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Secret 'slush funds'
new government scam
Hoarding has escalated in the 1990s
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Editor's note: This is the second of a two-part series..
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By Sarah Foster
© 1999 WorldNetDaily.com
"State and local governments may be hoarding billions of taxpayer dollars and reaping large profits from those unspent tax revenues at the same time public officials are crying how poor they are and demanding that taxpayers be forced to pay increased taxes."
No, those aren't the words of whistleblower Walter Burien They're from the Sacramento Union for July 16, 1993, announcing a study that had just been released by Richard Gann, son of the late Paul Gann, co-author of the property tax-cutting Proposition 13, and research consultants Sherry Curtis and Bonnie Kibbee. At the time, Richard Gann was president of the Sacramento-based Paul Gann Citizens Committee -- a non-profit, public policy organization dedicated to protecting Proposition 13 and investigating waste and fraud in state and local government.
Gann said Curtis and Kibbee had uncovered more than $60 billion worth of taxpayer funds squirreled away by state and local officials in various money-pools. The study was based on a number of randomly selected government agencies, and Gann estimated that as much as $150 billion was being hoarded.
Money hoarding apparently was a relatively new practice. Gann noted that California state revenues in a so-called money pool had ballooned from $5.2 billion to $21.89 billion in 10 years; while Sacramento County money pool funds skyrocketed from $385 million to $1.5 billion in six years, and San Diego County money pool funds had risen from $644 million to $2.9 billion from 1984 to 1993.
The money for the hoards comes from property taxes, sales taxes, user fees, development fees, mitigation fees, benefit and assessment fees -- and bond proceeds. This is invested in banks and other institutions and generates considerable money for government.
"As a result of this newfound revenue source, an abusive and dangerous trend has developed in which billions of dollars in tax and bond proceeds are being questionably collected and unconscionably hoarded for government revenue building purposes, rather than for their originally approved budget and capital-outlay purposes," Gann told the Union.
For corroboration of Burien's findings, WorldNetDaily contacted Gann and Curtis. Kibbee passed away, and Gann had closed his organization last year to return to the business community, but he was available for comment.
"That's what we discovered," Gann said, when asked if his findings compared to those of Burien's. "We estimated at least $150 billion throughout the state of California, at the state and local government level, in investment money pools. What happens is people approve a bond sale for capital improvements, bonds are issued but instead of making the capital improvement right away, they [the government agency] take the money and invest it. Sales tax increases that are supposed to pay for repairing earthquake damage is invested.
"Their motivation is that they can't access the money for any reason other than what it's budgeted for -- but if they invest it they can earn million of dollars in interest and investment earnings on it. They can skim that off and they use that on pet projects. The interest is spent, but the original principal -- the taxes that were collected and the bond proceeds -- just sits there.
"It's not built into the budget because investment earnings aren't part of the budgetary process. It's very clever. The problem is, it's legal."
Gann and his consultants also discovered another "scam" identified by Burien: Governments invest in each other.
"They buy government backed bonds and government investments," Gann said. "So every time they sell government-backed bonds, the biggest buyers are the government investment money pools. It's a vicious cycle. They're creating the money to go out and buy more debt to incur more debt.
"It's really scary," he added.
Gann recalled that he announced his findings a year in advance of the Orange County, Calif., bankruptcy, but had been issuing warnings and making predictions even earlier.
"Nothing happened," Gann said. "The Orange County treasurer, Bob Citron, was able to paint himself as a hero and made us out as crazy: 'How can they object? We're making the taxpayers billions of dollars in interest.'"
Curtis, an independent consultant on land use and local government finance, too, concurred with Burien's findings.
"I scanned the articles [about Burien]; my impression is that he has an accurate understanding of the situation," she said. "He goes beyond what we found and were attempting to show. We were looking strictly for the excess cash that was there, which he discovered."
Interestingly, Gann and Curtis did not obtain their data from the Comprehensive Annual Financial Reports. In fact, until queried by WorldNetDaily, neither had heard about them in all their decades of experience with state and local government. This lends a great deal of substance to Burien's charge that the existence of CAFRs is kept shrouded in secrecy by bureaucrats.
