Schweich v Nixon 082611

IN THE CIRCUIT COURT OF COLE COUNTYSTATE OF MISSOURI

THOMAS A. SCHWEICH,In his official capacity as Auditorof the State of Missouri,

Defendant.

)))))))))))))))))

Case No. --------

Plaintiff,

v.

JEREMIAH W. NIXON,in his official capacity as Governor ofthe State of Missouri,

Serve:Capitol, Room 216Jefferson City, MO 65101

Also serve:

Chris KosterAttorney General of Missouri207 West High StreetJefferson City, MO 65101

PETITION FOR DECLARATORY JUDGMENT AND INJUNCTIVE RELIEF

Plaintiff Thomas A. Schweich, by and through his attorney, hereby states and alleges for

his petition for declaratory judgment and injunctive relief:

1. Plaintiff Thomas A. Schweich is the duly elected and acting Auditor of the State

of Missouri and brings this suit in his official capacity ..

2. In his official capacity, Plaintiff exercises powers and rights, and performs his

duties as provided for by Article IV, Section 13, Missouri Constitution (1945) and Chapter 29,

RSMo.

3. Defendant Jeremiah W. Nixon is the duly elected and acting Governor ofthe State

of Missouri.

4. Plaintiff is presently conducting an audit of the Defendant pursuant to Plaintiffs

constitutional and statutory duties as provided by Article IV, Section 13, Missouri Constitution,

and Section 29.200, RSMo.

5. Plaintiff began an audit of Defendant on June 27, 2011. Plaintiff, as part of this

audit process, reviewed Defendant's basis for his withholding order on June 10, 2011, of over

$170 million dollars for the fiscal year 2012 [hereinafter FY 2012] budget of the State of

Missouri as appropriated by the Missouri General Assembly [hereinafter "legislature"] and

approved by Defendant, even though FY 2012 would not start until July 1,2011. $ 57 million of

the withholds from the FY 2012 budget are from general revenue. A true and correct copy of the

withholds is attached hereto as Exhibit A and incorporated herein by reference.

6. Defendant withheld FY 2012 funds for many programs, including Parents as

Teachers, Bright Flight College Scholarships, Access Missouri Scholarships, community

colleges, state universities, Medicaid, Domestic Violence Grants, Alzheimer's grants, Missouri

Department of Transportation (MoDOT) , school transportation, Office of Child Advocate, Area

Agency on Aging Grants, and Children's Treatment Services. See Exhibit A.

7. On or about June 10, 2011, Defendant reallocated $ 50 million of the withheld

funds to other budget line items for disaster relief. A true and correct copy of the reallocations is

attached hereto as Exhibit B and incorporated herein by reference.

8. Under Section 29.235, RSMo and the Government Accounting Standards (July

2007 Revision) issued by the Comptroller General of the United States the auditor is required to

2

perform procedures designed to ensure that public officials conduct the financial business of the

public in accordance with sound accounting principles and the law.

9. On July 27, 2011, Plaintiffs auditors met with Defendant's budget director and

asked for any and all documentation (e.g., in the form of spread sheets, cost analysis, revenue

analysis and projections) that would provide a basis for Defendant's FY 2012 withholds and

reallocations. Defendant's budget officer told Plaintiffs auditors that there is no formal

documented withholding calculation and that no formula is used to establish withholding

amounts. Defendant's budget director also advised Plaintiffs auditors that there were no "figures"

to support the reallocation of$150 million for disaster relief. Nor did Defendant's budget director

provide any documentation showing analysis that FY 2012 revenue would be lower than the

revenue estimates used as the basis for the FY 2012 budget which was enacted into law.

10. On August 18,2011, Plaintiffs auditors met with Defendant's budget director and

other representatives to review Plaintiffs draft letter (No, 2011-43) which points out the

unconstitutionality of Defendant's withholds and reallocations for FY 2012. A true and correct

copy of the final version of Plaintiffs letter (Auditor Number 2011-43) is attached hereto as

Exhibit C and incorporated herein by reference.

