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Capital, Rainy Day Funds, and Deserts

Generally and briefly, capital has different meanings, dependent on the macroeconomic context:

  1. Proprietary / private sector organizations, including publicly traded companies, have a shareholders’ equity set of accounts.
  2. Not-for-profit organizations, other than public sector organizations, have a set of net asset accounts.
  3. Public sector organizations have a set of net position accounts.

Assuming accuracy and completeness of both the underlying material facts and the rules of interpretation and construction according to authoritative bodies, those numerical data summarize at a given point in time the accumulated status of economic resources available to the reporting entity. Where there is a credit balance (i.e., not in a condition of accumulated deficit but in a condition of accumulated surplus value), who owns and controls these residual interests? Shareholders? Governing boards? Public-at-large? Perhaps, conflating the ideas of ownership and control misleads. Consider that he / she who makes key operating decisions directs the flows of funds and resources.

Practicably, determination of whose resources contributed to the credit balance includes customers and employees, donors and funders, public officials and executive boards, taxpayers and granters, etc. Identifying the ultimate and proximate causes of the credit balance is a daunting endeavor. While great man theories are popular in many venues, the paths of development of economic enterprises cannot seriously be traceable to any one individual without omitting material facts and distorting selected ones. However, who pays for present and future operations where there is a debit balance of capital (that is, a condition of accumulated deficit)? Detroit? Jefferson County? Greece?

Commonly, where resources are overcommitted (that is, the value of the obligations exceeds the value of the rights to resources to settle these obligations), lenders may play a key role, though lenders do not increase capital in the senses described above. Specifically, a dollar of borrowed cash increases assets and liabilities by a dollar (that is, debits equal credits). No surplus value is obtained immediately. In practice, from loan origination fees to periodic interest charges, the accounting effect, other things being equal, has a bias toward decreasing capital, though obligations due in the short- and near-term may be paid. These deferrals may be analogous to kicking the can down the road.

Putting aside interests of the fairness of policies of the reporting entity and the integrity of the accounting and supporting data, and assuming the reporting entity does not reduce the overhanging debts through agreement with lenders or legal process, a common material adverse effect of capital deficiency and lack of rainy day funds is the reformation of policy such that current and future users, customers, taxpayers, employees, etc. are required in net effect to subsidize past users, customers, taxpayers, employees, etc. The economic benefit was consumed yesterday, but the burden is carried today and tomorrow. Clean-up is a dirty job (compare the myth of Atlas).