Claims that surplus money is available in state budgets reveal complexity of laws and finances

Statesman Journal | January 24, 2010
By Peter Wong

An obscure report prepared annually on Oregon's finances suddenly is drawing attention from Republican lawmakers, some of whom say it makes their case that billions are available to spend from surplus accounts and that the tax increases on Tuesday's ballot are unnecessary.

A couple of state officials and the Legislature's own chief budget analyst say the lawmakers have it wrong at least about the availability of that money for spending on schools and state services. They say the accounts contain federal grants, bond proceeds, and legally earmarked fees that can be spent only for specific purposes.

"Unfortunately, this is a very complex area, and there are very few simple answers," said Kathryn Ross, one of the officials involved in preparing the report.

As deputy Republican leader, Sen. Jackie Winters of Salem said she doesn't want to get into an argument between some of her Republican colleagues including Sen. Brian Boquist of Dallas and Republican Leader Ted Ferrioli of John Day and those officials.

But as a decade-long member of the Legislature's joint budget panel and as a three-time subcommittee leader Winters said state finances are always more complicated than they appear. In human services, for example, she doubts there is money lying around.

"You never know from one day to the next where the dollars are, depending on the flow of federal and other money into the state," she said. "That budget is so large and has so many funding streams attached to it."

Winters joined most Republicans against raising taxes on higher-end earners and corporations during the 2009 session. Although Democratic majorities passed them, opponents petitioned to force a statewide vote on Measures 66 and 67, which together would raise$727 million to balance the current two-year budget.

Democratic leaders say if one or both measures fail Tuesday, spending cuts are the likeliest option not another try for new taxes at a session already scheduled for Feb. 1.

Some Republicans have advocated a budget alternative that relies in part on drawing money from ending balances in some state accounts.

They seized upon a statement in the state's comprehensive annual financial report for the previous budget year that said $4.4 billion was in combined ending-fund balances on June 30, 2009. A fund balance is defined as assets minus liabilities at a given point and is increased by income and decreased by expenses.

Although about a quarter of that total was reserved for purposes such as debt payments, the report said, "the remainder was classified as unreserved, undesignated fund balance and was available for spending, subject to statutory and constitutional spending constraints."

Argument starts

"This report confirms that there are billions of dollars for use at the Legislature's discretion," said Sen. Chris Telfer, R-Bend, in a Jan. 11 statement.

Not really, said Ross, who is statewide accounting and reporting manager for the State Controller's Division within the Department of Administrative Services. She said "constraints" are the key.

"In many cases, the spending purposes of a fund are spelled out in the Constitution, statute, grant agreement or other contract," she said.

A few days after her initial statement, Telfer a certified public accountant who specializes in tax and estate planning drew back a little.

"There is no question that there are limitations on how much of the money detailed in the report can be used by the Legislature," she said in another statement issued jointly with Ferrioli. "That's why we aren't proposing taking the full $3.3 billion, but4 percent of it."

The Republican alternative also proposes to roll back all employee pay increases to 2007 levels and require state employees to pay part of their health-insurance premiums. But either step would require the breaking of contracts negotiated with unions and contracts have never been subject to legislative approval.

Telfer did not return a call for comment.

'Other' funds

Ken Rocco has worked in the Legislative Fiscal Office, which advises lawmakers about the budget, since October 1990 and has led it since November 2001. He said that questions about ending-fund balances also arose during the state's most recent recession in 2002 when both chambers had Republican majorities and officials had similar answers then about why they were of limited use to offset spending cuts.

He said his staff has been combing through agencies' other-funds accounts which differ from the ending-fund balances described in the report to see if there is money that can offset cuts in the tax-supported general fund.

In budget talk, these are known as "fund sweeps."

"Last time I talked with him, which was when we met as a committee in January, he told me he was working with the two of them," Winters said, referring to Telfer and Ferrioli.

Winters said such accounts can be pared, but the work is painstaking, and the results not always spectacular. During the 2009 session, she and Rep. Nancy Nathanson, D-Eugene, spent weeks trimming $50 million from various accounts at the Department of Administrative Services, the central management agency for state government.

"There is often confusion about the nature of 'other funds' accounts," Rocco said. "These monies collected by state agencies are dedicated to specific purposes described in law."

Boquist, who called Rocco "politically partisan," said the Legislature can do whatever it wants.

