Review of Reserve Funds in the 2004-2005 Revised Certified Budget

September 12, 2005
The Hon. Leslie Merritt
Auditor State of North Carolina
20601 Mail Service Center
Raleigh, N. C. 27699-0601
 

Re: Advisory Opinion: Review of Reserve Funds in the 2004-2005 Revised Certified Budget

Dear Auditor Merritt:

On June 28, 2005, this Office received from you a report entitled “Review of Reserve Funds in the 2004-2005 Revised Certified Budget” (the Report). This Report contains the findings and conclusions of your office regarding certain Reserve Funds appropriated to the Office of State Budget and Management, the Department of Cultural Resources and the Department of Health and Human Services in the 2004 Appropriations Act, and the subsequent allocation, control and disbursement of those funds by the agencies. The Report states that the investigation was generated by requests from private citizens and elected officials for a review of these Reserve Funds. The Attorney General has received similar requests. This opinion will therefore address certain legal questions which have been generated by the factual findings of the Report.

FACTUAL SUMMARY

The Report states that during the 2004 legislative session a near impasse between the Senate and House of Representatives during the Joint Conference Committee’s budget reconciliation negotiations resulted in the establishment of certain reserves for grants (“Reserve Funds”) which were included in the final 2004 Appropriations Act. The Joint Conference Committee Report on the Continuation, Expansion and Capital Budget, dated July 17, 2004, designated these appropriations as follows:

(1)Office of State Budget and Management (OSBM) -$1,338,382

(2)Department of Cultural Resources (DCR) -$9,161,618 and $925,000

(3)Department of Health and Human Services (DHHS) – $2,400,000

The Reserve Funds as appropriated were not directed to line item recipients or specifically identified uses.

The Report states that the Reserve Fund appropriations were subsequently disbursed from OSBM, DCR and DHHS to a wide variety of organizations throughout North Carolina, usually in the form of grants. The Report further concludes, through extensive interviews with OSBM, DCR and DHHS management, as well as with legislative staff members and legislators, that control of the disbursement of these grant funds was, as a practical matter, retained and exercised by the legislative leadership.

Control over the Reserve Funds was divided between the President Pro Tempore of the Senate and the Co-Speakers of the House of Representatives. Documents reviewed indicated that the President Pro Tempore controlled $6,507,500, one of the Co-Speakers controlled $4,606,250, and the other controlled $2,891,250. OSBM, DCR and DHHS each maintained accounting records documenting amounts controlled and disbursed by the three legislators. Similar accounting records were maintained by staff in each legislator’s office.

Requests for disbursement of grants were generally received by agency officials from legislative staff members. The three agencies were advised which organizations should receive funds and the dollar amounts to be allocated. The agencies neither solicited, recommended nor awarded grants from the Reserve Funds without direction from the three legislative leaders. Managers at DCR and DHHS stated that they did not believe their agencies had any discretionary authority in regard to the award of these grant funds. As of the date of the Report there remained a total of $1,232,200 in Reserve Funds which had not been disbursed.

LEGAL ANALYSIS

Two primary legal issues have been raised by the findings of the Report. The first is whether the appropriation and grant disbursement process utilized in connection with the Reserve Funds raises separation of powers or other issues under the North Carolina Constitution. The second is whether the Reserve Funds have been disbursed in violation of N.C.G.S. § 143-16.3 or other statutory provisions.

A. CONSTITUTIONAL ISSUES

As previously discussed, the Joint Conference Report on the Continuation, Expansion and Capital Budget described four reserves for grants which were included in the 2004-2005 Appropriations Act. Page J-30, Item 70 appropriated $1,338,382 to OSBM as a “Reserve for Grants.” Page G-13, Item 94 appropriated $2,400,000 to DHHS as a “Grants Reserve” for health and human services grants. Page J-5, Item 13 appropriated $925,000 to DCR as a reserve for “Historical Cultural and Arts Organizations.” Page J-5, Item 14 appropriated $9,161,618 to DCR as a “Grants Reserve.” These provisions of the Joint Conference Committee Report were incorporated into the 2004 Appropriations Act by Section 33.2(a) of the Act.

The Reserve Funds in question were therefore appropriated to three Executive Branch agencies in accordance with the normal appropriations process. The Report does not point to, and we have not found any provision in the Appropriations Act, Joint Committee Report or any other provision of law enacted by the General Assembly which restricts OSBM, DCR or DHHS from distributing these Reserve Funds other than in accordance with their general statutory authority and normal grant procedures. Nor has any provision of law been identified which authorizes the President Pro Tempore of the Senate, the Co-Speakers of the House of Representatives or any other individual member of the legislature to direct or control the distribution of the Reserve Funds appropriated to OSBM, DCR and DHHS.

