I'm not saying that Larry Nichols experience isn't a valuable insight. Undoubtedly, the government does engage in financial shenanigans and Larry was a presidential insider while my DC experience was as a Captain working on the nuclear planning system in the basement of The Pentagon. Things have changed over the last 20 years and the financial reports show that States are more reliant than ever on the Federal government.
Larry suggests that a State would be no worse off in losing Federal funding by not sending the dollars to DC to begin with. That is not the picture that the Financial Report of the United States and the CAFRs of the 50 States paints for us.
I'll take you through the numbers, including the gasoline tax and rainy day fund that Larry mentioned on September 1st. Once I run the numbers for you, we'll see a couple of possibilities:
1. The States receive about 40% of their income from the Federal Government. There is no record of this money being sent to DC by the State before being sent back. The loss of 40% of income means that other sources of State income would need to be raised by 66% to make up the difference.
2. There is a $1 trillion conspiracy being perpetrated by the United States government, the governments of the 50 States, the banks holding the accounts for these governments, and the auditing firms. There is a trillion dollars being received by the States and recorded by the Federal Government. There is no record of the States collecting that trillion dollars, nor receipt by the Federal Government. This would give the Federal Government an off the books slush fund of a trillion dollars a year.
Let's start with how much the Federal government receives by State and the amount the State (as a whole) gets back.
This Wiki article shows the amounts by State totaling about $3 trillion in Federal revenue and $2.7 trillion going into a State (this includes Social Security and Medicare). If you notice the notes (6 and 7) for these columns provide links to government sources.
Note 6 takes us to an IRS spreadsheet detailing the sources of income. The $3 trillion comes mostly from personal income taxes and Social Security and Medicare payroll and self-employment taxes. Corporate income taxes are a distant second, and estate, gift, and excise taxes make up the rest.
This IRS spreadsheet does leave out some minor sources of income (like customs duties) as we see on PDF page 60 of the FY 2014 Financial Report of the United States.
Either way we're looking at a rounded amount of $3.07 trillion with no major source of income coming directly from a State government.
Note 7 from the Wiki article is a government website showing where the money goes. Click on the Spending Map to follow along.
First select FY 2014 for the Fiscal Year and hit Go. You'll see a total of $2.758 trillion in spending (this does not include expenses not allocated by State like interest and foreign spending, so we can't easily tie back to the financial report, but it looks reasonable).
This is as far as we can go as a whole. We need to look at the State level for the rest of the picture.
I'm mostly going to use Texas as an example, so go ahead and select Texas as the State and click Go again. You see $147 billion as reported in the Wiki article (note - reports are often revised, so it is normal to see slight differences between an early report vs what the sources says the numbers are now). This is all the spending going into a State, not just the spending going to the State government.
Unfortunately it's not as easy as putting State of Texas as the recipient to see how much the State government receives. For that we have to turn to the Comprehensive Annual Financial Report (CAFR). We'll be using FY 2014 for this exercise.
Page 40 of the PDF shows total revenue for the General Fund of $92.2 billion. $45.4 billion came from taxes, $36.3 billion came from the Feds meaning that about 39% of the General Fund. Looking at Totals we see $109.9 billion in Revenue with $51.4 from taxes and $39.8 from the Feds for a percent of revenue of 36%.
If the State were to lose all Federal funds, they would have to increase all other revenue by 58% to make up the difference based on combined Total Revenues.
The assets and liabilities give us a hint of the Federal in and out flows. PDF page 42 of the CAFR shows total Federal receivables at $852.4 million. At the bottom of the page we see Federal liabilities of $1.9 million. While this is just a snapshot, it it consistent with the rest of the report that the State received far more from the Fed than the State government sends to the Fed.
What if only a portion of Federal funds were withheld, for example Highway funds? On PDF page 40 we see $3.4 million coming in from the Feds for the State Highway Fund. That's the largest single revenue item for the highway fund providing 45% of the total, but just 8.5% of Federal funding, and 3% of Total Revenue. To make up that 3% loss, the other Texas sources of revenue would have to increase 4.8%.