"In reality, a simple majority of the Legislature can re-appropriate any statutory funds with majority vote. ... Likewise, any constitutional change can be referred to the citizens by majority vote," Boquist said.

Past missteps

Past Legislatures, however, have fared poorly sometimes when they did just that.

In 1982, lawmakers at the urging of Republican Gov. Vic Atiyeh transferred $81 million from reserves of SAIF Corp. to balance the budget in what was then Oregon's most severe economic downturn since the Great Depression. SAIF had been converted in 1980 from a state agency to a public corporation providing workers' compensation insurance.

Among the opponents were two future Democratic governors, John Kitzhaber and Ted Kulongoski, who were then state senators.

Twelve years later, the Oregon Supreme Court ruled that the transfer was illegal.

Under a settlement negotiated through Kulongoski, who was attorney general then, SAIF policyholders were paid back $225 million, including interest, in the 1990s while Kitzhaber was governor.

In 2003, lawmakers passed a budget-balancing bill that drew $10 million from a state trust fund for management of forest lands in 15 counties, mostly in Tillamook and Clatsop counties. The state acquired the lands from counties after the Tillamook Burn, a series of disastrous fires between 1933 and 1945, and replanted trees.

Two years later, a Coos County judge ruled that a "consensual arrangement" existed between the counties and the state and the fund was repaid.

Last March, lawmakers eliminated a potential$855 million shortfall in the 2007-09 budget by cutting spending, tapping federal economic-recovery funds that became available, and shifting money from other accounts.

House Speaker Dave Hunt, D-Gladstone, said about $85 million was recovered from the shifts but that other proposals turned out to be dead ends.

In both the 2003 and 2009 votes, a majority of Republicans opposed "fund sweeps."

Restricted use

Boquist said critics of his position have made too much of the well-publicized restrictions on state transportation spending.

"Tax-and-spend bureaucrats and unions have thrown out the 'transportation funds' and gas-tax red herring too much," he said, and disputes some of the reported fund balances.

What appears clear is that whatever those balances are, the money cannot be used for other purposes and voters have resisted change.

Since voters decided in 1980 to reserve fuel taxes and vehicle fees including the weight-mile tax on trucks for road and bridge work, they have rejected three proposals by the Legislature to ease the constitutional restriction.

In 1992 and 2000, voters rejected restoring police patrols to the highway fund, and in a different 1992 vote, state parks. (A 1996 ballot measure gave parks a cut of lottery proceeds.)

The other major sources for the Oregon Department of Transportation budget are federal grants and bond proceeds, which are repaid through earmarked fees and taxes.

ODOT's current two-year budget approved by lawmakers, including Boquist, is $4.1 billion. It includes nothing from the general fund. There is a $10 million general-fund account for special transportation for seniors and people with disabilities.

An early version of the Republican budget alternative suggested that as much as $100 million from ODOT's ending balance could be tapped for balancing the general-fund budget but later versions have dropped that.

Differing purposes

Oregon has prepared a comprehensive annual financial report since 1979, when Vic Atiyeh became governor.

In addition to a law that dates back to 1977, Ross said, such a report is required by the federal Office of Management and Budget to determine state compliance with federal grants and contracts.

Investors also get reports to accompany sales of state bonds and certificates of participation (a form of short-term debt) by the state treasurer.

Ross said although the financial report mentions restrictions in spending "unreserved" fund balances, current government accounting standards do not require the report to specify all of them.

"The purpose of the report is to provide stakeholders, particularly the debt community, a broader picture of the total 'economic resources' available to the state, not just cash receipts and expenditures," she said.

The state budget, which does track income and spending, uses a different system than the financial report. The most common category is the general fund, which draws most of its money from personal and corporate income taxes and offers lawmakers the most flexibility in budgeting. The remaining major budget funds are lottery, federal and other.

Starting with the year ending in mid-2011, Ross said, new accounting standards will require more precise definitions of "spendable" amounts within fund balances.

"We can't say for sure, but maybe these new categories will result in greater clarity," she said.

Although the financial report is prepared by the State Controller's Division, an accompanying audit is done by the Audits Division of the secretary of state, who under the Oregon Constitution is the auditor of public accounts.

Secretary of State Kate Brown named no names in a Jan. 13 statement, but said that information in the report was taken out of context.

"At this critical point in the election process, with ballots now in the hands of voters, it is more important than ever for voters to have accurate information," she said.