11. At the August 18, 2011, meeting described in paragraph 10 of this Petition,

Defendant's budget director and representatives denied that Defendant was acting

unconstitutionally but could not cite any authority for the FY 2012 withholds and reallocations

other than to assert that the Defendant had the responsibility to balance the budget.

12. On August 19, 2011, Plaintiff officially delivered Plaintiffs letter (Auditor

Number 2011-43) to Defendant. Plaintiff, in the letter to Defendant, encouraged Defendant to

work with the legislature to resolve the constitutional issues. Subsequent to that delivery on

• 3

August 19,2011, Defendant in a press release and other public comments continues to assert that

his FY 2012 withholds and reallocations are constitutional, and persists in refusing to try and

correct and resolve the matter in a cooperative manner with the legislature.

13. Under Section 29.235, RSMo and the Government Accounting Standards (July

2007 Revision) issued by the Comptroller General of the United States, the auditor is required to

perform procedures designed to ensure that public officials conduct the financial business of the

public in accordance with sound accounting principles and the law, and is required to report any

violations, especially violations of law, to appropriate authorities for corrective action. In this

case, the Defendant has refused to take corrective action so the only recourse available to

Plaintiff is this declaratory judgment action.

14. Since Defendant has chosen to not correct his FY 2012 withholds and

reallocations, Plaintiff has no other remedy but to bring this matter to this Court since there is

illegal conduct by Defendant violating:

(1) Article IV, Section 27 of the Missouri Constitution in making withholds

before FY 2012 began and before any 2012 revenue was shown to be below the FY 2012 budget

revenue estimate;

(2) The separation of powers doctrine embodied in the Missouri Constitution by

withholding funds and reallocating those funds without any specific legislative action

authorizing those reallocations; and

(3) The Missouri Constitution's provision for reasonable budget decision making

by engaging in arbitrary and capricious decisions regarding the FY 2012 budget withholds and

allocations, with political bias being at least one primary fact deciding where withholds were

made and holding other areas harmless since only the Republican legislature and one statewide

4

elected Republican officeholder were subject to withholds while the Defendant and other

statewide elected Democratic officeholders were not subject to any withholds.

15. Plaintiff was directly affected by Defendant's actions in that Plaintiff was subject

to withholdings by Defendant, as listed in Exhibit A.

16. Plaintiff brings this action pursuant to Chapter 527 of the Revised Statutes of

Missouri, and Missouri Supreme Court Rule 87.

COUNT 1- THE DEFENDANT'S FY 2012 WITHHOLDS ARE UNCONSTITUTIONAL

UNDER ARTICLE IV, SECTION 27, MISSOURI CONSTITUTION

17. Plaintiff incorporates all previous paragraphs of this Petition as if fully set forth

herein.

18. Defendant withheld over $170 million dollars of the FY 2012 budget on June 10,

2011, as reflected in Exhibit A.

19. Article IV, Section 27 of the Missouri Constitution allows the Defendant to

withhold only when actual revenues for a fiscal year fall below the amount of revenue on which

the appropriation was based.

20. Article IV, Section 23, Missouri Constitution, states that the fiscal year of the

State of Missouri and all its agencies begins on July 1 of one year and runs through June 30 of

the next year.

21. On June 10,2011, no FY 2012 revenues had yet been received.

22. Defendant had no legal authority to withhold funds on June 10,2011, since FY

2012 had not yet begun, there was no FY 2012 revenue collected and no factual basis for

concluding that FY 2012 revenue would fall below the amount of revenue on which

the FY 2012 budget was based.

5

WHEREFORE, Plaintiff prays that this Court declare that Defendant's FY 2012 budget

withholds are unconstitutional and void under Article IV, Section 27, order the withheld funds

restored and removed from the withhold list, enjoin Defendant from making any withholds that

are not in compliance with the Article IV, Section 27, Missouri Constitution, and for such other

relief as the Court deems appropriate.

COUNT 11-THE DEFENDANT'S FY 2012 WITHHOLDS AND REALLOCATIONS ARE

UNCONSTITUTIONAL AS VIOLATING SEPARATION OF POWERS


herein.

