United States GAO General Accounting Office Washington, D.C. 20548 Accounting and Information Management Division B-282561 April 20,1999 The Honorable Frank Lautenberg Ranking Minority Member Committee on the Budget United States Senate Subject: Emergencv Criteria: How Five States Budget for Uncertaintv Dear Senator Lautenberg: We are currently conducting a study at your request examining how states deal with uncertainty in their budget processes. To address this question, we selected five states- California, Delaware, Florida, Missouri, and Oklahoma-that have established reserve and/or contingency funds for emergencies or other uncertain costs. In our upcoming report, we will describe the use of these reserve funds and identify state practices that might help inform the federal debate. Jn a recent progress briefing to your office, we were asked to provide answers to questions regarding state criteria designed to control the use of reserve funds and how state criteria compared with criteria being proposed at the federal level. It is important to recognize that the criteria used by our study states is generally for the release of funds previously set aside or appropriated by the state legislatures. In contrast, the federal debate about criteria has focused on legislative decision-making prior to designating funds as an “emergency.” To answer these questions, we drew on information we had collected to date and made follow- up calls to state budget officials in the five states for clar&ation on certain points. Our upcoming report will address these questions more fully. We conducted this work in accordance with generally accepted government auditing standards. How do states plan for budgetaq uncertainty? The five states use reserves as a way to anticipate and plan for uncertainty in their budgets. These states worry most about budget uncertainty related to revenue shortfalls and significant increases in program spending and are less concerned with natural-disaster emergencies due to the assistance they expect to receive’from the federal government. In the enclosed table, we have grouped state reserves into three categories based on information provided by state budget officials. The first are governmentwide reserves for general purposes such as budget stabilization (“rainy day”) funds and/or nonappropriated revenue designed to provide a cushion for a state’s general fund in times of fiscal stress. For example, Florida must set aside at least 5 percent, and could reserve up to 10 percent, of the /AA?0 99 GAO/AIMD-99-156REmergencyCriteria preceding year’s net general fund revenue collections in its “Budget Stabilization Fund.” The second group consists of governmentwide reserves for specific purposes, such as natural disasters and large unanticipated legal expenses. For example, Oklahoma annually makes : mm~ appropriation to a state emergency fund for costs related to damage caused by natural disasters. F?naUy,one state in our study, Missouri, uses agency-specific reserves to provide - cushion in case program spending exceeds regular appropriation levels due to increased caseloads or other uncontrollable costs. For example, Missouri established the “Missouri Medicaid Supplemental Pool” for unanticipated costs related to its Medicaid program. Bow does proposed federal emergency criteria compare to criteria used by the states? The federal government currently does not have clear criteria for what constitutes “emergency” spending. Some believe that the lack of federal criteria makes use of the emergency designation overly subjective and may also lead to the increased use of the emergency designation in appropriation bills.’ In 1991,the Office of Management and Budget (OMB) proposed a set of conditions for emergency spending which has been included in proposed legislation. Under the OMB proposal, any emergency spending would have to meet all of the following five conditions to qualify for the emergency designation: (1) the expenditures are ‘necessary,“(2) the situation reqmring the emergency appropriation was “sudden,” (3) the situation was “unforeseen,” (4) the need for emergency appropriations was “urgent,” and (5) the situation requiring the emergency appropriations is “not permanent.” We found that some states have similar conditions for use of emergency reserves with the added requirement that emergency spending be for certain types of events. barge governmentwide reserves, primarily budget stabilization funds and nonappropriated revenue, are the first type of reserve shown in the enclosed table. These reserves typically have very general criteria because their primary purpose is to provide a fiscal cushion for a state’s general fund during periods of fiscal stress.* For example, Delaware’s ‘Budget Reserve Account” can be used in the event of a revenue shortfall or if legislation is enacted that results in reduced general fund revenue. Once these funds are transferred to the general fund they are available to any state program or activity included in the general fund budget. As another example, Missouri’s Supplemental Reserve sets aside approximately $80 million. nonappropriated revenue for supplemental funding needs. Criteria related to “rainy day” funds and nonappropriated revenues may have little relevance to establishing Yemergency” criteria at the federal level because these funds simply flow into the general fund and are not targeted to specific agencies or emergencies. Access to these large governmentwide reserve is generally controlled by the state legislature. %or a discussion of the lack of federal criteria, see CongressionalBudget Office Memorandum entitled Emerfencv Sending Under the Budget Enforcement Act (December 1998). *Although not their primary purpose, some large governmentwide reserves can also be used during natural-disaster type emergencies. 