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Capital Reserve Fund or Legislative Slush Fund?

When it comes to spending by the S.C. General Assembly, old habits die hard.

For three straight fiscal years after the Great Recession hit, the Legislature tapped the capital reserve fund – one of  two constitutionally established reserve funds available to lawmakers – to fill a collective $385.5 million hole in the state’s general fund budget, S.C. comptroller general records show.

Last fiscal year, lawmakers appropriated nearly $111 million to the capital reserve fund, but thanks to better-than-expected general fund revenues, they pretty much left it alone.

So what are they doing with the fund these days, given that the worst of the economic crisis supposedly is in the state’s rear-view mirror?

Spending it on a bunch of their favorite projects – just like they did before the Great Recession. 

For this fiscal year, lawmakers plan to blow the fund’s entire $107.6 million balance as of last June 30. For next fiscal year, the House has proposed spending $104.8 million from the fund.

Before the Great Recession hit, lawmakers appropriated the fund’s entire balance of $99.3 million for fiscal 2006, $102.3 million for fiscal 2007 and $111.8 million for fiscal 2008, records show.

Although the capital reserve fund is listed as a line item in the state budget bill (H. 4813) for fiscal 2013, which starts July 1, a separate joint resolution (H. 4814) details how the fund would be spent.

The joint resolution, which passed the House on March 15, is now before the Senate Finance Committee, which could take it up next week.

One lawmaker wants to at least slow the pace of spending from the capital reserve fund. Sen. Shane Massey, R-Edgefield, on April 11 proposed a constitutional amendment (S. 1425) banning lawmakers from using any capital reserve funds for “other nonrecurring purposes.”

“Basically, we can spend the money on whatever we want,” Massey told The Nerve last week. “It’s not for capital projects, and it’s not even a reserve fund.”

The larger problem, Massey continued, is that the General Assembly typically "spends all the money in good times and cuts very deeply in bad times because there is not enough in reserves to weather the storm."

Under the state constitution, lawmakers are required every fiscal year to set aside 2 percent of the previous year’s total general fund revenues for the capital reserve fund. Voters in 2010 approved changing the constitution to require that the state’s biggest “rainy day” fund – the general reserve fund – be increased to 5 percent from 3 percent of the prior year’s general fund revenues.

That same year, voters approved another constitutional amendment banning the capital reserve fund from being used to help offset mid-year budget cuts, as was done, for example, in 2009. Now, the fund’s stated primary purpose is to replenish the general reserve fund if the general reserve fund is needed to cover operating deficits.

But if the general reserve fund doesn't need to be replenished, lawmakers under the constitution can, by a two-thirds vote in each chamber, spend the capital reserve fund to:

  • Finance previously authorized capital-improvement bond projects;
  • Retire interest or principal on bonds previously issued; or
  • Fund capital improvement projects or use it for "other nonrecurring purposes.”

Although much of the capital reserve fund typically is earmarked for deferred maintenance projects at state agencies, including colleges and universities, millions often are funneled to a variety of other nonrecurring projects that critics say don’t meet the  definition of a capital improvement project.

This fiscal year, for example, $13 million is set aside for the S.C. Technical College System’s “readySC” program to train workers at certain companies; the House for fiscal 2013 has proposed upping that amount to $16 million.

Another $5 million this fiscal year is earmarked for the state Department of Commerce’s “deal-closing” fund to attract new companies to the state, while an additional $5 million will flow through Commerce to various regional economic development organizations.

And $3.8 million is set aside for the S.C. Election Commission to pay for a statewide primary election in June.

Last June, Gov. Nikki Haley vetoed a joint resolution appropriating the capital reserve fund for this fiscal year, noting in a letter to lawmakers that her veto is “based on the fundamental premise set out in our state’s Constitution, which requires reserves to be set aside and utilized to cover revenue shortfalls.”

“In two of the four most recent fiscal years, the Capital Reserve Fund was needed to offset substantial General Fund shortfalls,” Haley wrote. “We need to replenish and further build on that, leaving these funds unspent and moved to the Contingency Reserve Fund to weather another possible economic downturn.”

The contingency reserve fund is made up of  excess general fund revenues from the previous fiscal year. More than $122 million in excess revenue from last fiscal year alone is available for fiscal 2013, state budget records show.

“To be clear,” Haley continued in her veto message, “I am not questioning the merit of many of the projects funded in this Bill – simply that these funds should be held in reserve as we continue in the current budgetary crisis.”

The House and Senate, however, apparently didn’t believe there is a budget crisis, as both chambers easily overrode her veto, causing the capital reserve fund resolution (H. 3701) to become law for this fiscal year.

Massey, who was one of eight senators who voted to uphold the veto, told The Nerve last week that capital reserve fund resolutions  pass the Legislature with typically little controversy because lawmakers often agree in advance to support each other’s pet projects.

“I called it the ‘Not-So-Capital-Slush-Fund,’” Massey recalled saying on the Senate floor last year.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.

 

 

 

 

 

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