24. Article II, Section 1, Missouri Constitution, expressly provides for the separation

of powers between the three departments: executive, legislative and judicial. Article II, Section

1, Missouri Constitution, further provides that the powers expressly belonging to one department

may not be exercised by any of the other departments.

25. Article III, Section 1, Missouri Constitution, vests the legislative power in the

legislature of the State.

26. The legislature has sole power to appropriate money, and Article III, Section 36,

and Article IV, Section 28, Missouri Constitution, specifies no state revenue may be diverted or

withdrawn from the treasury unless it is in accordance with an appropriation made by the

legislature for the purpose directed by the legislature.

27. On or about June 10,2011, Defendant withheld over $170 million appropriated in

the FY 2012 budget. See Exhibit A.

6

28. On or about June 10, 2011, Defendant reallocated the withheld funds to other

budget line items as shown in Exhibit B and incorporated herein by reference.

29. Defendant's withholding and reallocation of funds was in violation of Article III,

Sections 1 and 36, and Article IV, Sections 23, 24, 25, 26, 27 and 28 of the Missouri Constitution

in that the Defendant is infringing upon the power of the General Assembly to specify the

distinct amount and purpose of each appropriation when withheld funds are unilaterally diverted

and reallocated by Defendant.

30. Defendant's withholdings and reallocation of funds was in violation of Article III,

Sections 1 and 36, and Article IV, Sections 23, 24, 25, 26, 27 and 28 of the Missouri Constitution

in that Defendant is allowed only to "control the rate of expenditure of an appropriation", and the

Missouri Constitution does not provide the Defendant the authority to reallocate those funds

once they have been distinctly specified in amount and purpose by the legislature and approved

by the governor.


withholds and reallocations are unconstitutional and void under Article III, Sections 1 and 36 and

Article IV, Sections 23, 24, 25, 26, 27 and 28 of the Missouri Constitution, order the withheld

funds restored and removed from the withhold list, order reallocated money restored as provided

in the original FY 2012 budget, enjoin Defendant from making any withholds and reallocations

that are not in compliance with Article III, Sections 1 and 36, and Article IV, Sections 23, 24, 25,

26, 27 and 28 of the Missouri Constitution, and for such other relief as the Court deems

appropriate.

7

COUNT 111-THE DEFENDANT'S FY 2012 WITHHOLDS AND REALLOCATIONS

ARE UNCONSTITUTIONAL AS ARBITRARY AND CAPRICIOUS


herein.

32. Article IV, Sections 23, 24, 25, 26 and 27 of the Missouri Constitution require

that decisions regarding the state budget (revenues and expenditures) be made in an orderly,

reasonable manner with due consideration and regard of the facts and circumstances impacting

the state budget, with full discussion and communication between the Defendant and the

Missouri State legislature.

33. Article IV, Sections 24, 25, 26 and 27 of the Missouri Constitution also require

that any decisions made in adjustment of the budget be made in a reasonable manner with due

consideration and regard of the facts and circumstances impacting the state budget, with full

discussion and communication between the Defendant and the legislature.

34. Defendant's withholding of over $170 million was not reasonable and in fact

arbitrary and capricious in that the Defendant, once the FY 2012 budget was approved, may only

withhold when actual revenues fall below the revenue estimate on which the appropriations were

based.

35. Defendant's withholdings and reallocations for FY 2012 was not reasonable as

required by Article IV, Sections 24, 25, 26 and 27 of the Missouri Constitution, and in fact

arbitrary and capricious in that the Defendant withheld over $170 million without any data to

support the basis for his withholds. Defendant reallocated withheld funds to other budget line

items without any constitutional authority.

8

36. Defendant's withholding was arbitrary and capricious in violation of Article IV,

Sections 23, 24, 25, 26 and 27 of the Missouri Constitution in that the Defendant only withheld

from the Republican legislature and Republican State-wide elected official while not withholding

money to his own office or other Democratic State-wide elected officials and in diverting and

reallocating money to other areas without specific legislative authority.


withholds and reallocations are unconstitutional and void under Article IV, Sections 23, 24, 25,

26 and 27 of the Missouri Constitution, order the withheld funds restored and removed from the

withhold list, order reallocated money restored as provided in the original FY 2012 budget,

enjoin Defendant from making any withholds and reallocations that are not in compliance with

Article IV, Sections 23,24,25,26 and 27 of the Missouri Constitution, and for such other relief

as the Court deems appropriate.