2 GAO/AIMD-9%156REmergency Criteria B-282561 The second type of reserves, smaller governmentwide reserves with specific criteria, are emergency or contingency funds for clearly defined events. As in the OMB proposal, use of these reserves is tied to specific conditions. However, unlike the OMB proposal, they also identify specific events for allowable uses. For example, Oklahoma’s “State Emergency Fund” has two conditions for use: expenditures must be “necessary” and for needs that were “unforeseen” at the time regular appropriations were enacted. The fund’s use is further restricted to cover events causing destruction of public property (floods, fires, and other natural disasters), National Guard costs when activated in cases of emergency, to protect public health, and matching Federal Emergency Management Agency disaster relief funds. Another example is the “Governmental Emergency Fund” in Missouri that can only be used for expenditures that are “essential” and “not foreseeable or predictable” and that “insure the proper functioning of state government and to render essential state services.” Because these funds normally represent general fond appropriations made at the time the budget is passed, the governor and/or a controlling board can usually authorize their use during the fiscal year without further legislative action. In addition to the criteria identified above, smaller govementwide reserves may have additional constraints that are not included in the OMB proposal. Florida and Missouri expect state agencies to exhaust funds from already appropriated emergency related accounts before asking for additional emergency funds. In Oklahoma, the “State Emergency Fund” cannot be used for spending items considered, but not approved, by the legislature. In California and Florida, “emergency” funds should not be used to fund new programs or initiatives. The third type included ip the table, agency-specific reserves, provide a cushion if regular agency appropriations are insticient to meet legislated obligations. For example, the “Missouri Medicaid Supplemental Pool” provides additional funds to the state health agency if caseloads or utilization are higher than the department’s budget ~sumptions. This fund can only be used to address cost increases in existing programs and cannot be used for new initiatives. This type of reserve could be relevant to the federal budget process if contingency accounts were established at those federal agencies that normally respond to emergencies Two of the states we reviewed also control a reserve fund’s use through passage of emergency bills that require a larger majority. For example, Oklahoma’s “Constitutional Reserve Fund,” half of which is available for emergencies, can be used if the Governor declares an emergency and tw@hirds of the legislature agree or the legislative leaders can designate spending as an emergency without the Governor’s declaration with a three-fourths super-majority approval of both houses. Delaware requires a three-fifths super-majority to spend from either their “Budget Reserve Account” or nonappropriated revenue reserves. Bow do states determine that the ctitetia have beeh met? The states in our study have both formal and informal practices to ensure that emergency criteria are met. Codified procedures can provide transparency and a degree of scrutiny by requiring a formal written explanation of how the emergency criteria are met. These procedures apply to state agencies requesting emergency funds or to the governor after declaring an emergency and wishing to use funds not yet appropriated by the legislature. 3 GAO/AIMD-99-156R EmergencyCriteria IS282561 In four of the five states we reviewed, when a state agency submits a request to access emergency reserves, it generally submits a written request explaining the nature of the emergency and how it meets the specific criteria related to the fund. The request is then reviewed by the governor, budget director, or a review board to determine if the request meets the criteria For example, agencies in Oklahoma that request funds from the emergency fund must submit written findings to the Governor if the emergency situation is specifically identified in statute (for example, floods) or to the fund’s contingency review board if the specific need is not covered by the criteria. In California, the Director of the Department of Finance is required to review agency requests for emergency funds and, if requests are approved, must send a report to the Joint Legislative Budget Committee and the appropriating committee chairpersons stating that the expenditures satisfy the criteria for emergency funding. In addition to the formal review processes, informal channels are also used to determine if “emergency” criteria have been met. For example, in Florida, budget officials told us the Governor’s budget office may inform legislative staff prior to releasing emergency funds frc- its “Worldng Capital Fund” to assure that a consensus is reached. Similarly, in Delaware, officials told us that the Governor will work with the legislature to agree on use of its nonappropriated revenue reserve. Do state cri’teria contain any escape clauses, i.e., ways to circumvent the criteria? In cases of funds for which there are specitic criteria, we did not find alternative ways or explicit “escape clauses” to access those funds. However, the states we reviewed have other ways to obtain funds for emergencies, such as supplemental appropriations or inter-fund transfers.3 Bow useful are the states’ criteria in contxolZing emergency spending? Officials in our study states said emergency reserve criteria are useful in limiting yemergencyz spending to the established criteria. In cases where specific emergency criteria were established in statute and the executive branch or a controlling board had the authority to release reserve funds, emergency spending was generally limited to conditions and events defined within the reserve criteria. For example, the “State Emergency Fund” in Oklahoma I designed to fund emergency situations such as storm damage, range fires, and floods, and spending from this account seems to be restricted by these criteria. Similarly, when the Florida “Working Capital Fund” is used for governor-declared emergencies, spending is limited to “conditions that were unforeseen at the time the General Appropriations Act was adopted.. .and that constitute an imminent threat to public health, safety, or welfare.” State officials told us that the criteria had been adhered to. budget officials in three &&es in our study said that supplemental appropriations could be passed for any purpose. However, California does not allow funding for new programs or initiatives through the supplemental appropriations process, and Delaware has not used supplement& for several years. 