Request By:
Honorable George L. Atkins
Secretary
Executive Department of Finance and Administration
Capitol Annex
Frankfort, Kentucky
Opinion
Opinion By: Steven L. Beshear; On the Opinion: Charles W. Runyan, Assistant Deputy Attorney General
You have indicated that there will be an approximate deficit this fiscal year in the general fund of $114,000,000, in the transportation fund of $45,000,000, and in the capital construction fund of $58,000,000. You attribute these deficits to the reduction of taxes in the 1979 Extraordinary Session, to economic decline in some sectors, to the impact of fuel prices upon the state's fuel excise taxes and ultimately upon the transportation fund, and to the withdrawal of federal revenue sharing money.
You request the opinion of this office on questions relating to a reduction in appropriations, lapsing of funds, and allied matters.
At the outset, it must be noted that the foundation of state financing is found in the first sentence of Section 171 of the Kentucky Constitution:
"The general assembly shall provide by law an annual tax, which with other resources, shall be sufficient to defray the estimated expenses of the Commonwealth for each fiscal year. ". (Emphasis added).
The major ways by which the legislature can raise money for necessary governmental functions are by taxation or by borrowing money. Section 171 of the Constitution, which emphasizes ad valorem taxes, must be read together with sections 174 and 181, relating to state income, licenses, franchises, and excise taxes.
In considering the reduction of appropriations, you, as Secretary of Finance, under the principle authority of KRS 45.160 must keep in mind that you are dealing not only with "necessary constitutional functions" for the people of the Commonwealth and the economic impact of the budget, but with the lives and fortunes of dedicated and competently performing state officers and employees as well. This business of reduction was not intended to be just an exercise in computer technology and abstraction, even though state government is vast and complex. A sense of the general welfare of all of our people lies at the roots of our constitutional and political tradition.
Question No. 1:
"What overall authority does the Secretary of Finance have relative to responding to a general fund deficit? (i.e. your interpretation of such phrases as 'equitably reducing, according to needs, without discrimination' in House Bill 931)"
Paragraph 8 of Part VI of the 1980 Biennial Budget [Ch. 109, p. 256 of 1980 Acts] provides that appropriations to budget units from the General Fund and Transportation Fund can only be anticipated, since the available revenue accruing to the state and the specific needs of budget units can likewise only be anticipated. Also the legislature considered the complex nature of the state and national economy.
Thus the legislature in paragraph 8 of Part VI of the Budget expressed the policy that the expenditures for each fiscal year shall not exceed the total revenue accruing to any fund, as defined in KRS Chapter 45, for the same fiscal year. Kentucky is not a deficit government and may not contract debts amounting to casual deficits exceeding at any one time $500,000. Kentucky Constitution Sections 49 and 50.
The General Assembly therefore directed the Secretary of Finance, with the advice of the Commissioner of Revenue (KRS 41.390(2)), upon approval of the Governor, to determine the needs of the various budget units and ascertain the total revenue to be accrued to the General Fund and the Transportation Fund. Then, upon such determination, the Secretary of Finance, as provided by general law (see KRS 45.160), is directed to prevent an overdraft or deficit in any fiscal year for which appropriations are made, "by equitably reducing, according to needs, without discrimination, the appropriations herein made from the General Fund and Transportation Fund" to each budget unit in state government. (Emphasis added). However, this authority to reduce appropriations shall not permit any reduction of the appropriations of any budget that "will actually impair the necessary constitutional functions of such agency or activity, the operations and functions of which are determined to be necessary constitutional functions of state government. " (Emphasis added). Biennial Budget, Ch. 109, p. 256 of 1980 Acts.
