approving a new bond issue. This has actually happened, bringing local government to a standstill. In emergencies, government officials can try to borrow short-term through "certificates of participation" or tax participation loans, but the interest rates are prohibitively high; and in today's tight credit market, finding willing lenders is difficult.
To avoid those unpredictable contingencies, municipal governments will keep a cushion of from 20% to 75% more than their budgets actually require. This money is invested, but not necessarily lucratively. One finance officer, for example, said that her city had just bid out $2 million as a 30-day certificate of deposit (CD) to two large banks at a meager annual interest of 0.11%. It was a nice spread for the banks, which could leverage the money into loans at 6% or so; but it was a pretty sparse deal for the city.
Meanwhile, Back in California
That was in Missouri, but the figures I was particularly interested were for my own state of California, which was struggling with a budget deficit of $26.3 billion as of April 2010. Yet the State Treasurer's website says that he manages a Pooled Money Investment Account (PMIA) tallying in at nearly $71 billion as of the same date, including a Local Agency Investment Fund (LAIF) of $24 billion. Why isn't this money being used toward the state's deficit? The Treasurer's answer to this question, which he evidently gets frequently, is that legislation forbids it. His website states:
"Can the State borrow LAIF dollars to resolve the budget deficit?
"No. California Government Code 16429.3 states that monies placed
with the Treasurer for deposit in the LAIF by cities, counties, special
districts, nonprofit corporations, or qualified quasi-governmental agencies
shall not be subject to either of the following:
"(a) Transfer or loan pursuant to Sections 16310, 16312, or 16313.
"(b) Impoundment or seizure by any state official or state agency."
The non-LAIF money in the pool can't be spent either. It can be borrowed, but it has to be paid back. When Governor Schwarzenegger tried to raid the Public Transportation Account for the state budget, the California Transit Association took him to court and won. The Third District Court of Appeals ruled in June 2009 that diversions from the Public Transportation Account to fill non-transit holes in the General Fund violated a series of statutory and constitutional amendments enacted by voters via four statewide initiatives dating back to 1990.
In short, the use of these funds for the state budget has been blocked by the voters themselves. Bond issues are approved for particular purposes. When excess funds are collected, they are not handed over to the State toward next year's budget. They just sit idly in an earmarked fund, drawing a modest interest.
What's Wrong with This Picture?
California's budget problems have caused its credit rating to be downgraded to just above that of Greece, driving the state's interest tab skyward. In November 2009, the state sold 30-year taxable securities carrying an interest rate of 7.26%. Yet California has never defaulted on its bonds. Meanwhile, the too-big-to-fail banks, which would have defaulted on hundreds of billions of dollars of debt if they had not been bailed out by the states and their citizens, are able to borrow from each other at the extremely low federal funds rate, currently set at 0 to .25% (one quarter of one percent). The banks are also paying the states quite minimal rates for the use of their public monies, and turning around and relending this money, leveraged many times over, to the states and their citizens at much higher rates. That is assuming they lend at all, something they are increasingly reluctant to do, since speculating with the money is more lucrative, and investing it in federal securities is more secure.
Private banks clearly have the upper hand in this game. Local governments have been forced to horde funds in very inefficient ways, building excessive reserves while slashing services, because they do not have the extensive credit lines available to the private banking system. States cannot easily incur new debt without voter approval, a process that is cumbersome, time-consuming and uncertain. Banks, on the other hand, need to keep only the slimmest of reserves, because they are backstopped by a central bank with the power to create all the reserves necessary for its member banks, as well as by Congress and the taxpayers themselves, who have been arm-twisted into repeated bailouts of the Wall Street behemoths.
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