Budget Provisos and Pass-Throughs – A Primer

March 9, 2010

Investigative Reports

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The NerveA $2 million state allocation to a nonprofit health care system in the Horry County area exemplifies a lack of accountability and transparency in the state budget, via a pervasive and convenient method of shrouding spending called a pass-through.

The appropriation also illustrates how stimulus funding appears to be doing as much to aid state and local governments as it is to create private-sector jobs.

These lessons in the state budget prove timely at this juncture: The S.C. House could begin debating a spending plan for the new fiscal year, which begins July 1, in the next week or so.

Granted, the American Recovery and Reinvestment Act, better known as the stimulus, partly was billed as a way to help state and local governments muddle through the recession and prevent mad layoffs of teachers and cops and so on.

Mainly, though, the $787 billion package was pitched as a vehicle for creating jobs amid unemployment spiraling up, the financial system melting down and consumer confidence panicking in fear of the Great Depression redux.

What has happened with much of the money, however, amounts to a shell game, whereby state governments are using it for existing programs, freeing up chunks of their tax revenue for other uses.

Case in point: the $2 million state allocation.

In the form of a big old symbolic check, S.C. Rep. Tracy Edge, R-Horry, presented the money to the nonprofit Loris/Seacoast Healthcare Foundation during a gala the foundation held in August.

The foundation is a relatively new entity that supports the Loris Healthcare System, a not-for-profit collaborative serving a largely rural population inland of Myrtle Beach. The system was established as a special-purpose district in 1950, according to Celeste Bell, marketing director for the health care provider.

“Part of our service area is considered medically underserved,” Bell says. Many patients of the system are on Medicaid; many others are uninsured, she says.

The check from Edge caught the foundation unawares, as the organization did not know it would be receiving the money, Bell says. “That was kind of a surprise to us that night it was announced.”

Asked how the foundation used the money, Bell said she wasn’t sure and would get back to The Nervewith that information.

She later did so, saying in an e-mail that the Loris system would use the $2 million to buy equipment.

Loris is based in Edge’s district and he is a big supporter of the health care system. In the General Assembly, Edge serves on the powerful budget-writing House Ways and Means Committee and is chairman of its Health, Human Services and Medicaid Subcommittee.

Efforts by The Nerve to reach Edge were unsuccessful.

Despite apparently good intentions behind the lawmaker’s presentation to the health care cooperative, it clearly was a classic case of bringing home the bacon.

It was all feel good, too.

“The foundation ball was held at the very attractive venue at the Lakeside Conference Center at Premier Resorts at Barefoot Resorts,” says a northmyrtlebeachonline.com story about the event. “Guests enjoyed fine food and wine, entertained by the Catalinas and participated in a live auction.”

Passing Through

Behind that wine and cheese lurks a much more substantive side to the $2 million.

Under a proviso in the current state budget, the money originally was allocated to the S.C. Department of Health and Human Services. But the proviso required HHS to transfer the funds to the state Department of Health and Environmental Control, a common practice known as a pass-through.

The only specific requirement in the budget for use of the funding is “rural hospital equipment and facilities.”

Beyond that, there is little if any accountability and transparency in how the money is spent.

Unless someone follows up on it, that is.

Citing those factors, Gov. Mark Sanford tried to block the pass-through by vetoing it.

In a letter explaining his veto, which the Legislature overrode, Sanford said he nixed the pass-through for the same reasons he shot down a $4 million line item in the proviso for grants to rural hospitals.

The grants “are not equitably distributed to all of the state’s rural hospitals because only 13 of the 23 designated rural hospitals in our state can receive them,” the governor wrote. “This creates the perception that the receipt of these grants is more dependent on political influence than need.”

Sanford also said, “These grants are awarded without accounting for how the funds are spent, and therefore, we cannot continue to support this program without checks to ensure that taxpayer money achieves quality health care.”

Making one final point, Sanford noted that the proviso was moved from Health and Human Services, which is part of his Cabinet, to the Department of Health and Environmental Control, which isn’t, after HHS implemented criteria for awarding the grants.

“This left some of the hospitals without taxpayer support, so the former HHS director, who has lobbied to keep this in the budget throughout the years, convinced budget writers that DHEC would simply cut checks and not ask for accountability,” Sanford concluded.

He was referring to former HHS director Bill Prince, who throughout 2009 was a registered lobbyist for Sisters of Charity Providence Hospital.

Prince could not be reached for comment Monday.

Check, Please

Was the governor right “that DHEC would simply cut checks and not ask for accountability”?

It’s hard to say.

In an undated one-paragraph letter to DHEC Commissioner Earl Hunter, Rep. Edge cited the $2 million in the budget for rural hospital equipment and facilities. “As we discussed during the legislative session, please release these funds in a check so they can be presented to Loris Hospital,” the lawmaker wrote to Hunter.

DHEC subsequently issued that check and wrote Edge back.

The agency’s reply, from Wanda Crotwell, assistant to the commissioner for external affairs, is dated Aug. 14. By way of background, it says Sanford issued an executive order in 2004 requiring agencies of his Cabinet to spend their money in strict compliance with the state budget “to further the functions and purposes of that agency …”

The Department of Health and Environmental Control board adopted the order for DHEC, according to Crotwell’s response. “Therefore, these funds should be expended in a manner that advances DHEC’s mission of promoting and protecting the health of the public and the environment.”

It is unclear whether equipment the Loris Healthcare System said it would buy with the $2 million meets those criteria, or whether DHEC followed up on the matter to find out.

Meanwhile, the pass-through was made possible by – wait for it – the stimulus.

“In a roundabout way that’s stimulus money,” HHS spokesman Jeff Stensland says of the $2 million. “We wouldn’t be able to transfer money to anybody without the stimulus.”

That’s because a large portion of the stimulus is funding for Medicaid, a health care program for the needy paid for jointly by the federal and state governments; in South Carolina, typically 70 percent/30 percent respectively.

But the stimulus temporarily raised the feds’ share to 80 percent, allowing the Legislature to provide less state funding to Medicaid programs and instead use those dollars for, well, whatever lawmakers see fit.

The budget says the proviso addresses more than $450 million in state Health and Human Services funding, part of which came from “the increased federal Medicaid assistance percentage provided by the” stimulus.

Says Stensland, “Basically the stimulus money that we’re getting is helping keep other agencies’ programs afloat, and it’s basically keeping state government afloat.”

Other states are doing the same and it’s all perfectly legal, he adds.

But be that as it may, what happens when stimulus funding is cut off, expected to happen in December?

That, it seems, is the proverbial $64,000 question.

Well, more like the $64 billion question. And while an accurate answer to it is anybody’s guess, there is little doubt that lawmakers will continue to try to sneak spending through the budget using provisos and pass-throughs.

Reach Ward at (803) 779-5022, ext. 117, or eric@scpolicycouncil.com.