It must be noted that this basic policy language for preventing deficit financial operations in state government contained in the 1980 Budget Bill is nearly a mirror of the general statute relating to such matters, KRS 45.160. KRS 45.160 reads in full as follows:
"Except as deviations therefrom are made necessary by changes in conditions of operation, to meet unforeseen contingencies, to correct errors, or to avoid cash deficits, the heads of the budget units, the executive department for finance and administration and the governor, in allotting appropriations for expenditure, shall be governed by the functions, major program areas, programs, or units or organization as shown in the detailed budget estimates as enacted by the general assembly, and the heads of the budget units shall hold to the functions, major program areas, programs or units or organization as authorized and approved on advices of allotments. The secretary of the executive department for finance and administration shall make quarterly allotments of appropriations, except in the case of appropriations for the purpose of capital outlay for buildings, roads and bridges, and for printing, as provided in KRS 45.200. In any other cases where periodic allotments are provided for herein are impracticable, the department may prescribe a different period suited to the circumstances, not exceeding one (1) year nor extending beyond the end of the biennium. The department shall have authority at any time to modify or amend any allotment previously made by it, upon application of, or upon notice to, the department or agency concerned, provided that no such modification or amendment shall reduce an allotment below the amount required to meet valid obligations or commitments previously incurred against the allotted funds. In making the allotments the expenditures to be authorized shall be classified according to purpose, and the funds allotted for each purpose of expenditure shall be used for no other purpose, except that the head of any budget unit, with the approval of the secretary of the executive department of finance and administration, may transfer allotted funds from one (1) purpose of expenditure to another, within the budget unit. In no case shall obligations be incurred or expenditures made in excess of the total amounts alloted. The decision of the secretary of the executive department for finance and administration as to the amount of any allotment for any fiscal quarter or other period or as to the purposes for which money alloted may be expended, shall be final and conclusive. The secretary of the executive department for finance and administration is authorized, empowered and directed by the general assembly to reduce any appropriation and withhold allotments therefrom to prevent an overdraft or deficit in any fiscal year for which any appropriation is made; provided, however, that the power vested shall not permit any reduction of the appropriation of any officer, board, commission, institution or subdivision of state government that will actually impair the necessary constitutional functions of any agency whose operations and functions are determined to be necessary constitutional functions of government."
It can be seen from the above statutory provision that the Secretary of Finance and the Governor are not restricted, in reducing appropriations, to the general fund. The statute says in part that the Secretary of Finance is "authorized, empowered and directed by the general assembly to reduce any appropriation and withhold allotments therefrom to prevent an overdraft or deficit in any fiscal year for which any appropriation is made. . . ." (Emphasis added). This emergency power extends to any state appropriation of any fund.
We also note at this point another difference between the language in KRS 45.160 and the Budget Bill. For many years in a "General Provisions" section of the biennial budget, a treatment has been given the matter of scaling down appropriations to prevent a deficit. The budget contains the language "equitably reducing, according to needs, without discrimination." There is no similar language in KRS 45.160. KRS 45.160 provides in part that the Secretary of Finance is directed to reduce any appropriation and withhold allotments therefrom to prevent an overdraft or deficit in any fiscal year for which any appropriation is made; provided that such reduction shall not impair the necessary constitutional functions of government of any agency.
While KRS 45.160 offers no specific guidelines, except that reductions in appropriations cannot impair necessary constitutional functions of government of any agency, we believe the principles emerging from KRS 45.160 and the case law on statutory interpretation make the end result of the application of KRS 45.160 consonant with the intent language ("equitably reducing, according to needs, without discrimination") of the Budget Bill.
A major rule of statutory construction is that a statute should be construed as to make its application equitable and just. Goodpaster v. United States Mortgage Bond Co., 174 Ky. 284, 192 S.W. 35, 37 (1917). This rule of construction applied to KRS 45.160 makes it consistent with the language directing the Secretary of the Department of Finance to "equitably reduce" appropriations "without discrimination."
Another important principle of construction is that the language of the statute should receive a practical construction. Nuetzel v. Will, 210 Ky. 453, 276 S.W. 137, 138 (1925). The Budget Bill language of "according to needs" is consistent with this principle of practical construction as applied to KRS 45.160.
Thus, these court decisions just cited above point up that KRS 45.160 and the Budget Bill must be interpreted together so that they may be reasonably applied under the practical circumstances and necessities faced in this fiscal year.
Under the above-mentioned circumstances and principles, you, as the Secretary of Finance, in applying KRS 45.160 and the pertinent general provisions of the 1980 Budget Bill, to the reduction of appropriations, should follow at least these guidelines:
1. You should make a written finding that a deficit is imminent, if that is true.
2. You should make the best possible ascertainment, with the aid of the Commissioner of Revenue, of the total financial resources anticipated to be accrued to the General Fund, the Transportation Fund, and the Capital Construction Fund, for the particular fiscal year.
3. You should ascertain the needs of each budget unit within the context of necessary constitutional function.
4. You should give careful consideration of the nature of those functions and the probable impact of reduction in terms of governmental services and general economic impact.
5. You should keep in mind the urgent necessity for continuing necessary constitutional functions and the history of appropriations for budget units.
6. The reductions may not impair necessary constitutional functions of government.
7. Above all, the reductions must be reasonably effected in the light of the public needs and interest subserved by the particular agencies.
As Secretary of Finance, you must keep in mind that state government exists only for the people, and not just for itself. See Section 4, Kentucky Constitution. The work papers reflected in the Executive Budget should be resorted to as to detailed necessary governmental programming consistent with constitutional functions and as to integrating such programming with the above guidelines.
