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Schweich v Nixon 082611

Schweich v Nixon 082611

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State Auditor Schweich Files Suit in Response to Governor's Withholdings

Suit follows state auditor's report, alleges Gov. Nixon violated constitution in budgeting process
State Auditor Schweich Files Suit in Response to Governor's Withholdings

Suit follows state auditor's report, alleges Gov. Nixon violated constitution in budgeting process

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08/26/2011

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IN THE CIRCUIT COURT OF COLE COUNTY STATE OF MISSOURI THOMAS A.

SCHWEICH, In his official capacity as Auditor of the State of Missouri, Plaintiff, v. JEREMIAH W. NIXON, in his official capacity as Governor of the State of Missouri, Serve: Capitol, Room 216 Jefferson City, MO 65101 Defendant. Also serve: Chris Koster Attorney General of Missouri 207 West High Street Jefferson City, MO 65101 PETITION FOR DECLARATORY JUDGMENT AND INJUNCTIVE RELIEF Plaintiff Thomas A. Schweich, by and through his attorney, hereby states and alleges for his petition for declaratory judgment and injunctive relief: 1. Plaintiff Thomas A. Schweich is the duly elected and acting Auditor of the State ) ) ) ) )

)
) ) ) ) ) ) ) ) ) ) ) Case No. --------

of Missouri and brings this suit in his official capacity .. 2. In his official capacity, Plaintiff exercises powers and rights, and performs his

duties as provided for by Article IV, Section 13, Missouri Constitution (1945) and Chapter 29, RSMo.

3. of Missouri. 4.

Defendant Jeremiah W. Nixon is the duly elected and acting Governor ofthe State

Plaintiff is presently conducting an audit of the Defendant pursuant to Plaintiffs

constitutional and statutory duties as provided by Article IV, Section 13, Missouri Constitution, and Section 29.200, RSMo. 5. Plaintiff began an audit of Defendant on June 27, 2011. Plaintiff, as part of this

audit process, reviewed Defendant's basis for his withholding order on June 10, 2011, of over $170 million dollars for the fiscal year 2012 [hereinafter FY 2012] budget of the State of Missouri as appropriated by the Missouri General Assembly [hereinafter "legislature"] and

approved by Defendant, even though FY 2012 would not start until July 1,2011. $ 57 million of the withholds from the FY 2012 budget are from general revenue. A true and correct copy of the withholds is attached hereto as Exhibit A and incorporated herein by reference. 6. Teachers, Defendant withheld FY 2012 funds for many programs, including Parents as Bright Flight College Scholarships, Access Missouri Scholarships, community

colleges, state universities, Medicaid, Domestic Violence Grants, Alzheimer's grants, Missouri Department of Transportation (MoDOT) , school transportation, Office of Child Advocate, Area Agency on Aging Grants, and Children's Treatment Services. See Exhibit A. 7. On or about June 10, 2011, Defendant reallocated $ 50 million of the withheld

funds to other budget line items for disaster relief. A true and correct copy of the reallocations is attached hereto as Exhibit B and incorporated herein by reference. 8. Under Section 29.235, RSMo and the Government Accounting Standards (July

2007 Revision) issued by the Comptroller General of the United States the auditor is required to

2

perform procedures designed to ensure that public officials conduct the financial business of the public in accordance with sound accounting principles and the law. 9. On July 27, 2011, Plaintiffs auditors met with Defendant's budget director and

asked for any and all documentation (e.g., in the form of spread sheets, cost analysis, revenue analysis and projections) that would provide a basis for Defendant's FY 2012 withholds and reallocations. Defendant's budget officer told Plaintiffs auditors that there is no formal documented withholding calculation and that no formula is used to establish withholding amounts. Defendant's budget director also advised Plaintiffs auditors that there were no "figures" to support the reallocation of$150 million for disaster relief. Nor did Defendant's budget director provide any documentation showing analysis that FY 2012 revenue would be lower than the revenue estimates used as the basis for the FY 2012 budget which was enacted into law. 10. On August 18,2011, Plaintiffs auditors met with Defendant's budget director and

other representatives to review Plaintiffs draft letter (No, 2011-43) which points out the unconstitutionality of Defendant's withholds and reallocations for FY 2012. A true and correct copy of the final version of Plaintiffs letter (Auditor Number 2011-43) is attached hereto as Exhibit C and incorporated herein by reference.
11.

