which authorize the withdrawal of funds from the Treasury directly and indirectly.

Nevertheless, in considering the subject of the State's accounts the fact must be recognized that the most perfect budget system that could be devised would not be able to accomplish its purpose under the present accounting system. Significant defects of this system with respect to furnishing information as to expenditure authorization include the following:

1. There are no appropriation accounts. There are in the General Ledger of the Auditor's office occasional notations as to amounts of appropriations, but the value of such memoranda is negligible. The appropriation ledger should be and generally is recognized as the principal distinctive feature of government accounting. It has received more study and has possibly been more highly developed than any other one phase of government accounting, yet, in this State the results of research and experience are as little reflected in the accounting system as if they had never been. On this subject the ledgers are a complete blank.

2. Although necessity has compelled the maintenance of special revenue fund accounts in some form, no proper accounts for authorization of expenditures from these funds have been kept, and it has been attempted to make a single account for each special fund show information belonging to two or three distinct categories. It is to be hoped that the system of supporting public offices, partially or entirely, by allowing them to retain the fees or other special revenues collected by them will be abolished soon, and when this is done the difficulties as well as the defects of this group of accounts will be done away with automatically.

With reference to the major special funds-namely, those supported chiefly by an apportionment of the general property tax-it is sufficient to state that the statutes are not being obeyed, and that the amounts now annually credited to these funds are not the amounts which would be credited to them

under a faithful interpretation of the law. It is not intended to give the impression that the law governing the disposition of revenues is clear and that a failure to comply with the intentions of the lawmakers in this matter would be without excuse. Nevertheless, it is asserted that some of the most important and plainest provisions of the law are being violated. These violations come about in a number of ways, some of which may be enumerated:

(a) The system of calculating the apportionments and passing credits to funds is one which allows clerical errors to pass. For the year 1922-1923 these errors, while somewhat numerous, were not of great importance, the largest two being for $1,016.49 and $677.65.

(b) There is no one in the Auditor's Office who pretends to know the law on this subject or to be able to justify the formulas now in use. The assignment of revenues to funds is made by a single clerk, and without audit or review. Part of this assignment is done according to some informal notations on a sheet of paper kept in the front of the General Ledger, and handed down from one administration to another. The remainder of the distribution of revenues to funds is based upon traditions rather than any written instructions or memoranda. In both these distributions there are important and unquestionable departures from the statutory requirements.

(c) One of the most important instances of improper apportionment of revenues to funds (inheritance tax) rests upon a decision of the Court of Appeals. This decision clearly was based upon at least two fundamental misunderstandings of the facts in the case. The seriousness of this charge is recognized, but it cannot be avoided. As a partial explanation it should be stated that the State has not provided itself with a department of finance qualified to present the facts necessary to just decisions in technical cases such as this.

Information as to Receipts: The State does not obtain from the present accounts complete or accurate information as

to its revenues and other receipts, nor is the information now furnished recorded and reported under significant titles or classified and tabulated in such form as needed for legislative and administrative purposes. Defects with respect to this feature of the State's accounting include the following:

1. The receipts reported by the Auditor relate only to the treasury and omit an unknown amount of receipts retained by various agencies which collect and expend them without the control or even the knowledge of the government. Some of these receipts and expenditures are reported to the Budget Appropriation Commission while others are not.

2. The receipts reported by the Auditor include an unknown amount of correction entries which are not receipts at all. The inclusion of these mere bookkeeping entries is due both to the nature of the records and to the fact that actual warrants and deposits are used to transfer credits from one nominal account to another-another illustration of the crudeness of the present accounting system.

3. The Auditor's accounts and reports do not distinguish (except partially) true revenues from receipts in the nature of refunds and reimbursements of previous expenditures by the State.

4. The amounts reported by the Auditor for a particular year are not the correct totals for that year, but represent merely the amounts of receipts recorded in the General Ledger during that year; consequently the figures for a given year include some amounts actually received during the preceding year, and exclude other amounts actually received during the year reported upon but not entered in the books from which the statements are compiled. The figures for any one year may be and often are very far from correct.

5. The accounts and reports of the Auditor's Office do not furnish a classification of revenues as such, and it is impossible to obtain such a classification without an extensive if not com

plete voucher analysis. The whole purpose of the ledger in which revenues are recorded is to obtain the credits to funds. In consequence the only classification of revenues is such as is necessary to the fund distribution. For a large part of the State's revenues this means no classification at all. Because of the manner in which the special fund accounts are kept and because of such items as transfers between accounts, it is impossible to use a trial balance of the General Ledger to obtain a revenue or income statement.

Information as to Expenditures: The same conditions that affect receipt accounts operate to prevent the accounts of expenditures from being complete or accurate, viz;

1. The Auditor's accounts relate only to expenditures from State treasury.

2.

Corrections and transfers are included in the same totals with direct expenditures.

3. Yearly totals as shown by the Auditor's accounts and published in his reports do not include such expenditures as are not recorded in the General Ledger at the conclusion of the fiscal year and do include expenditures properly belonging to the preceding year. One effect of this practice is that expenditures incurred under the authorization of one year are paid out of those of the following year, which is essentially if not literally illegal. The other effect has already been mentioned, namely, that the State does not have for its own use or for public information correct statements of its fiscal operations for any period. It is just as possible and obligatory for the State to keep correct accounts and present true statements of its operations for fiscal years as it is for other institutions and business corporations using invested or contributed funds.

As to analyses and summaries of expenditures the Auditor's books furnish no significant data, and the only classification is such as is necessary in order charge fund accounts or to make comparisons with budget appropriations. On account of the

public money of departments and institutions to be deposited with the State Treasurer and providing for the creation of disbursing offices where necessary to make payments at points away from Frankfort. (This would mean, in effect, merely the substitution of the imprest fund system for the present system of private department and institution treasuries.)

Other related recommendations as to budget procedure, accounting, and auditing will be made as each of these subjects is considered below.

Financial Condition of the State and Borrowing Policy:

The Treasury Policy as to Funded Debt: The State of Kentucky has no true funded debt. It has a number of socalled bonds which represent merely nominal obligations, not intended to be paid. The bonds are owned by the School Fund, the University, and other educational agencies. In discussing the administration of the financial affairs of the State, therefore, these obligations will be entirely ignored, except as they affect the budget procedure considered in another chapter.

The policy of the State is evidently not to borrow under ordinary circumstances or without extremely urgent reasons. This is unquestionably a wise policy. It seems safe to say that most States that initiate a policy of borrowing for such purposes as, say, road construction, and the like, in the long run involve themselves in difficulties which are not compensated for by any benefits realized. One loan leads to another and, in fact, often so ties up current revenues for debt redemption and interest that future construction must be financed by further bond issues or discontinued. So far as the State fails to meet today's needs out of current revenues, it must make it up in the future or the interest charge will become a burden running into the millions and wholly unproductive of any benefits. The argument that the future generation is benefitted and should bear the costs is, of course, of little significance since bond redemption must begin immediately and is entirely completed within a few years.