With the above guidelines in mind, a brief recitation and consideration needs to be given to those areas where reductions cannot be made. Reductions cannot be used to impair obligations of contract previously entered into. See Section 19, Kentucky Constitution and Article 1, Section 10, U.S. Constitution. This includes, inter alia, contracts made under KRS 45A.240, et seq., and bonded indebtedness [bonds sold and issued]. This includes government obligation bonds [see Section 50, Ky. Const.] and state revenue bonds. While revenue bonds do not involve constitutional obligations of the Commonwealth, the continued orderly provision for payment of principal and interest on revenue bonds is extremely vital to the state when considering the state's fiscal image of responsibility and the future market for state revenue bonds.
A reduction cannot be effected such that constitutional officers' compensation is reduced during their terms. Section 235, Kentucky Constitution. A constitutional officer is an officer named and designated in the text of the constitution. Board of Education of Graves County v. DeWeese, Ky., 343 S.W.2d 598 (1961). Section 120 of the Constitution provides that all justices and judges shall be paid adequate compensation. However, the courts might hold that to single out nonconstitutional state officers and employees for reduction or nonadvancement in salaries, such as to reduce such salaries below the level of adequacy, would be to act arbitrarily, as contemplated in Section 2 of the Constitution and as that section has been interpreted by the courts. See Pritchett v. Marshall, Ky., 375 S.W.2d 253 (1964) 258, the court declaring that Section 2 of the Constitution is broad enough to embrace due process and equal protection of the laws, both fundamental fairness and impartiality. All state public officers and employees are entitled to payment of their salaries. It is the duty of the General Assembly to provide the money. Talbott v. Burke, 287 Ky. 187, 152 S.W.2d 586 (1941) 588. The work of the government, of course, depends upon the workers.
Question No. 2:
"Can the Secretary of Finance identify areas of cuts rather than an across-the-board reduction?
e.g. Cuts in new and expanded programs?
Cuts in state grant programs?
Other selected cuts?"
Within the guidelines mentioned above, reduction in appropriations may be made. We believe you, with the assistance of the heads of the budget units, may identify areas for reduction in appropriations. It is to be noted that the language of KRS 45.160 as well as that of the Budget Bill, authorizes reducing any appropriation and withholding allotments therefrom. We believe you may, remembering the reasonable guidelines suggested, look at each section of the Appropriation Act "as a separate and/or specific appropriation and law." See Budget Bill, Ch. 109, Part VI, General Provisions, Paragraph 2, p. 255 of the 1980 Acts. This being the case, we think an across-the-board reduction would not be in order since some appropriations are going to involve "necessary constitutional functions" and others not at all or to a lesser extent. Obviously, considerable discretion is to be shouldered by you in reviewing each specific appropriation. But we think it clear the General Assembly has granted this discretion to you so that an overdraft or deficit may be avoided and at the same time allow the necessary constitutional functions of government to continue. Although a new or expanded program may involve a necessary constitutional function, we believe the history of appropriations deserves close scrutiny, as part of the suggested guidelines noted above indicates, and that the continuation of governmental services previously existing at their approximate past level of funding deserves some priority.
Question No. 3:
"Within an area such as new and expanded programs, can the Secretary of Finance reduce one program more than another? e.g. the AFDC benefits increase, while an expansion, should not be cut in our judgment, while other expanded programs should be eliminated completely."
We have answered that under Question No. 2. We believe the answer is that the Secretary of Finance can exercise reasonable discretion in this regard. The above guidelines should furnish a reasonable and practical basis for such reductions.
Question No. 4:
"If we can identify cancelled projects in the capital construction fund and/or can substitute funding source for uncancelled projects, can we lawfully transfer the associated funds to the general fund? "
Except where the budget language or a general statute authorizes a lapse or transfer of major category funds, the appropriations in the state budget are generally limited to the specific use or purpose intended. See KRS 45.040(9), 45.020(1), and KRS 45.010(2). In the latter statute the term "appropriation" is defined as an authorization by the general assembly to a budget unit to expend from public funds a sum of money not in excess of the sum specified for the purposes specified in the authorization etc. The court wrote in Davis v. Steward, 198 Ky. 248, 248 S.W. 531 (1923) 532, that "An appropriation by the legislature is the setting apart of a particular sum of money for a specific purpose. . ." (Emphasis added). This specificity cannot be violated, except where the General Assembly has expressly so authorized such deviation.
In Part V of the 1980 state budget [p. 253 of the 1980 Acts], it is provided that where capital construction projects are cancelled, any appropriated debt service for those projects shall remain unallotted and "lapse" to the General Fund Surplus. In Part V it is stated that if revenue sharing funds are not made available to the state, the Secretary of Finance may reduce appropriations under Part VI, paragraph 8 of the budget.
