12:33 PM -:- Posted by Allen    

CAFR -- Hidden Loot?

Doug Kenline and others have asked my opinion on CAFRs -Comprehensive Annual Financial Reports. As requested, I looked at Walter J. Burien, Jr.'s site.

I noted the rather sensationalist headline right away: "The Biggest Shell Game For Theft In This World's History!" But then I did see that the tag line, "Organized Government at all levels holds back it's [sic] Financial Statement from the people of America for over 50 years!", which implies serious wrong-doing and promises to justify the headline. Ultimately, although a couple of interesting questions are raised by the subject in general, the sensationalism and professed outrage of the site in general are not justified.

Overall, the thrust of Burien's argument is, in his own words, "There is enough aggregate wealth owned by our government agencies to abolish ALL property and income taxes TODAY." That's not exactly true.

We must understand what a CAFR is and is not.

True, all government financial info should be public. And if you know how to find it, it is. But I must admit, when you consider that there are people like Burien out there who will twist and exagerrate things all out of proportion, I can understand why this information can be kept hard to find.

Allow me to illustrate.

Suppose you had a few stocks and bonds set aside for your retirerement. And a partial investment in a small real estate syndicate that builds and manages local strip malls. And let's suppose that you have a loser cousin who lives by "borrowing" from the rest of the family, seldom paying back more than a few pennies on the dollar.

You also have a monthly budget. Into it go all your earnings, and from it you pay all your bills and make a small deposit into your savings account. Whenever your savings account gets big enough, you move the money into stocks, etc, hoping for a little extra growth in your retirement fund. (You really must do this if you understand the econimics of our world; otherwise inflation will eat away at your nest egg through the years and it could be worthless when you get to retirment. So you put it into appreciable investments: stocks, interest-bearing bonds, and real estate.)

Now your cousin comes a-beggin' for $100 to tide him over until the next big thing falls into his lap. You show him your budget for the week and how there's not enough coming in compared to what's going out to leave room for you to skim a hundred off for him. He notices that you have $25 earmarked for savings, and he asks for it, 'cause it would help some. You remind him that you've done that 5 times already, and that you told him last time you wouldn't do it again because he never repays, and you refuse. He goes away upset.

Your cousin gets to thinking about your budget. First he's just jealous of how much you make, but after a while, he gets to that "savings" item. And he realizes that it's always been there whenever you showed him your budget while he was asking for money. In fact, he actually has benefitted from that item 5 times in the past, and then it clicks: you set aside $25 a week, every week! $100 a month! And you've been doing it for years! B.S. you don't have any money! You must have a fortune under your mattress. How dare you deny him in his time of need?!!!

{Yes, I know, we tax saps are not the errant cousin, and tax money is technically our own, but please bear with me while I make my point. Then we can discuss the merits of Burien's argument.}

So your cousin snoops around. He has an alcoholic girlfriend at the local real easte office, and she mentions that you invest in a real estate syndicate and that it is worth millions. And his buddy the janitor at the bank has seen you coming out of the local stockbroker's office more than once. And it hits him: you're not saving the money, you're spending it on stocks and real estate!

Your cousin comes back to you spouting accusations of lying and deceit, saying you've been buying up real estate and playing the stock market, and that you could have helped him many times over if you only wanted to. You try to explain that it's your retirement money and it's invested. You don't own any yachts, you're not a member of some golf club, and you don't play among the jet set. You're just making sure that when you get to retirement you won't be a beggar too.

Your cousin asks you a few questions about your investments, and you explain it all to him, thinking that maybe finally he'll come to an understanding of what it takes to get by in the real world. You show him how the insurance guys say that you'll probably live 27 years after you retire; it will cost you $23,000 per each of those years in today's dollars, and you now have, halfway through your working career, 15 years covered in your security plan to have 30 years retirment money. You point out that you're getting it done right at the wire, that there won't be any extra at this rate, should you lose your insurance or live longer than 30 years you could still get into trouble. You hope that he will see that, given the long view, you really can't afford to toss away any money at all.

But all your cousin sees is the money. "15 years at 23K," he says to himself... "why, that's over $300 thousand!" You're rich! And selfish. And shortly after that is when you get the shock of your life. Instead of educating this dimwit, you've given him just enough information to be dangerous, but you never got enough wisdom through his thick skull not to be dangerous.

Two weeks later you find out that he's been telling everybody he knows that you're walking around with $300,000 and won't lend him a dime. And now you understand why every salesperson and con artist in town has suddenly started calling you.

What's my point? Most of what's in CAFRs is committed money that isn't part of today's budget. It's an allocation from years past, set aside for years ahead.

It's the transportation fund we voted in six years ago to build a new bridge over the river to the next town. Sure, the bridge has already been built, but we did that by floating a ten-year bond. And when that bond comes due in four years, we'll need to have the money on hand to redeem it, with interest. How else did you think we built a 16 million-dollar bridge and only raised your taxes $23 a month?

It's the building maintenance fund for the school district, because we're planning ahead for a total remodel in five years when the building codes will change and the building itself will be old enough to need sevral renovations anyway.

It's the retirement fund for everyone who ever worked for the city: part of our promise to them that if they'd give up the option of ever becoming billionaire CEOs, we'd take care of them later if they'd make sure our streets stayed paved and our kids were safe and our houses didn't burn all the way to the ground in a disaster.

{Yes, I am talking about the ideal here, not the real-world that has come to be, but then, I haven't given up on getting it back.}

In short, those items in the CAFRs are not money we can just pull out and spend. Not if we want our long-term municipal (or county, state and federal) projects to be funded. And not if we don't want to rip off our hard-working dedicated civil servants. {Okay, okay... a little joke now and then is a good thing!}

I've looked at the 2001 California CAFR page, accessible through Burien's site. At a glance you can see that what I'm talking about is true. Most of the money is past investment in future obligations.

My impression? Mr Burien hasn't thought this thing through. He is saying that we should just go out and spend all this money, put an end to taxes. But if we do, we'll suffer horribly later when our construction bonds come due and we have to massively self-assess to pay in a single chunk what we used to cover with a savings account. And our public retiement obligation will become just another unfunded liability like social security, and we'll have to tax ourselves even more heavily as more and more public employees retire and these's no fund set aside to take care of them. Every time we need a new fire truck or police car we'll have to hold a bake sale, just like they did a hundred years ago. And Mr. Burien is not being very bright when he accuses the government of "spending" the money on real estate and such. Like your fictional cousin above, he just doesn't get that it's not spending, it's investing, and that the interst he's so jealous of has been figured into the calculation of how much to tax now against probable need in the future.

However, having said that, it is true that some CAFR funds are discretionary, and a few are actually nothing more than buffers and rainy-day hide-aways. But if the're there to cover disaster stuff, like bulidings damaged in earthquakes and hurricanes, roads damaged in earhtquakes and floods, and other unexpected things, then that is not spendable money either.

Not that there is no problem at all. These funds do get raided now and then. And there might be even better ways to accomplish what these funds were set up to do. See Catherine Austin Fitts for more on that.

My Conclusion: There's not much here wheen you get right down to it.

The government isn't keeping double books. It has a budget, and a liabilities-investment portfolio. We should all be so diligent in securing our future.

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