At the August 18, 2011, meeting described in paragraph 10 of this Petition, budget director and representatives denied that Defendant was acting

Defendant's

unconstitutionally but could not cite any authority for the FY 2012 withholds and reallocations other than to assert that the Defendant had the responsibility to balance the budget. 12. On August 19, 2011, Plaintiff officially delivered Plaintiffs letter (Auditor

Number 2011-43) to Defendant. Plaintiff, in the letter to Defendant, encouraged Defendant to work with the legislature to resolve the constitutional issues. Subsequent to that delivery on

• 3

August 19,2011, Defendant in a press release and other public comments continues to assert that his FY 2012 withholds and reallocations are constitutional, and persists in refusing to try and correct and resolve the matter in a cooperative manner with the legislature. 13. Under Section 29.235, RSMo and the Government Accounting Standards (July

2007 Revision) issued by the Comptroller General of the United States, the auditor is required to perform procedures designed to ensure that public officials conduct the financial business of the public in accordance with sound accounting principles and the law, and is required to report any violations, especially violations of law, to appropriate authorities for corrective action. In this case, the Defendant has refused to take corrective action so the only recourse available to Plaintiff is this declaratory judgment action. 14. Since Defendant has chosen to not correct his FY 2012 withholds and

reallocations, Plaintiff has no other remedy but to bring this matter to this Court since there is illegal conduct by Defendant violating: (1) Article IV, Section 27 of the Missouri Constitution in making withholds before FY 2012 began and before any 2012 revenue was shown to be below the FY 2012 budget revenue estimate; (2) The separation of powers doctrine embodied in the Missouri Constitution by withholding funds and reallocating those funds without any specific legislative action

authorizing those reallocations; and (3) The Missouri Constitution's provision for reasonable budget decision making by engaging in arbitrary and capricious decisions regarding the FY 2012 budget withholds and allocations, with political bias being at least one primary fact deciding where withholds were made and holding other areas harmless since only the Republican legislature and one statewide

4

elected Republican

officeholder

were subject to withholds while the Defendant

and other

statewide elected Democratic officeholders were not subject to any withholds. 15. Plaintiff was directly affected by Defendant's actions in that Plaintiff was subject

to withholdings by Defendant, as listed in Exhibit A. 16. Plaintiff brings this action pursuant to Chapter 527 of the Revised Statutes of

Missouri, and Missouri Supreme Court Rule 87. COUNT 1- THE DEFENDANT'S FY 2012 WITHHOLDS ARE UNCONSTITUTIONAL UNDER ARTICLE IV, SECTION 27, MISSOURI CONSTITUTION 17. herein. 18. Defendant withheld over $170 million dollars of the FY 2012 budget on June 10, Plaintiff incorporates all previous paragraphs of this Petition as if fully set forth

2011, as reflected in Exhibit A. 19. Article IV, Section 27 of the Missouri Constitution allows the Defendant to

withhold only when actual revenues for a fiscal year fall below the amount of revenue on which the appropriation was based. 20. Article IV, Section 23, Missouri Constitution, states that the fiscal year of the

State of Missouri and all its agencies begins on July 1 of one year and runs through June 30 of the next year. 21. 22. On June 10,2011, no FY 2012 revenues had yet been received. Defendant had no legal authority to withhold funds on June 10,2011, since FY

2012 had not yet begun, there was no FY 2012 revenue collected and no factual basis for concluding that FY 2012 revenue would fall below the amount of revenue on which the FY 2012 budget was based.