The North Carolina Constitution provides in part:

The legislative, executive, and supreme judicial powers of the State

government shall be forever separate and distinct from each other.

N.C. Constitution, Article I, § 6. This section is commonly referred to as the “separation of powers” clause of our Constitution. The North Carolina Supreme Court has reiterated that “the principle of separation of powers is a cornerstone of our state and federal governments.” State ex rel. Wallace v. Bone, 304 N.C. 591, 601, 286 S.E.2d 79, ___ (1982).

In State ex rel. Wallace v. Bone, the North Carolina Supreme Court struck down legislation authorizing the appointment of members of the General Assembly to the Environmental Management Commission. The Court unanimously concluded that the General Assembly lacked the constitutional authority to mandate the appointment of legislators to bodies in the executive branch.

The Court has also rendered an advisory opinion on the constitutionality of a now-repealed statute which required the approval of the Joint Legislative Commission on Governmental Operations for the Governor to transfer or change certain line items in the state budget. The Court determined that, in light of the constitutional mandate of separation of powers, the statutory authority given to the legislator members of that commission “exceeds that given to the legislative branch by Article II of the Constitution. That statute also constitutes an encroachment upon the duty and responsibility imposed upon the Governor by Article III, Section 5(3), and, thereby violates the principle of separation of governmental powers.” Advisory Opinion in re Separation of Powers, 305

N.C. 767, 776-777, 295 S.E.2d 589, ___ (1982).

The North Carolina Constitution sets forth the duties of the Governor and of the General Assembly. Among the duties of the Governor is the duty to “prepare and recommend to the General Assembly a comprehensive budget of the anticipated revenue and proposed expenditures of the State for the ensuing fiscal period.” N.C. Constitution, Article III, § 5(3). Additionally, “[t]he budget as enacted by the General Assembly shall be administered by the Governor.” Id. However, “[t]he legislative power of the State shall be vested in the General Assembly, which shall consist of a Senate and a House of Representatives.” N.C. Constitution, Article II, § 1.

Chapter 143, Article 1 (The Executive Budget Act) sets forth the statutory budget process in North Carolina. N.C.G.S. § 143-12 requires the Governor, through the Director of the Budget, to submit a proposed budget to the General Assembly. N.C.G.S. § 143-15 authorizes the General Assembly to modify the Governor’s proposed budget prior to enactment. Upon enactment by the General Assembly, both the Constitution and the Executive Budget Act require that the Governor administer the budget as enacted. The extent to which the General Assembly can enact laws which interfere with the Governor’s administration of the budget without violating the separation of powers principle, however, has not been clearly delineated by our courts.

The Report, however, does not reference the enactment of any law which granted to individual legislators the legal authority to direct Executive Branch officials in the disbursement of Reserve Fund grants. We have likewise been unable to identify such legislation. Nor are we aware of any action of the General Assembly which restricted the general authority of agency officials to administer the Reserve Fund grant disbursement process in accordance with normal rules, regulations and policies, or required them to disburse funds as directed by legislative leaders. Executive Branch officials were therefore not required by law to distribute grant funds as requested by individual legislators.

Independent actions of individual members of the General Assembly, regardless of the member’s position of leadership, do not constitute the exercise of official legislative power triggering constitutional safeguards. The process described in the Report therefore does not raise separation of powers issues under Article 1, § 6 of the Constitution.

B. STATUTORY ISSUES

The Report also includes a review of certain “special appropriations” which were included in committee reports, excluded from the final Appropriations Act, and ultimately funded from Reserve Funds. Specifically, the Report has identified eleven OSBM, DCR or DHHS grant recipients for whom funding in a total amount of $6,500,000 was included in either the House Appropriations Committee Report on the Continuation, Expansion and Capital Budgets dated June 5, 2004 or the Senate Appropriations/Base Budget Committee Report on the Continuation, Expansion and Capital Budgets dated June 22, 2004, but was deleted from the Joint Conference Committee Report on the Continuation, Expansion and Capital Budgets dated July 17, 2004, and the 2004 Appropriations Act. Questions have been raised as to whether such grants were funded in violation of N.C.G.S. § 143-16.3.