4 GAO/AIMD-99156R Emergency Criteria B-282561 According to one official we interviewed, the existence of emergency criteria may also subject state agencies to more scrutiny. F’irst, agencies are expected to closely review their budgets before requesting emergency funds. Second, agency requests for additional funding can be evaluated based on the emergency criteria, thus making it easier to defer additional spending requests for existing programs or new initiatives until consideration of the next fiscal year’s budget. Finally, agencies requesting emergency appropriations open themselves to additional scrutiny and visibility by the legislature and the executive branch, which can affect future budget decisions. Officials told us that where there were no established criteria for using emergency reserves, spending was not limited to what people would generally believe to be emergencies. In the emergency component of Oklahoma’s “Constitutional Reserve F’und,”for example, emergency spending ranged from providing funds for Historical Society repairs and maintenance to Medicaid managed care. Also, California’s “Special F’und for Economic Uncertainties,” which is available for emergencies, does not have any criteria and can be used for any purpose the Governor and the legislature agree upon. As agreed with your office, unless you publicly announce the contents of this letter earlier, we plan no further distribution until 7 days from the date of this letter. At that time, we will send copies of this letter to the Chairman of the Senate Committee on the Budget and the Chairmen and Ranking Minority Members of the House Committee on the Budget and the Senate and House Committees on Appropriations. Copies will also be made available to others upon request. Please contact me at (202) 512-9573if you or your staff have any questions concerning this letter. Sincerely yours, Paul L. Posner Director, Budget Issues Enclosure GAOMMD-99-156REmergency Criteria Enclosure Enclosure State Budget Reserves iu Five Site Visit States Category 1: Governmentwide Reserves for General Furnoses Reservetype Purpose./criteria Access/control Cash on hand set aside for Meets manticipated Funds generally any agency into general revenue shortfalls or cash appropriated by the operating fiznd. flow needs. legislature with governor’s h some cases, may also be consent. used for emergencies. Budget Stabilization F’und Meets unanticipated revenue Legislature appropriates fund pIissouri) shortfalls. F’und contains but only with authorization about 2.5 percent of prior year from the governor. receipts in the general fund but not to exceed 5 percent. Fund can only be used to replenish- existing appropriations. Cash Operating Reserve F’und Meets annual cash-flow needs Commissioner of (Missouli) by allowing the state to make AdminiWation controls its use timely payments. F’und is and ensures that its balance maintained at 5 percent of remains at 5 percent of general general fund revenues. fund revenues. Budget Reserve Account Meets unanticipated revenue Legislature authorizes (Delaware) shortfalls or if revenue is spending. Release of funds reduced by legislation. May requires a thre&fths majority not exceed 5 percent of vote. generaI revenues received in the preceding fiscal year (not including interest). Constitutional Reserve ??und Half of fund meets If the governor declares an (Oklahoma) unanticipated revenue emergency, funds can be shortfalls. Half of the fund appropriated through a two- may be used if the governor thirds approval from both declares an emergency- houses of the legislature. The although specific emergency legislature may declare an criteria have not been emergency and access the fund established. if it obtains a three-fourths majority vote. Special Cash F’und Sets aside unspent funds from Legislature authorizes (Oklahoma) the previous fiscal year that spending through regular or are reappropriated for general supplemental appropriations. purposes. Cash Flow Reserve F’und Meets annual cash-flow needs Executive branch controls this (Oklahoma) by helping to reduce fund The legislature may borrowing and allowing the appropriate unneeded portions state to make timely payments. of the fund. Ifthe balance of this fund exceeds cash needs, then the legislature may appropriate all or a portion of this fund GAOLAIMD-99156REmergency Criteriz Enclosure Enclosure Reserve type Pwposehiteria Access/control Working Capital F’und Sets aside monies in the Legislature authorizes (Florida) general revenue fund in excess spending through regular of the amount needed to meet appropriations. The governor general revenue fund can access these funds by appropriations. evoking emergency powers through an executive order. Budget Stabilization F’und Meets unanticipated revenue The legislature provides (Florida) ShOItfd.lS. direction in the appropriations Also available for funding an act for use of these funds. emergency with criteria provided in Florida law. The fund must be replenished after use. Nonappropriated revenue Meets manticipated Fimds generally set aside for geneA spending needs or revenue appropriated by the operating fnnd. short&&. legislature with governor’s consent. Supplemental Reserve Nonappropriated general Legislature authorizes (Missouri) revenues set aside for