The Department of Health and several smaller units like the State Board of Accountancy and the State Board of Embalmers also maintain their own treasuries. The balances vary during the year from almost nothing to several hundred thousand dollars.

This situation is undesirable from several points of view. The most obvious is that it reduces the cash balance in the State treasury and increases borrowing. It is far more significant, however, that in these various institutions where separate treasuries exist, it is a much more difficult problem for the institutional accounting staff and treasurer to keep their books and documents in proper order and the problem of supervision and auditing is a very much more difficult one.

The Treasury Problem in its Relation to Accounting and Auditing Problems: It is to be noted that the institutions that have separate cash accounts, aside from petty cash accounts, are on the whole treated as if they were independent of the rest of the State government and as if the money appropriated to them were given as a grant to be used as they see fit. The present situation in Kentucky is particularly inconsistent and illogical in that the normal schools, for example, which are strictly public institutions, receive money from the treasury in lump sums as it is collected and are not required to make any accounting for this money to the office of the Auditor of Public Accounts, while State-aided institutions, like the Children's Home Society, are required to go through the form of presenting vouchers covering the money which is issued to them under State appropriations. The practice of issuing money in lump sum cannot be justified in the case of State institutions unless a current audit is provided in some other way than at the time the money is withdrawn. The practice of requiring vouchers from State-aided institutions cannot be criticized except on the ground that it is largely futile to require a current accounting of this kind for only a part of the moneys which the institution expends.

The removal of the present inconsistency in this matter is

by no means an unimportant problem. The central fiscal of fice should have an important function. A thorough accounting and a complete check on all transactions is certainly necessary in all departments and institutions alike. Such a check can be made effectively and can be of material assistance in preventing departmental and institutional officers from permitting irregularities and mishandling public moneys only if it is made currently in connection with the financial operations of the institutions. It is a simple matter to provide a machinery for audit and central supervision where the central officers of the State are required to take part in each financial transaction that takes place while if the central officers are not brought into such direct contact with the financial management of departments and institutions, it is likely that the most important questions of the accounting and financial management will be dealt with by persons who are wholly unqualified to handle such difficult problems and the institution will not be subject to any adequate audit control.

The decentralized method may appear to be the simple and easy one in that the money does not have to be recorded on the books of the officers at Frankfort, but as a matter of fact, it is a source of unending difficulty, since the institution. must keep far more elaborate accounts than would be necessary merely to record their receipts deposited with the State treasury and their expenditures made through the State treasury. If the problem of institutional accounting and financial control is to be simplified to such a point that it is safe to assume that the institutions can handle it in at least a fairly creditable manner, the depositing of all receipts in the State treasury must be required.

Unless there is some law to the contrary, it will always be found that State departments and institutions will retain miscellaneous income and expend it for their own use without authority of any appropriation act. Even when there is a law it may be evaded sometimes. Most of the income from the State departments at Frankfort is provided for by laws which state that the money shall be deposited in the treasury

but there still are numerous miscellaneous receipts of institutions which may be retained by them to meet their own expenses. Each of the institutions listed above has miscellaneous income of its own which it takes in and expends without the money being placed in the general State treasury at any time.

The Treasury Problem in its Relation to the Budget Procedure: The preceding comments have referred to the need for centralization of the treasury system in order to simplify the procedure in the institutions, facilitate auditing, and maintain the largest possible cash balance in the State treasury, Although these ends are in themselves deserving of every consideration, there are still other important reasons why all money should be deposited in the State treasury and should be expended from the State treasury only as required to pay claims or to reimburse authorized disbursing officers who have made expenditures. If the money is retained by the institution and expended by it without passing through the State treasury or if the money passes through the treasury and is sent to the institution in lump sum like the special levies for the normal schools, there is no practical means for the Legislature to exercise the control attempted with respect to other state expenditures. If the money does not pass through and remain in the treasury, it may be assumed that it will not be covered by the annual appropriation act. The tax levies for the normal schools are not covered by the annual appropriation act nor are the miscellaneous receipts of these and other institutions.

It is difficult to justify any expenditures authorized on a statutory basis, that is, on a continuing basis which does not require reconsideration and readjustment of amounts each time the Legislature makes appropriations. It is even more difficult to justify a complete ignoring of miscellaneous receipts of institutions and permitting them to be retained by the institutions and expended without even statutory authority.

Central Disbursements: Experience in other States has

amply justified the conclusion that the only practicable means of securing a current control through the appropriation act and current supervision by fiscal officers is to have the actual cash which is collected in all cases pass through the State treasury and be disbursed from the State treasury to meet the requirements of the various institutions as they arise. This is the system now employed by the State Board of Charities and Corrections which operates institutions in all parts of the State of Kentucky. The experience of this Board indicates that it is practicable to centralize disbursements at Frankfort, assuming, of course, that designated disbursing offices will be provided with petty cash funds.

The device of employing designated officers in the institutions as disbursing officers to make payments subject to the renewal of their imprest funds is one which can be adapted to any type of local situation. In the case of the University and the normal schools it might be justified to make all payments through a local disbursing officer. Such an arrangement, however, if properly planned in conformity with the well established and relatively simple principles upon which imprest funds are operated, would in no respect complicate the problem or reduce the value of centralizing the treasury system of the State.

Conclusions and Recommendations: In conclusion it may be said that a central treasury system should mean a greatly simplified and more effective audit procedure and a degree of assistance to the various institutions by the central fiscal officers which will make it impossible for serious mismanagement of accounting and financial affairs to occur. It will also permit an appropriation procedure whereby the Legislature will consider all of the needs of the State government and all of the revenues available and can apportion the revenues on a basis which will give special favors to none and will require strict accountability and proof as to the need for every dollar.

In order to realize these advantages it is recommended that legislation be enacted requiring all receipts and balances of

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.