5

WHEREFORE, Plaintiff prays that this Court declare that Defendant's FY 2012 budget withholds are unconstitutional and void under Article IV, Section 27, order the withheld funds

restored and removed from the withhold list, enjoin Defendant from making any withholds that are not in compliance with the Article IV, Section 27, Missouri Constitution, and for such other relief as the Court deems appropriate. COUNT 11- THE DEFENDANT'S FY 2012 WITHHOLDS AND REALLOCATIONS UNCONSTITUTIONAL 23. herein. 24. Article II, Section 1, Missouri Constitution, expressly provides for the separation AS VIOLATING SEPARATION OF POWERS ARE

Plaintiff incorporates all previous paragraphs of this Petition as if fully set forth

of powers between the three departments: executive, legislative and judicial. Article II, Section 1, Missouri Constitution, further provides that the powers expressly belonging to one department may not be exercised by any of the other departments. 25. Article III, Section 1, Missouri Constitution, vests the legislative power in the

legislature of the State. 26. The legislature has sole power to appropriate money, and Article III, Section 36,

and Article IV, Section 28, Missouri Constitution, specifies no state revenue may be diverted or withdrawn from the treasury unless it is in accordance with an appropriation legislature for the purpose directed by the legislature. 27. On or about June 10,2011, Defendant withheld over $170 million appropriated in made by the

the FY 2012 budget. See Exhibit A.

6

28.

On or about June 10, 2011, Defendant reallocated the withheld funds to other

budget line items as shown in Exhibit B and incorporated herein by reference. 29. Defendant's withholding and reallocation of funds was in violation of Article III,

Sections 1 and 36, and Article IV, Sections 23, 24, 25, 26, 27 and 28 of the Missouri Constitution in that the Defendant is infringing upon the power of the General Assembly to specify the distinct amount and purpose of each appropriation when withheld funds are unilaterally diverted and reallocated by Defendant. 30. Defendant's withholdings and reallocation of funds was in violation of Article III,

Sections 1 and 36, and Article IV, Sections 23, 24, 25, 26, 27 and 28 of the Missouri Constitution in that Defendant is allowed only to "control the rate of expenditure of an appropriation", and the Missouri Constitution does not provide the Defendant the authority to reallocate those funds once they have been distinctly specified in amount and purpose by the legislature and approved by the governor. WHEREFORE, Plaintiff prays that this Court declare that Defendant's FY 2012 budget withholds and reallocations are unconstitutional and void under Article III, Sections 1 and 36 and Article IV, Sections 23, 24, 25, 26, 27 and 28 of the Missouri Constitution, order the withheld

funds restored and removed from the withhold list, order reallocated money restored as provided in the original FY 2012 budget, enjoin Defendant from making any withholds and reallocations that are not in compliance with Article III, Sections 1 and 36, and Article IV, Sections 23, 24, 25, 26, 27 and 28 of the Missouri Constitution, and for such other relief as the Court deems appropriate.

7

COUNT 111- THE DEFENDANT'S ARE UNCONSTITUTIONAL 31. herein. 32.

FY 2012 WITHHOLDS AND REALLOCATIONS AS ARBITRARY AND CAPRICIOUS

Plaintiff incorporates all previous paragraphs of this Petition as if fully set forth