In any event, where a capital construction project is properly cancelled [does not impair contractual obligation], the Secretary of Finance may, under KRS 45.160, treat the appropriations for the particular cancelled capital construction project as lapsing to the General Fund. This is by operation of law, not the act of the Secretary. However, as the "watchdog of the treasury", the Secretary of Finance must exercise a sound discretion in applying the "cash deficit" or emergency language of KRS 45.160. Reeves v. Talbott, 289 Ky. 581, 159 S.W.2d 51 (1942) 55. The central premise in state finance is that the legislature in enacting the budget must address itself to necessary constitutional functions of government. Thus when the clouds of economic decline or lack of sufficient taxes enshroud the state, KRS 45.160 must be construed as providing a reasonable vehicle of flexibility in meeting temporarily the demands of state government during such periods of austerity. This flexibility in scaling down appropriations and the lapsing of major category funds, if unsuccessful in meeting necessary governmental needs, means the legislature and the governor must consider additional taxes to meet its responsibility under Section 171 of the Kentucky Constitution. Justice Reed, for the court, in Bradshaw v. Ball, Ky., 487 S.W.2d 294 (1972) 297, wrote that "The duty to enforce the criminal laws rests upon the executive department, and the duty to appropriate money for the adequate enforcement of the criminal laws rests upon the legislative department. (Emphasis added). Where an actual deficit in state revenues occurs, the legislature may constitutionally, at any succeeding session provide, by its enactment, for an additional or supplemental levy and collection of taxes with which to meet such appropriations of the prior session. State Budget Commission v. Lebus, 244 Ky. 700, 51 S.W.2d 965 (1932). There the court wrote at page 967 that "If this were not so, the constitution would be impotent and the legislature prevented from functioning for governmental purposes." (Emphasis added). See Miller v. Quertermous, 304 Ky. 733, 202 S.W.2d 389 (1947) 391. See also Ferguson v. Oates, Ky., 314 S.W.2d 518 (1958), where the attorney general was not successful in getting additional appropriations from the unappropriated general fund surplus simply because he failed to allege and prove that the biennial appropriation was unreasonably inadequate for the constitutional function. Also see Jones v. Commonwealth, Ky., 457 S.W.2d 627 (1970), holding that the lack of an appropriation would not be a bar to a judicial order for payment where an essential governmental expense under the constitution is involved. Section 171 of the constitution provides in part that the General Assembly shall provide by law an annual tax, which, with other resources, shall be sufficient to defray the estimated expenses of the Commonwealth for each fiscal year. The courts, however, have held that the provision is not self-executing, but requires legislation to put it in force. See Russell v. County Board of Education, 247 Ky. 703, 57 S.W.2d 681 (1933) 684.
The application of KRS 45.160, as pointed out earlier herein, in reducing appropriations and lapsing of funds under legislative direction, presents no constitutional problem as to exercise of power under division of powers of constitutional government. Commonwealth v. Johnson, 292 Ky. 288, 166 S.W.2d 409 (1942) 415. See Section 230, Ky. Constitution, and Hopkins v. Ford, Ky., 534 S.W.2d 792 (1976) 795. In that case the Supreme Court of Kentucky, in noting that the state budget process is not an exact science, held that the governor's exercise of discretion in allocating surpluses to various state agencies, as directed in the budget, did not violate Section 230 of the Constitution and did not constitute an unconstitutional delegation of legislative power. The court said that the principle that the constitution does not prohibit some delegation of legislative power is well settled, citing Commonwealth v. Associated Industries of Kentucky, Ky., 370 S.W.2d 584 (1963).
Authority exists for the cancellation of capital construction projects contained in the state budget. In Part V [Construction Fund] of the 1980 state budget [Ch. 109, p. 253], it is written that " In the event that any authorized capital construction and/or equipment purchase projects are cancelled it is the intent of the General Assembly that any appropriated debt service for those same projects shall remain unallotted and lapse to the General Fund surplus." (Emphasis added). That indicates that cancellations of such projects are clearly contemplated by the General Assembly in order to meet deficits in the General Fund, since such capital construction funds involved in a cancellation "lapse" to the General Fund. See also KRS 45.750 to 45.800, relating to capital construction fund financing. Then, most importantly, as we said above, Section 171 of the Constitution requires the General Assembly to levy taxes sufficient to carry on necessary governmental operations. The language in the 1980 budget, relating to the lapse of cancelled capital construction projects money to the general fund, implements the constitutional mandate of Section 171, at least temporarily.