Respectfully submitted,

BY:hl~;J.~Darrell 1.Moore, Mo. Bar #30444Chief Litigation Counsel301 W. High Street, Suite 880Jefferson City, Missouri 65101Telephone: (573) 751-4213Facsimile: (573) 751-7984dan-ell.moorecmauditor.mo.gov

Attorney for PlaintiffSchweich

9

June io, 2011FY 2012 BUDGET

EXPENDITURE RESTRICTION/LINE ITEM VETOES(millions of $5)

Approp Amt Comments

RESTRICTED ITEMS--GENERAL REVENUE

1. Parents as Teachers 16.05 2.05 Provides $lM increased funding above FYll spending.2. Bright Flight Scholarship 14.3 2.0 Provides $lM increased funding above FYll spending.3. Access Missouri Scholarship 16.9 1.0 Provides $lM increased funding above FY11 spending.4. Community Colleges/Linn State 129.5 1.9 Returns funding to 7% decrease.5. 4-Year Institutions 655.9 14.9 Generally returns funding to 7% decrease. Some institutions that i

implemented higher tuition increases have that revenue available and have I,

about an additional 1% restriction.6. MOREnet 0.05 0.05 Restriction returns funding to $0, same as FYll spending. MOREnet was able

to operate with $0 state support through administrative cuts and user fees.

7. Revenue Collection Efforts 3.6 3.6 The General Assembly did not pass the enhanced collection legislationassociated with this item.

8. Capitol Commission 0.1 0.1 These funds were to enable a study ofthe physical infrastructure needs oftheCapitol. However, such a study was already carried out in 2009.

9. Office of Child Advocate 0.2 0.1 Brings funding level to be consistent with FYll available funds.10. Lease Purchase Debt Service 1.9 0.9 The refundingof debt generated more savings than assumed in the budget.

11. Veterinary Student Loans 0.1 0.1 All existing obligations have been met; maintains the phase-out ofthis[program,

12. Community Development 0.2 0.2 Insufficient revenue available to provide state support to a program that hasCorporations not received state funding in many years.

1EXHIBIT A

June 10,2011FY 2012 BUDGET

EXPENDITURE RESTRICTION/LINE ITEM VETOES(millions of $s)

Approp Amt Comments

13. Film Office 0.2 0.2 DED will continue to support the film industry and administer the film taxcredits.

14. Community Intervention 0.2 0.2 Insufficient revenue available to begin state support for a program that hasnot previously received funding.

15. Firefighter Training 0.2 0.2 Other core resources are available for training programs.16. Air Search and Rescue 0.015 0.015 Other core resources are available for this program.17. Corrections Overtime 7.8 2.0 Overtime will continue to be addressed through comp time and other

management tools.

18. Eating Disorders Staff & Expenses 0.15 0.15 Restrict dollars for staff and expenses.

19. Area Health Education Centers 0.4 0.4 Insufficient revenue available to provide state support for the Area HealthEducation Centers.

20. Alzheimer's Grants 0.25 0.25 Insufficient revenue available to start a new grant.21. Area Agency on Aging Grants 9.0 0.9 Provides same level of funding as in FY11. I22. Domestic Violence Grants 4.8 0.7 Provides same level of funding as in FY11. I

I

23. Crisis Care Services 2.0 0.8 Provides same level of funding as in FY11. I

24. Children's Treatment Services 9.1 1.6 Provides same level of funding for the family reunification contract as in FY11.

25. Medicaid 1,700.0 13.9 FYll anticipated lower spending level expected to be carried forward in theMedicaid program. (Physician $10.7M, Nursing Facilities $2.2M, and ManagedCare $1.0M)

I

I26. State Auditor--Comparative Audits 6.7 0.3 Insufficient revenue available to start a new program. Added to fund SB323, !

which was not passed by the legislature.