Article IV, Sections 23, 24, 25, 26 and 27 of the Missouri Constitution require

that decisions regarding the state budget (revenues and expenditures) be made in an orderly, reasonable manner with due consideration and regard of the facts and circumstances impacting the state budget, with full discussion and communication Missouri State legislature. 33. Article IV, Sections 24, 25, 26 and 27 of the Missouri Constitution also require between the Defendant and the

that any decisions made in adjustment of the budget be made in a reasonable manner with due consideration and regard of the facts and circumstances impacting the state budget, with full

discussion and communication between the Defendant and the legislature. 34. Defendant's withholding of over $170 million was not reasonable and in fact

arbitrary and capricious in that the Defendant, once the FY 2012 budget was approved, may only withhold when actual revenues fall below the revenue estimate on which the appropriations were based. 35. Defendant's withholdings and reallocations for FY 2012 was not reasonable as

required by Article IV, Sections 24, 25, 26 and 27 of the Missouri Constitution, and in fact arbitrary and capricious in that the Defendant withheld over $170 million without any data to support the basis for his withholds. Defendant reallocated withheld funds to other budget line items without any constitutional authority.

8

36.

Defendant's withholding was arbitrary and capricious in violation of Article IV,

Sections 23, 24, 25, 26 and 27 of the Missouri Constitution in that the Defendant only withheld from the Republican legislature and Republican State-wide elected official while not withholding money to his own office or other Democratic State-wide elected officials and in diverting and reallocating money to other areas without specific legislative authority. WHEREFORE, Plaintiff prays that this Court declare that Defendant's FY 2012 budget withholds and reallocations are unconstitutional and void under Article IV, Sections 23, 24, 25, 26 and 27 of the Missouri Constitution, order the withheld funds restored and removed from the

withhold list, order reallocated money restored as provided in the original FY 2012 budget, enjoin Defendant from making any withholds and reallocations that are not in compliance with Article IV, Sections 23,24,25,26 as the Court deems appropriate. and 27 of the Missouri Constitution, and for such other relief

Respectfully submitted,

BY:hl~;J.~

Darrell 1. Moore, Mo. Bar #30444 Chief Litigation Counsel 301 W. High Street, Suite 880 Jefferson City, Missouri 65101 Telephone: (573) 751-4213 Facsimile: (573) 751-7984 dan-ell.moorecmauditor.mo.gov

Attorney for PlaintiffSchweich

9

June io, 2011

FY 2012 BUDGET EXPENDITURE RESTRICTION/LINE (millions of $5)
Approp Amt

ITEM VETOES

Comments

RESTRICTED ITEMS--GENERAL
1. Parents as Teachers 2. Bright Flight Scholarship 3. Access Missouri Scholarship

REVENUE
16.05 14.3 16.9 129.5 655.9 2.05 2.0 1.0 1.9 14.9 Provides $lM increased funding above FYll spending. Provides $lM increased funding above FYll spending. Provides $lM increased funding above FY11 spending. Returns funding to 7% decrease. Generally returns funding to 7% decrease. Some institutions implemented about an additional 1% restriction. Restriction returns funding to $0, same as FYll spending. to operate with $0 state support through administrative that
i
I ,

4. Community Colleges/Linn State 5. 4-Year Institutions

higher tuition increases have that revenue available and have MOREnet was able cuts and user fees.

6. MOREnet

0.05

0.05

7. Revenue Collection Efforts 8. Capitol Commission 9. Office of Child Advocate 10. Lease Purchase Debt Service 11. Veterinary Student Loans 12. Community Development Corporations

3.6
0.1 0.2 1.9 0.1 0.2

3.6 0.1 0.1 0.9 0.1 0.2

The General Assembly did not pass the enhanced collection legislation associated with this item. These funds were to enable a study ofthe physical infrastructure Capitol. However, such a study was already carried out in 2009. Brings funding level to be consistent with FYll available funds. The refundingof debt generated more savings than assumed in the budget. needs ofthe

All existing obligations have been met; maintains the phase-out ofthis [program, Insufficient revenue available to provide state support to a program that has not received state funding in many years.