Where a capital construction project is set up in the budget, but with no bonding anticipated at the time, and then later the executive branch decides to bond [issue revenue bonds] the project, the money appropriated for the project may also be considered as lapsing to the general fund under the language of Part V of the budget, provided that the sinking fund for the bonds may be provided through appropriations made to a state agency for "rental purposes."
Question No. 5:
"Can the Secretary's authority to act in such an emergency also apply to substituting sources of funds? For example, can investment income, which is now budgeted in the capital construction fund be deposited instead to the general fund? "
KRS 41.380(3) provides that interest earned from investments of state funds shall accrue to the credit of the general expenditure fund. Certain exceptions listed therein do not apply under your question. In Part V [Construction Fund] of the 1980 budget, p. 254 of the Acts, it is provided in effect that income from investments of capital construction fund money shall remain in the capital construction fund. KRS 41.380(3), however, controls. The budget bill was signed April 2, 1980. However, S.B. 376 [Ch. 295], Section 11, amending and republishing KRS 41.380 was signed on April 9, 1980. Thus the latter was the later legislative expression of will, and it should control. See Butcher v. Adams, 310 Ky. 205, 220 S.W.2d 398 (1949) 400, the court observing that "It is an elementary rule of statutory interpretation that whenever in the statutes on any particular subject there are apparent conflicts which cannot be reconciled, the later statute controls." (Emphasis added). Thus investment income involving the capital construction fund should be deposited to the general fund, by operation of law.
Question No. 6:
"Should an 'emergency' or similar notion be formally declared by the Governor and/or the Secretary? "
Under KRS 45.160 the Secretary of Finance is authorized to reduce appropriations in the manner described therein and under the guidelines mentioned above.
You, as Secretary, should set forth in an administrative order, under the guidelines mentioned under Question No. 1, and after your investigation and budget analysis [based on needs and available revenue], that a deficit will occur in particular budget funds for the particular fiscal year unless, and prior to any intervening legislative action of additional tax levy, the Secretary takes action to reduce appropriations under KRS 45.160, if that is deemed to be true.
The order should contain a detailed outline of proposed reductions of appropriations and lapse of capital construction fund money, found necessary under KRS 45.160 in order to avoid cash deficits, if that is true. After approval by the Governor, the action of reduction and cancellation of capital construction projects finally to be taken by the Secretary of Finance can be formally approved in an appropriate executive order of the Governor [see also KRS 45.750 to 45.800].
Question No. 7:
"Should any distinction be made between the executive branch and the legislature? the judiciary? constitutional officers?"
The statute, KRS 45.160, makes no distinction as to the budget units of the various branches of government. The essential criterion is "essential constitutional functions of government." And the Secretary of Finance and the Governor must not forget that in any pruning or reduction process, as relates to appropriations and lapses, necessary constitutional functions cannot be impaired, even if additional taxes become necessary. The courts have said that "illustrative of what are indispensable governmental expenses are expenditures for salaries of officers, expenses for elections and maintenance of institutions." First National Bank of Manchester v. Hays, 288 Ky. 297, 156 S.W.2d 121 (1941) 125.
Section 171 of the Kentucky Constitution, as we have said, requires that an annual tax be levied which shall be sufficient to defray the ordinary expenses of the state. Sections 49 and 50 of the Constitution relate to borrowing money necessary for the state's governmental operations. The court, in Rhea v. Newman, 153 Ky. 604, 156 S.W. 154 (1913), concerning the three constitutional sections, wrote this at page 157:
"These provisions, when read together, constitute a sound business rule for the conduct of the state's finances. It needs no argument to demonstrate the soundness of the elementary proposition that the state should live within its income -- year by year. The yearly income can be approximately estimated; and whenever the Legislature concludes to exceed those revenues in its appropriations of money, not only good business methods, but the very terms of the Constitution, which its members have sworn to support, require it to levy an additional tax to meet the additional appropriation. "
Elsewhere in Rhea, at page 158, the court observed:
"All the executive and judicial officers of the state, its many penal and charitable institutions, its public schools and State University, and its other public institutions, too numerous to mention, must be maintained, regardless of the condition of the treasury. The machinery of government provided by the Constitution for the protection of all the people of the state must not cease operating merely because a majority of the members of some particular Legislature might be so unmindful of their oaths of office as to neglect to provide an adequate revenue."
CONCLUSION
We have pointed out above that you, as Secretary of Finance, are empowered and directed to reduce appropriations to prevent an overdraft or deficit. Guidelines have been suggested which we believe should be followed to carry out your discretion in equitably reducing, according to needs, without discrimination, various appropriations while not impairing any necessary constitutional functions.