Digging Out of $98 Million Hole

May 28, 2010

Investigative Reports

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Getting out of a $98 million hole isn’t easy.

When the state started this fiscal year last July 1, it had a $98.2 million general fund operating deficit from the previous fiscal year. The gap initially was much bigger – $207.3 million – but the amount was reduced with a $108 million transfer from the state’s general reserve fund.

The S.C. Constitution requires a balanced budget, though the 2008-09 deficit might not be eliminated for at least another year, a review by The Nerve found.

By law, the state has until June 30, 2011, to pay off the 2008-09 deficit,  S.C. Budget and Control Board spokesman Michael Sponhour told The Nerve last week.

But South Carolina hasn’t always been quick to pay off past deficits.  For example, state Comptroller General Richard Eckstrom discovered in 2003 that the state had been running a $155 million deficit for more than a year. In a battle with the Legislature the next year to pay down that debt, Gov. Mark Sanford brought two squealing piglets – dubbed “Pork” and “Barrel” – to the State House to protest lawmakers’ plans to fund local projects instead of pay off the deficit, which had been reduced to $16 mllion at that time.

And the Legislature in 2006 paid off another $105 million deficit that had been carried over for 14 years.  Eckstrom, who discovered the problem, said at the time the deficit was caused by borrowing money from future tax revenues during previous budget cycles.

So what happens if the state doesn’t pay off the $98.2 million deficit by the end of next fiscal year?

Apparently not much, according to Sponhour.

“From what I am told, the remaining amount would continue to be reported in the state’s financial statements,” he said.

The S.C. House and Senate in a budget proviso (90.15) for next fiscal year have proposed making up the $98.2 million shortfall mainly with “excess” general fund revenue “above the statewide adjusted appropriations” for this fiscal year, which ends June 30.

At first glance, however, that solution doesn’t make much sense given that projected general fund revenue shortfalls for this fiscal year forced the Budget and Control Board twice to make across-the-board general fund budget cuts totaling nearly $439 million, or 9.04 percent.

The initial ratified general fund for this fiscal year was $5.7 billion. The House and Senate each have proposed an approximate $5.1 billion budget for next fiscal year; a conference committee was appointed earlier this week to work out differences between their versions. The total 2010-11 budget proposed by both chambers, which includes federal and “other funds,” such as fees and fines, is about $21.1 billion.

Sponhour told The Nerve that although general fund revenues currently are about “$30 million ahead” of the state Board of Economic Advisors’ last revised estimate, “it’s too early to say how it will play out.”

“That will be known when the books for the (current fiscal year) are closed in August,” he said.

Contacted this week, Eckstrom told The Nerve, “The likelihood of surpluses this year is very remote,” adding that if there is any extra money, “We’re looking at something under $2 million.”

Given that situation, Eckstrom said it “looks like the proviso is being included to roll that deficit over for another year.” He noted that under state law, the five-member Budget and Control Board, of which he is a member, can, after general reserve funds are used, borrow from departmental surpluses  to repay any deficit. The treasurer would be required to repay any loans, with interest, to those agencies by June 30 of the following fiscal year.

Sponhour said if the proposed proviso doesn’t cover the deficit, the state could tap any available reserves next fiscal year, including the state’s capital reserve fund, which was depleted earlier this fiscal year to help make up for the projected general fund revenue shortfalls.

The House and Senate in their proposed 2010-11 budgets call for about $111 million in the capital reserve fund.  Currently, there is $63.9 million in the general reserve fund, with another $55.4 million earmarked for the fund on July 1, Sponhour said.

The state constitution requires that the capital and general reserve funds equal 2 percent and 3 percent, respectively, of general fund revenues from the previous fiscal year.

Eckstrom said he believes that lawmakers need to get more serious about repaying the deficit.

“What we’re doing with this proviso is like running up a credit card bill and not paying it off,” he said. “It encourages irresponsible financial management on the part of the state. … This (budget) belt needs to be tightened.”

Besides using any excess general funds from this fiscal year, the proposed budget proviso for 2010-11 also would transfer about $19.2 million from three separate funds to help make up the $98.2 million deficit. The proposed transfers would include:

• $9.4 million from the Budget and Control Board’s “Subfund 3146,” which, according to Sponhour, is the “Barnwell Operational Shortfall Account” that was created under a budget proviso last fiscal year. That account was set up to cover possible operating shortfalls when a change in state law restricted the low-level radioactive waste disposal site to accept shipments from only South Carolina and two other states instead of nationwide. About $14.5 million initially was deposited into the account, which is funded with a portion of revenues from the site, Sponhour said. After the fund was created, however, the site operators entered into a proposed agreement with nuclear utilities in the region to cover “all allowable operating costs and margin,” Sponhour said. The proposed proviso would leave $4.3 million in the reserve account after the $9.4 million transfer.

• $7.3 million from another Budget and Control Board fund made up of proceeds from the lease of the state’s broadband network to private-sector firms. Two years ago, the S.C Educational Broadband Service Commission was formed to lease excess broadband spectrum capacity of licenses held by the state Educational Television Network.  The state last fall awarded a 30-year lease jointly to Clearwire Spectrum Holdings and Digital Bridge Spectrum Corp. The agreement called for up-front payments of $7 million, with remaining total lease payments estimated at about $136 million, records show.

• $2.5 million from the S.C. Department of Agriculture’s “Renewable Energy Infrastructure Development Fund.”  That fund was established in 2007 to support wind, solar and biomass energy projects in the state, including demonstration projects, research and development projects, and planning grants to businesses, organizations and research institutions, according to the department’s S.C.  Market Bulletin. Larry Boyleston, an assistant agriculture commissioner, told The Nerve that the program was discontinued after the S.C. Supreme Court upheld a lawsuit that claimed the program was unconstitutionally “piggy-backed” onto another bill. “The department had hoped that these funds might eventually be put in the department for other purposes but that, as you can imagine, was wishful thinking,” Boyleston said. About $3.5 million currently is in the fund, according to the Comptroller General’s Office.

Reach Brundrett at (803) 779-5022, ext. 106, or rick@scpolicycouncil.com.