1

EXHIBIT A

June 10,2011

FY 2012 BUDGET EXPENDITURE RESTRICTION/LINE ITEM VETOES

(millions
Approp 13. Film Office 14. Community Intervention 15. Firefighter Training 16. Air Search and Rescue 17. Corrections Overtime 18. Eating Disorders Staff & Expenses 19. Area Health Education Centers 20. Alzheimer's Grants 21. Area Agency on Aging Grants 22. Domestic Violence Grants 23. Crisis Care Services 24. Children's Treatment Services 25. Medicaid 0.2 0.2 0.2 0.015 7.8 0.15 0.4 0.25 9.0 4.8 2.0 9.1 1,700.0 Amt 0.2 0.2 0.2 0.015 2.0 0.15 0.4 0.25 0.9 0.7 0.8

of $s)
Comments

DED will continue to support the film industry and administer the film tax credits. Insufficient revenue available to begin state support for a program that has not previously received funding. Other core resources are available for training programs. Other core resources are available for this program. Overtime will continue to be addressed through comp time and other management tools. Restrict dollars for staff and expenses. Insufficient revenue available to provide state support for the Area Health

Education Centers. Insufficient revenue available to start a new grant. Provides same level of funding as in FY 11. Provides same level of funding as in FY 11. Provides same level of funding as in FY 11. Provides same level of funding for the family reunification FYll anticipated contract as in FY11.
I
I

I

I

1.6
13.9

lower spending level expected to be carried forward in the
I

Medicaid program. (Physician $10.7M, Nursing Facilities $2.2M, and Managed 26. State Auditor--Comparative 27. J~!L~i~iary Audits 6.7 170.1 0.3 6.0 Care $1.0M) I Insufficient revenue available to start a new program. Added to fund SB323, ! which was not passed by the legislature. Provides same level offunding as in FY11. ~
-... --.---~-

2

June 10, 2011

FY 2012 BUDGET EXPENDITURE RESTRICTION/LINE (millions
Approp 28. General Assembly 29. Boonville Readiness Center 30. Trade Zone Facilities 31. Regional Port Authorities Total Restricted 32.6 0.5 Amt 0.8 0.3

ITEM VETOES

of $s)
Comments

Net reduction to the House of Representatives and Senate of 4.6%. This project is substantially amount. Insufficient complete and will not require full appropriated I

0.5
1.0 2,784.3

0.5
1.0 57.1

revenue available to add funding for this item.

Insufficient revenue available to expand state support.

NOTE: GR restriction also includes $SG.3M in restriction on facilities maintenance and reserve fund included in the Governor's assumed in the budget approved by the legislature.

Budget Recommendation and

3

June 10, 2011

FY 2012 BUDGET EXPENDITURE RESTRICTION/LINE
(millions
Approp Amt

ITEM VETOES

of $s)
Comments

RESTRICTED ITEMS--OTHER FUNDS
1. Transportation 2. Math and Science Tutoring 3. Scholars and Fine Arts Academy 4. Early Grade Literacy 5. Character Education 6. Lottery Commission 7. Local Air Pollution Control 8. MoDOT Facility Relocation 9. Missouri Federal and State Technology Partnership Program (MOFAST) 10. Mediation 11. MOHELA Projects 12. MSP Remediation 13. Industry Training 14. Marine Maintenance Total Restricted Facility 0.6 0.1 Provides same level of funding as in FYll. Funds are not available for these projects. Funds are not available for this project. Funds are not available for this project. Use of funds for this project requires consent from several entities. These funds will remain restricted until that consent is confirmed. 222.5 115.1 107.80 0.3 0.2 0.1 0.01 8.0 0.3 0.2 0.1 0.01 0.2 1.2 2.0 0.2 Lottery Proceeds Fund revenue insufficient to cover additional expenditures.

Lottery Proceeds Fund revenue insufficient to cover additional expenditures. Lottery Proceeds Fund revenue insufficient Lottery Proceeds Fund revenue insufficient to cover additional expenditures. to cover additional expenditures.

Lottery Proceeds Fund revenue insufficient to cover additional expenditures. To reflect anticipated administrative efficiencies.

