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)

      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division


      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

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

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

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

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

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

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

Sincerely yours,

Paul L. Posner
Director, Budget Issues


                                                             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.
 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
Supplemental Reserve         Nonappropriated general             Legislature authorizes
(Missouri)                   revenues set aside for general      spending after governor’s
                             purposes.                           supplemental
                                                                 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
Nonappropriated revenue      Rive percent of revenue             Legislature authorizes
(Oklahoma)                   forecast is set aside for general   spending.
                             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
 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.

9                                                           GAO/AIMD-99-156REmergency Criteria
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