general spending after governor’s purposes. supplemental recommendation. Legislature cannot add new items to governor’s recommendations but can increase dollar amounts. Nonappropriated revenues Two percent of the revenue Legislature authorizes (Delaware) estimate is set aside in this spending and governor must reserve. Fund’s use is limited sign. to emergencies. Release of these funds requires a three-fifths majority. Special Fund for Economic Sets aside unreserved and CA Department of Finance Uncertainties undesignated revenues for oversees use of this fund. (California) general purposes. Normally used to (1) augment general fund cash flows (2) cover general fund deficits, and (3) fund emergency-related expenses. Nonappropriated revenue Rive percent of revenue Legislature authorizes (Oklahoma) forecast is set aside for general spending. purposes. This reserve is not available during the current fiscal year but is available for general fund use in the next fiscal year. If more than 100 percent of revenue is collected during the year, the remainder is deposited in the “Constitutional Reserve F’und” 7 GAO/AIMD99-156R Emergency Criteria Enclosure Enclosure Category 2: Governmentwide Reserves for SDecXc Purooses Ceserve tgpe Purposekriteria Access/control General or special fund Addresses speciEc events Usually conixolled by appropriation available to or situations meeting executive branch or tuy agency but limited to established criteria. controlling board. leGned purposes. sovemmental Emergency An appropriation to provide Must be approved by a +.md emergency funds for state majority vote of the full Missouri) services when the legislature is membership of the not in session. governmental emergency fund committee. kgmentation for Emergencies An appropriation used to cover Controlled by the CA md Contingencies unanticipated but necessary Department of Finance. :califomia) obligations not covered in regular budget act. Not to be used for capital outlays. EmergencyAppropriation An appropriation whose funds The Adminktmtion plorida) can be released if they meet Commission can approve certain ‘emergency- criteria release of these funds after contained in Florida law. requested in writing by a state agency. The governor’s office then determines whether the request meets the emergency requirements specified in Florida law. Deficiency Appropriation An appropriation for state The AdmhQstmtion poda) agency operations when Commission authorizes these regular appropriations are funds under specified inadequate because the circumstances. workload or cost of the operation exceeds that anticipated by the legislature. Agricultural Emergency Primarily designed to eradicate Commissioner of Agriculture Eradication Trust Fund the citrus canker emergencies. can use funds with notice to (Florida) Financed by a fuel sales tax the legislature. and the general fund. Legal Fees Fund Appropriation to fmance the State budget office and (Delaware) anticipated cost of judgments Controller General may release or settlements against the state these funds for approved during the f&al year. purposes. Self-Insurance Fund Appropriation to finance State budget office and (Delaware) emergency repairs/ Controller General may release replacement of state buildings, these funds when criterion is schools, etc., which are met. damaged due to natural or other disasters (i.e., arson and bombings). State purchases.an insurance policy for damage costs exceeding $10 million. State Emergency Fund Appropriation for destruction Governor can approve (Oklahoma) of properly due to natural expenditures from the fund disasters or other disasters, or that meet the criteria State matching federal disaster r$ief agencies must submit written program funds or for situations findings to the governor that not foreseen or reasonably emergency request was not foreseeable by the legislature. foreseen or reasonably foreseeable by the legislature. 8 GAO/AlMD-99-156REmergency Criteria Enclosure Enclosure category 3: Agencv4Decific Reserves for SDecific moses Reserve type Purpose/criteria Access/control Contingency appropriations Provides a cushion ifagency Governor controls release designated to a specific appropriations are of ftmds. agency. insuff%zien t. Missouri Disaster Fund Appropriation for the MO State Governor can release funds to (Missouri) Emergency Management the State Emergency Agency for emergency ManagementAgency when the expenditures caused by legislature is not in session. disasters and to provide required state match for federal grants. Missouri Corrections Growth Appropriation for the MO Governor can release funds Pool Department of Corrections for when regular appropriation (Missouli) costs associated with fails to cover costs. increased inmate populations. Missouri Youth Services Appropriation for the MO Governor can release funds Growth Pool Department of Social Services when regular appropriation (Missouri) for costs associated with fails to cover costs. increased caseloads. Missouri Medicaid Appropriation for the MO Governor can release funds Supplemental Pool Division of Medical .&vices to when regular appropriation (Missouri) cover additional costs beyond fails to cover costs. those covered by its regular Medicaid appro&ation. Missouri Work First Pool Appropriation for the MO Governor can release funds (Missouri) Department of Social Services when regular appropriation for costs associated with the fails to cover costs. Temporary Assistance for Needy Families, child care, Work First Initiatives, and other purposes related to welfare reform. Source: Information provided by state budget officials. (935308) 9 GAO/AIMD-99-156REmergency Criteria Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Mastercard credit cards are accepted, also. 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Emergency Criteria: How Five States Budget for Uncertainty
Published by the Government Accountability Office on 1999-04-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)