6.9
1.4 2.0 0.4

DNR can perform these functions at a lower cost, saving $1.2M the first year and an estimated $1.7M annually beginning in year 2. MoDOT is working on an alternative funding solution. This provides a $200,000 increase above FY11 dedicated funding for MOFAST.

99.7
0.5 1.5 1.05

99.7
0.5 1.5 1.05

4

June 10, 2011

FY 2012 BUDGET EXPENDITURE RESTRICTION/LINE ITEM VETOES (millions of $s)
Approp Amt Comments

VETOED ITEMS--GENERAL REVENUE
1. Civil Detention

and Legal Fees

0.03

0.03

HB 10 and RSMo 56.700 limits counties that can be reimbursed.

This funding

was to add Boone County, however, Boone County is not statutorily authorized to be reimbursed under this section. Total Vetoed 0.03 0.03

5

Gov. Nixon Reserves $25 Million for Joplin Tornado Recovery

Page 1 of 1

Missouri Office of Administration --------_._-------_._---_._-_ _-_._----_ _--_._._._----_._.
.._.._..._..

-_.__ ._--_ ..-_ ..

..

Jay Nixon, Governor Kelvin L. Simmons, Commissioner

QA-'::'-Qm~ C.om rnis~iQn~[~sJ2ffj~~
_~e\lfs_8.~Jggse_s

2011

Office of Administration
May 27, 2011

News

Gov. Nixon Reserves $25 Million for Joplin Tornado Recovery
JEFFERSON CITY, MO - In response to the historic tornado that hit Joplin on Sunday, May 22, Gov. Jay Nixon has instructed State Budget Director Linda Luebbering to reserve $25 million from next year's budget to be used to address the immediate needs from the deadly tornado. This $25 million is on top of the $25 million that the Governor has already reserved to help pay for flooding in southeastern Missouri. Money for emergency response and cleanup will come from Missouri's Fiscal Year 2012 budget, which begins on July 1.

###

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Offi~e oLt:-illJal Opportunity Pers9nnel ~LJL~h9~iD.g EXHIBIT B

http:// oa.mo .gov 1co/releases/20 11IGov _Nixon_Reserves _25 _Million_for _Joplin_Tornado...

8/26/2011

THOMAS A. SCHWEICH
Missouri State Auditor
August 19,2011

Honorable Jeremiah W. (Jay) Nixon Governor State Capitol Jefferson City, Missouri Dear Governor Nixon: As you know, the extraordinary events and damage associated with the Joplin tornado, other storms, and the flooding on the both the Missouri and Mississippi rivers have created a significant financial obligation on our state. While I firmly agree with your position that communities and citizens affected by these disasters should receive state and federal assistance needed for a comprehensive and rapid recovery, I also want to ensure necessary resources are provided in a transparent and lawful manner. This letter, in fulfillment of our duties under Chapter 29, RSMo, communicates the results of our comprehensive review of your actions to withhold state fiscal year (FY) 2012 appropriated expenditures. The objectives of our review were to determine whether: 1. The amount withheld from FY 2012 appropriated expenditures was accurately calculated and adequately supported. The methods used to make the withholdings were in compliance with applicable legal provisions. The budgetary process, as it relates to withholdings, is in need of improvement.

2

3.

Our review has determined that my office cannot audit the accuracy of amounts withheld because your office prepared no calculation. Additionally, the reason provided for the withholdings does not appear to meet constitutional provisions. We are aware of no constitutional or statutory authority to withhold from appropriated expenditures based on state obligations that were unanticipated at the time the budget was passed by the General Assembly. To the contrary, the relevant constitutional provision allowing withholdings deals only with shortfalls of revenue, not increased costs. In addition, budgetary and related withholding processes need to be re-evaluated and/or state law revised. Applicable Legal Provisions Article IV, Section 24, Missouri Constitution, requires the Governor to submit to the General Assembly, within 30 days of it convening, a budget that contains the estimated available revenues and a complete and itemized plan of proposed expenditures of the state, with any recommendations of laws necessary to provide sufficient revenues to meet expenditures.

