MY LAST NERVE: So Columbia Reallocated Funds? So Do All Governments.

September 11, 2015

Inside Insight

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IF YOU SEND IT TO GOVERNMENT, GOVERNMENT WILL SPEND IT HOWEVER GOVERNMENT WANTS

On Wednesday the state Supreme Court issued a 5 to 0 opinion in Azar v. City of Columbia – a case challenging the city’s practice of using water and sewer revenues for purposes that have nothing to do with water and sewer services. In its ruling, which overturned a lower court’s summary judgement in favor of the city, the Supreme Court found that there are “genuine issues of material facts as to whether the city’s expenditures of water and sewer revenues were lawful.”

In short: For years Columbia has been transferring revenues from its water and sewer user fees to the city’s General Fund to pay for unrelated purposes – such as economic development, law enforcement, and fire services. From 1999 to 2010, according to media reports, more than $78 million was diverted in this way, and officials directed more than $12 million in just the last three years.

While the Supreme Court stopped short of forcing the City to end the practice (they remanded the case back to the lower court), it communicated sufficient concern over the legality of the practice. As reported in The State, the City of Columbia is not the only municipality that diverts money from utility service for other uses.

I don’t pretend to be a constitutional scholar, and I leave the jurisprudential merits of the case to those who understand it more fully than I do. Still, from my admittedly non-trained viewpoint, the practice of raising water rates in order to pay for economic development schemes and various other unrelated projects and programs does seem legally dubious.

And it’s not just a municipal practice, either. The General Assembly does it all the time.

For example, in drafting the FY 2014 budget, lawmakers diverted tens of millions of dollars from thenational mortgage settlement fund – money intended to aid those whose mortgages had been improperly foreclosed on – to the Commerce Department’s deal closing fund, as well as the state’s general fund.

It happened again this year. While trying to close a $67.5 million “gap” in funding after the House (fortunately) failed to pass a multi-million-dollar bond package, lawmakers scraped together several sources of funding – including $18 million from the litigation recovery account. This account consists of money paid to the state as a result of lawsuits in which the state was a plaintiff – and at the time the budget was being debated, the state didn’t have all the funds proposed in the budget. The proposed $18 million from the litigation recovery account was in addition to a previously allocated sum of $9.8 million, bringing the total amount diverted from this fund to $27.8 million.

The practice of siphoning off earmarked accounts to balance the state budget means, in effect, that the general fund grows to an artificially inflated size. But for the improperly raided account, in other words, the general fund would be smaller than it is. And the fact that agencies are getting what they asked for (even though, if the general fund were its rightful size, they would get less) guarantees that they will ask for at least that much next year, and probably more. Which means eventually lawmakers will have to raise taxes or fines and fees to keep from making cuts.

These raided accounts, then, eventually lead to tax and fee hikes, and expanded, more expensive government.

The lesson, in my view, isn’t so much about the legality or illegality of what the General Assembly does with its earmarked accounts. Legal or not, it certainly doesn’t pass the smell test. But the more important point here is one that citizens and taxpayers need to appreciate: Money is fungible.

If government has a pot of money, it will use that money for any purpose officials see fit, whatever shell game officials play with special funds. This is especially true when lawmakers have promised far more than the money they have on hand can pay for. The first step isn’t always to raise taxes in these scenarios – particularly when the promises need to come to fruition quickly. So officials take money from what would seem to be restricted accounts, with the intent to replenish those accounts later.

The problem for taxpayers is that officials almost always have to raise taxes and/or fees in order to put the money back, as well as maintain the level of spending with each succeeding budget year.

For all our talk about different “accounts” and “funds” the state maintains, it’s all one big pot of money, and it all comes from the same place – your taxes. That’s why it’s naïve and foolish to assume that fines and fees for a particular service will actually fund that service, and only that service. If Columbia doesn’t have enough money to run and maintain its sewer system, that’s because city officials have squandered public money on extraneous programs, not because residents haven’t paid enough for their water.

Jamie Murguia is Director of Research at the S.C. Policy Council, The Nerve’s parent organization.