Rather than CAFRs, Curtis and Gann relied on another arcane public document: the Audited Financial Statements.
"We obtained the audited financial statements, which showed specifically undesignated" money stashed away in investments. We went to the city, to the state, to the school districts, and we looked at probably 12 percent of the different types of governments and found about $250 million -- just looking at undesignated cash. Then we looked at the investment portfolios. Those are public record.
"The report that Burien was looking at [the CAFR] included a lot more than we looked at," she said.
Curtis recalled that the various entities were investing huge sums of money for much longer than the short-term (30 days to a year) accounts -- which is what a city is supposed to do with its income.
"The average term of investment was four to five years, some as long as 10 years," she said. "These were moneys pulled out of the general fund, the normal budgetary cycle of an annual budget that you make up, collecting money from taxpayers to run your government with. That's the general fund.
"What this did was remove those moneys from the budgetary cycle -- so they had them, but they weren't available to spend for services, which is what people thought they were paying taxes for," she said, adding, "This money wasn't from bond sales, but from property taxes, sales taxes, fees, charges and assessments."
"It's outrageous," she exclaimed.
Citizens across the country agree, as Walter Burien discovered. But changing the situation will prove harder than CAFR reforms, one of which is to make changes in reporting methods. Stopping the creation of "slush funds" will be a lot more difficult: it's a government fiscal reform that politicians, bureaucrats and some very influential people love.
Observes Eric Norby, "The problem is that if we took all the cash that Burien is talking about and paid the debt off, we have a whole group of people -- not evil people -- but people who make money off interest. In our private lives it's the credit card companies. A lot of people out there are making money off government debt and investments."
Says Snow Hume, "If bonded indebtedness were subjected to popular vote you wouldn't have those huge reserves of money sitting around in different funds, because local government wouldn't be able to go borrow money. Right now they can borrow far too easily.
"The reason they do borrow is so they can invest it and then get campaign contributions from the people involved in the securities market. Then they spend the money and get contributions from developers and the construction people. You can never stop that completely, but you can slow it down.
"Governments should have to beg for money," Hume said.
As for the money itself -- what's already there in the funds -- the consensus is it should be spent for what it was intended or returned to the people in the form of tax cuts or possibly a rebate.
Burien has his own proposal: an initiative which includes the development of a Citizens Trust Investment Account, as he advocated in Arkansas recently.
As explained to WorldNetDaily, "Under the initiative there would be no new bond issuances. Cash and carry only -- essentially using the money now accumulated in the funds. There would be a 25 percent downsizing of the revenue structure of a state government. Along with the initiative, the 25 percent downsizing would be reappropriated annually into a Citizens Trust Investment Account, whereby the citizen after about eight to 12 years participation in the system, his interest and dividend yield would cancel out his tax liability. After 12 years of having no tax liability, he gets a dividend check that accrues each year till the day he dies."
The idea of a citizen's trust fund is not without precedence, says Lynn Martin -- who recently met Burien. Martin, who now lives in Arizona, was for many years with the oil industry in Alaska, and is familiar with the income generated there each year by the oil production and the pipeline. He helped set up the Permanent Fund, which pays about $1,500 a year to every Alaskan resident. The oil funds and the pipeline make a huge amount of money, and this is invested.
"The money from the oil is paid to the residents up front before the remainder is invested," Martin explains. "So the fund keeps growing and growing, and the investment income cannot be touched."
But now there are problems: the fund is so tightly restricted "It would be much harder to touch that fund and spend the money than it would be to raise taxes," said Martin. So Alaska is contemplating having a state sales tax and a state income tax.
"Which is ridiculous," he says. "They should start spending some of that money."
Martin agrees with Burien that "the entities that have the millions and perhaps trillions of dollars in funds could do what Alaska does -- set up their own Permanent Fund and pay dividends to the taxpayers.
"At what point do we stop building these large funds and spend some of this money instead of increasing taxes?" he asks. "When is the time to spend some of the money? It's a good thing to have reserves, and it's a good thing to invest the money. But the time has come for some of these funds to be loosened so they [the entities] can start spending the money on programs and services and not increasing taxes."
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