P.O. Box 869 • Jefferson City, MO 65102 • (573) 751-4213 • FAX (573) 751-7984

EXHIBIT C

Article IV, Section 27, Missouri Constitution, grants the Governor the power to reduce the expenditures below appropriated amounts (withhold) when actual revenues are less than the revenue estimates upon which the appropriations were based. Article IV, Section 27(a), Missouri Constitution, also establishes the Budget Reserve Fund (commonly referred to the Rainy Day Fund). The Governor may request the General Assembly to appropriate emergency funds from this fund with certain restrictions, if there is a budget need due to a disaster. In addition, Article IV, Section 28, and Article III, Section 36, Missouri Constitution, allow monies in the state treasury to be spent only if appropriated. Recent Disasters Prior to the beginning of FY 2012, citizens and communities in the state suffered significant disasters. In April and May, flooding occurred in the southeastern section of the state along the Mississippi River, on May 22 a massive tornado destroyed a significant portion of Joplin, and beginning in June flooding occurred in the northwestern section of the state along the Missouri River. On June 10, 2011, you directed the Office of Administration (OA) to withhold over $172 million, approximately $57 miIIion from the state General Fund (to be used for disaster recovery) and $115 million from FY 2012 appropriated expenditures of other funds. On July 1,2011, based on your instructions, the OA committed an additional $100 million for disaster aid to be paid for with the better-than-expected revenues carried forward from FY 2011. You subsequently ordered the release of over $1.2 million of withholdings. Withholding Procedures and Methodology According to the state Budget Director, assumptions/predictions from the following categories are considered when determining withholdings: 1) actual and estimated revenues, 2) state spending obligations, 3) approved legislation which involves revenues/costs not considered in the current budget, and 4) legislation which involves revenues/costs considered in the budget but not approved. Obligations are items, with and without appropriations, which involve the state's share of expenses/costs, and may involve items difficult to estimate/predict such as natural disaster expenditures. Obligation/spending issues may be handled in several ways, including using an estimated (E) appropriation, supplemental budgets, withholdings, or a combination of these items. An example of an item approved by the General Assembly but not considered in FY 2012 appropriations is the legislation which approved the gradual repeal of the franchise tax. An example of an item not approved by the General Assembly, but included in the FY 2012 available revenue amount, is the tax amnesty program estimated to generate approximately $34 million. According to the Budget Director, the OA does not prepare a formal documented withholding calculation, and does not use a formula to establish withholding amounts. Instead the Governor's office and the Budget Director negotiate withholding amounts and the amount is ultimately based on what the Governor believes is necessary. Each month the OA tracks and evaluates the actual revenues and predictions for future revenues to determine if revenue estimates are on target for the year. The OA also evaluates gaming and lottery revenues monthly because these monies affect the appropriations for education. Withholdings may also be necessary due to the amount of actual expenditures from E appropriations and supplemental budgets, according to the Budget Director. The Governor and General Assembly use E appropriations in the budgetary process. A $1 E appropriation is typically used for expenditures that cannot be readily estimated such as disasters or costs of the National Guard when ordered by the Governor to respond to emergency situations. Disaster recovery costs often are partially funded by federal monies; however, the federal participation rate is often unknown until weeks after the disaster occurred. Since the early 1990s, the state has used a consensus revenue estimate (CRE) to estimate General Fund revenues. The CRE is an amount agreed upon by the Governor and the General Assembly, based on

2

recommendations prepared by the state Budget Director and the Directors of the House Appropriations and Senate Appropriations Committee Staff. The CRE comprises a significant portion of the resources available from the General Fund for appropriations by the General Assembly. A meeting is held in December each year to agree upon a CRE for the next fiscal year's budget and to revise the CRE for the current fiscal year. State Auditor Methodology The methodology to accomplish our objectives included: 1. Interviewing key personnel from the Governor's office, the OA, House Appropriations, and the Senate (including Appropriations Committee staff) regarding the budgetary and withholding process; Reviewing and evaluating certain applicable legal provisions; Reviewing Governor withholdings and related release of withholdings for FY 2012 and FY 2011; and Reviewing the FY 2012 state budget, including the General Revenue summary of the estimated resources and obligations, and the FY 2011 consolidated revenue report which provides the actual revenues by type for the current and prior fiscal years.

