While most Americans assume that local, state and the federal governments are non-profit organizations operating on a "pay-as-you-go" basis, a fair study of the CAFRs show that this is simply not the case. Klatt maintains that -- except for retirement/pension funds - they should be, and further, that reform of the CAFR system properly belongs to experienced accountants and not to lawyers.
According to the Institute for Truth in Accounting - which focuses on the budget portion of the Governmental Funds CAFR category - major operational budgeting problems stem both from the fact that most such budget reports are not released in a timely fashion and also because most state budgets employ two different accounting mechanisms for the CAFR accounting categories. The accrual accounting method is used for the fiduciary and proprietary funds, while the modified accrual method (which is very similar to the cash-based or pay-as-you-go method) is applied to the Governmental Funds category.
While there would be no significant difference between accrual based and cash based budgeting for transactions such as grant payments, salaries and other general expenditures, the situation changes when it comes to long-term assets such as infrastructure or commitments such as post-employment health care benefits which are typically handled in the operational budget. In these cases, says the IFTA, "an accrual budget would recognize costs earlier, when the commitment is made, and thus enhance the legislature's ability to understand and control these costs." This is because the "accrual system's major goal is to properly define and match revenues with the actual costs and expenses incurred during the fiscal period."
Klatt, in apparent partial opposition to certain IFTA positions, maintains that governmental entities should operate on a zero based budgeting procedure, with little or no cash and investments on hand at the end of each fiscal year. However, and while not specifically addre ssing accrual accounting, Klatt essentially agrees with IFTA's relevant points when he writes: "Budgeted expenditures should be last year's expenditures (as shown in the CAFR) with an adjustment for increase in requirements (costed out) or reductions in requirements." In other words, revenues should be properly defined and matched with the actual costs and expenses incurred during the fiscal period.
Mr. Klatt's research sheds important light on the little understood CAFRs by explaining in clear terms the manner in which profit centers are often set up under fund categories that are separate from the reported budget. This is accomplished by applying unrecognized surpluses carried over from previous budgets - and within funds themselves - toward the purchase of a variety of investment vehicles. This situation goes a long way towards explaining charges of government corporatism, oligarchy and even fascism running through the public discourse.
No small degree of credibility is given to theses charges when one understands that - just as increasing numbers of municipalities have been incorporating themselves [1] [2] over the past few decades - so too are increasing numbers of governmental agencies and even pension systems organizing themselves under corporate charters. Most participate in global financial opportunities and some are themselves organizing under international guidelines for corporations, apparently in order to gain greater unfettered access to international markets.
For example, on March 18, 1996 the California Public Employee Retirement System adopted an international corporate governance program "designed to increase returns on the System's international equity portfolio [which could potentially] generate an additional half billion dollars annually." A few months later, on December 18 , Calpers "announced an historic partnership with the prestigious Asian Development Bank (ADB) to make long-term, direct private equity investments in the emerging markets of the Asian-Pacific region."
Describing itself as "the largest U.S. public pension fund, with assets totaling $201 billion spanning domestic and international markets as of February 28, 2010," it stated in a 2004 document on its global corporate governance principles that "[a]t Calpers, corporate governance is about making money, not changing the political or social environment." Proving its point in 2007, Calpers, as "the 13th largest holder of Berkshire Hathaway stock, sided against an investor who want[ed] Berkshire to sell its stake in PetroChina as a statement against violence in Sudan."
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