Let's take a closer look at revenues.
This webpage has a nice breakdown of Texas' revenues. Note - this source does not include trust funds, so we can't tie it directly to the CAFR.
We see that Federal revenue is the largest line item at about a third of total revenue. The #2 source is Sales Tax at 26% of revenue.
Larry specifically mentioned two sources - gasoline tax and the "rainy day fund."
Here we see the Motor Fuels Taxes coming in at $3.3 billion. While that does represent about 3% of total revenue, it's just a fraction of the $34.3 billion received from the Feds.
So what does the "rainy day fund" look like?
The Economic Stabilization Fund (ESF) is the formal name for the rainy day fund. For FY 2014 we see about $2.5 billion transferred in, $2 billion transferred out, and a balance of $6.7 billion. So if Texas lost all Federal funding, the ESF could make up for less than 17% of the loss.
Keep in mind we've only been looking at the CAFR for the State of Texas. Texas has 254 counties. Each county has a county seat. I'd say that each county has at least one school district (there are several school districts just in Dallas County). Other entities include cities, water districts, MTAs, and on and on. Suffice it to say, there are thousands of governmental entities in Texas and I'd say at least a thousand of them receive some kind of Federal funding.
The point is, if Texas got into a battle with the Federal Government and lost all Federal funding (including funding to local governments), then the financial hit to the State would be far worse than what I've detailed here.
New Mexico is in even worse shape. We'll be looking at PDF pages 49 and 50 for the revenues.
For the General Fund, $5.3 billion comes from the Fed, they have total taxes of just $5 billion. It's slightly better in Total as tax revenue from all funds is $5.6 billion. That means that Federal funds make up 42% of the $14 billion total revenue. A loss of Federal Funds would mean increasing all other revenue sources by 72%.
Texas and New Mexico combined received $45 billion from the Feds in FY 2014. I choose a large state and a small state in hopes of getting a decent average without having to look at 50 CAFRs. If we multiply that times 25, we get a number over $1 trillion that State governments (the main entities) receive in a year.
Let's consider "black" projects for a moment. The work for these highly classified projects is compartmentalized so that workers don't know what they're working on. However, these projects require money and there is a record of that. These funds may be hidden under another account, but the money is "accounted" for.
If the States are collecting over a trillion dollars and sending it into the Federal Government, then we do have quite a conspiracy to uncover. These funds collected by the States are not reflected in the CAFRs. Money is transmitted between bank accounts, so banks are involved. The auditing firms would have to miss all this revenue into the States and the transfers to the Feds.
On the Federal level, that $1 trillion is not shown as revenue in the Financial Report of the United States. This would mean there is an undocumented trillion dollar a year slush fund that the public should know about.
I doubt such a conspiracy exists. I also have no doubt that billions of dollars are used in ways most people would find repugnant. However, income and borrowing are tracked fairly well which makes total expenses (as a number) know as well. The use of the money is an entirely different matter.
States cannot print money and have limited borrowing options. I've shown that just loss of highway funds would be a significant blow to a State.
Loss of Federal Health and Human Services funding (food, medical, and housing) would be even more devastating. Loss of all Federal funding would be catastrophic.
If you want to tell a Governor that he can just hold on to funds vs. sending the money to the Feds, you'll need to show how that can be done and you'll have to counter the evidence in the audited financial reports.
I also want to address the issue of time.
We will not make it to the 2020 presidential election before debt service on our over $60 trillion in government/corporate/personal debt, plus government spending (Federal, State, and Local) eclipse total income. And those numbers assume interest rates don't rise.
This is an unprecedented event in human history, and since this simple formula doesn't include things like food, housing, transportation, medical, and any other expense you can think of, we don't have until 2020 before the day of reckoning gets here.
Technology and a 24x7 global economy means that economies will be affected quicker than ever. We can look to history as a guide, but so much has changed that's going to make the coming collapse worse than ever.
I don't think there's enough time left to get a couple of books published. That's why I've been working on "The Report" for the past few weeks.
A lifeboat is much more handy if you have one before the ship sinks.