2. 3.

4.

Results and Conclusions Because the OA did not document a calculation of the necessary withholding amount, it was not possible.for us to determine whether the amount withheld from fiscal year 2012 appropriated expenditures was accurately calculated. The method used to make FY 2012 withholdings does not appear to comply with constitutional provisions. When the Governor ordered the withholdings in June 2012, FY 2012 had not begun, and therefore, actual revenues could not have been lower than anticipated FY 2012 revenues. In addition, there is no provision in the Missouri Constitution, that allows the Governor to withhold amounts from appropriated expenditures based on obligations that were unanticipated at the time the budget was passed by the General Assembly. Your actions are troubling because the legislative branch of govermnent was not provided appropriate checks and balances, and could result in the Governor basically rewriting the budget without recourse by the General Assembly. To address withholding issues and the constitutional separation of powers question, on July 22, 20 II, several members of the General Assembly requested a legal opinion from the Office of Attorney General. The Attorney General has not yet issued an opinion related to this request. One option available under state law would be to use the Rainy Day Fund to fund disaster related costs. This would require you to request an emergency appropriation to be approved by two-thirds of the members of the General Assembly. Utilizing the Rainy Day Fund would require both the Governor and General Assembly to make budgetary decisions and provide greater accountability and transparency for decisions related to funding unanticipated obligations needed for disaster recovery efforts. State law provides little guidance regarding the proper manner and method to determine withholding amounts, whether withholdings must be released should actual revenues subsequently exceed revenue estimates, or how to determine if actual revenue shortfalls occur. During FY 2011, actual revenues were less than the CRE by about $97 million yet withholdings totaled over $301 million, of

3

which only $17.5 million were ultimately released. Also, withholdings and subsequent release of withholdings may be based on the revised CRE; however, case law provides that a revenue estimate prepared after passage of the budget has no legal significance. Also, determining when actual revenue shortfalls occur is problematic. While actual revenues for a current year cannot be determined until June 30, the current practice of comparing year-to-date revenues to prior years actual amounts and the CRE appears reasonable. Several mechanisms currently used in the budgetary process are not authorized by state law. Neither, the CRE nor the E appropriations are authorized by state law. The use of the CRE appears to be a reasonable method to estimate revenues for budget purposes. However, the utilization of E appropriations is subject to misuse as the executive branch has no spending limit as long as cash is available in the State Treasury. Recommendations As noted above, my office does not question the need for the swift actions taken by you, as Governor, to address the unprecedented disasters faced by the citizens of the state and the state's responsibility for certain costs. However, the method you used to make FY 2012 withholdings does not appear to comply with constitutional provisions, and amounts withheld were not supported by adequate documentation. In addition, I believe you need to work with the legislature to propose legislation to clarify and/or address the following issues: 1. Whether the Governor can withhold due to spending based on obligations resulting from a disaster or emergency, and were unanticipated at the time the budget was passed by the General Assembly. The establishment of well defined and measurable criteria to determine I) when to initiate withholdings, 2) required documentation to support withholding amounts, and 3) whether and/or when withholding amounts are to be released. Amending state law to provide for the use of the CRE and E appropriations in the budget process. Consideration of a cap for estimated appropriations.

2.

3. 4

Sincerely,

Thomas A. Schweich State Auditor

CC: Members of the General Assembly

4

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