N.C.G.S. § 143-16.3 reads as follows:

Notwithstanding any other provision of law, no funds from any source, except for gifts, grants, funds allocated from the Repair and Renovations Account in accordance with G.S. 143-15.3A, and funds allocated from the Contingency and Emergency Fund in accordance with G.S. 143-12(b), may be expended for any new or expanded purpose, position, or other expenditure for which the General Assembly has considered but not enacted an appropriation of funds for the current fiscal period; provided, however, that in the event the Director of the Budget declares that it is necessary to deviate from this provision, he may do so after prior consultation with the joint Legislative Commission on Governmental Operations. For the purpose of this section, the General Assembly has considered a purpose, position, or other expenditure when that purpose is included in a bill, amendment, or petition and when any committee of the Senate or the House of Representatives deliberates on that purpose.

This statute appears to have been interpreted by our appellate courts only once, in the case of N.C. Monroe Construction Co. v. State, 155 N.C. App. 320 (2002). In that case the Court of Appeals held that N.C.G.S, § 143-16.3 was not violated when OSBM entered into a contract for prison construction prior to the appropriation of funds for that purpose because funds were subsequently appropriated prior to any work being performed. The analysis in this case therefore provides little guidance as to the application of the statute to the factual findings in the Report.

Based upon our review of the Report, it does appear clear that eleven specific line item appropriations included in the Senate or House budget bills were not included in the final Appropriations Act. A literal reading of N.C.G.S. § 143-16.3 therefore suggests that these expenditures were considered but not enacted by the General Assembly, thus prohibiting OSBM, DCR and DHHS from distributing grant funds for the same purposes. We believe this analysis is complicated, however, by the Report’s further conclusion that, in order to reconcile the budget debate, the funds in question were actually appropriated indirectly through Reserve Funds, as a substitute for line item special appropriations.

The question is therefore whether the General Assembly did, in fact, appropriate funds which were intended to be distributed to the eleven grant recipients identified by the Auditor, even though the funds were not specifically identified in the Appropriations Act. An argument can be made that the statutory prohibition in N.C.G.S. § 143-16.3 is not implicated where House and Senate budget negotiators reached a compromise through which funds for specific purposes were, as a practical matter, appropriated as Reserve Funds, even though those purposes were not directly identified in the final budget act. On the other hand, members of the General Assembly who were not directly involved in the conference committee process may not have been made aware of the compromise agreement and thus the full legislature could not have knowingly enacted an Appropriations Act which was intended to fund the specific grants in question.

Under these circumstances we cannot conclude that the process described by the Auditor clearly violated N.C.G.S. § 143-16.3. We acknowledge, however, that the process utilized likely contravenes the intent of the General Assembly in enacting the statute and recommend that appropriate clarifying amendments be considered.

GRANT FOR COMMUNITY DEVELOPMENT SPECIALIST POSITION

The Report describes the use of $45,000 from the Reserve Funds appropriated to DCR for the establishment of a Community Development Specialist position in that agency. The position established was filled by former House of Representatives member Michael Decker, Sr. Questions have been raised regarding the establishment of this position and selection of Mr. Decker.

The chronology of events prepared by DCR and included in the Report reflects that DCR officials were contacted in January, 2004 by staff members of the Co-Speaker concerning the possibility of using Reserve Fund resources to establish a position to assist local communities in business and economic development planning around historic sites and local attractions. Michael Decker, Sr. was recommended for the position. The Co-Speaker’s staff was informed that such a position could be established, but that Mr. Decker would be required to participate in the normal hiring process and be qualified for such a position.

DCR subsequently received substantial input from the Co-Speaker’s staff concerning the position description, vacancy announcement and budget for the position. The Report concluded that specific language was included in the position description in order to “tailor” the position for Mr. Decker. A time-limited position labeled Community Development Specialist I was posted on February 2, 2005 and Mr. Decker’s application was received by DCR on February 8, 2005. Mr. Decker was interviewed, along with two other candidates, and was offered the position on February 16, 2005. The Co-Speaker’s office thereafter approved the transfer of a $45,000 grant from DCR’s Reserve Fund to fund the position. Mr. Decker’s position as a Community Development Specialist I was funded through grant funds until June 30, 2005.

We have been unable to identify any specific violation of law or regulation in the process outlined by the Report. We therefore cannot conclude that either the creation of the Community Development Specialist I position, the source of its funding or the selection of Mr. Decker were in violation of law. We note, however, that the State Personnel Commission, in accordance with N.C.G.S. § 126-14.3, has adopted rules designed to encourage open and fair competition for positions in State government. In our opinion, the appearance of impropriety detailed by the Report reflects a process that was neither open nor fair.

If we can be of further assistance, please contact me.

Very truly yours,

Grayson G. Kelley
Chief Deputy Attorney General