27. J~!L~i~iary 170.1 6.0 Provides same level offunding as in FY11. ~ -...--.---~-

2

June 10, 2011FY 2012 BUDGET


Approp Amt Comments

28. General Assembly 32.6 0.8 Net reduction to the House of Representatives and Senate of 4.6%.29. Boonville Readiness Center 0.5 0.3 This project is substantially complete and will not require full appropriated

amount. I30. Trade Zone Facilities 0.5 0.5 Insufficient revenue available to add funding for this item.31. Regional Port Authorities 1.0 1.0 Insufficient revenue available to expand state support.

Total Restricted 2,784.3 57.1

NOTE: GRrestriction also includes $SG.3M in restriction on facilities maintenance and reserve fund included in the Governor's Budget Recommendation andassumed in the budget approved by the legislature.

3



Approp Amt Comments

RESTRICTED ITEMS--OTHER FUNDS

1. Transportation 107.80 8.0 Lottery Proceeds Fund revenue insufficient to cover additional expenditures.

2. Math and Science Tutoring 0.3 0.3 Lottery Proceeds Fund revenue insufficient to cover additional expenditures.

3. Scholars and Fine Arts Academy 0.2 0.2 Lottery Proceeds Fund revenue insufficient to cover additional expenditures.

4. Early Grade Literacy 0.1 0.1 Lottery Proceeds Fund revenue insufficient to cover additional expenditures.

5. Character Education 0.01 0.01 Lottery Proceeds Fund revenue insufficient to cover additional expenditures.

6. Lottery Commission 6.9 0.2 To reflect anticipated administrative efficiencies.7. Local Air Pollution Control 1.4 1.2 DNR can perform these functions at a lower cost, saving $1.2M the first year

and an estimated $1.7M annually beginning in year 2.8. MoDOT Facility Relocation 2.0 2.0 MoDOT is working on an alternative funding solution.9. Missouri Federal and State 0.4 0.2 This provides a $200,000 increase above FY11 dedicated funding for MOFAST.

Technology Partnership Program(MOFAST)

10. Mediation 0.6 0.1 Provides same level of funding as in FYll.11. MOHELA Projects 99.7 99.7 Funds are not available for these projects.12. MSP Remediation 0.5 0.5 Funds are not available for this project.13. Industry Training 1.5 1.5 Funds are not available for this project.14. Marine Maintenance Facility 1.05 1.05 Use of funds for this project requires consent from several entities. These

funds will remain restricted until that consent is confirmed.Total Restricted 222.5 115.1

4



Approp Amt Comments

VETOED ITEMS--GENERAL REVENUE

1. Civil Detention and Legal Fees 0.03 0.03 HB 10 and RSMo 56.700 limits counties that can be reimbursed. This fundingwas to add Boone County, however, Boone County is not statutorilyauthorized to be reimbursed under this section.

Total Vetoed 0.03 0.03

5

Gov. Nixon Reserves $25 Million for Joplin Tornado Recovery Page 1 of 1

Missouri Office of Administration--------_._-------_._---_._-_ .._ .._ ..._ ..-_.__ ._--_ ..-_ .._-_._----_ .._--_._._._----_._.

Jay Nixon, GovernorKelvin L. Simmons, Commissioner

QA-'::'-Qm~C.om rnis~iQn~[~sJ2ffj~~_~e\lfs_8.~Jggse_s2011

Office of Administration News

May 27, 2011

Gov. Nixon Reserves $25 Million for JoplinTornado RecoveryJEFFERSON CITY, MO - In response to the historic tornado that hit Joplin on Sunday, May 22,Gov. Jay Nixon has instructed State Budget Director Linda Luebbering to reserve $25million from next year's budget to be used to address the immediate needs from the deadlytornado.

This $25 million is on top of the $25 million that the Governor has already reserved to helppay for flooding in southeastern Missouri.

Money for emergency response and cleanup will come from Missouri's Fiscal Year 2012budget, which begins on July 1.

###

Sub Menu Navigation

AccountingBudget & PlanningCommJssiQXLerFa~_H.ttiesG~O~Li:lLSer:vi~e~lISQOffi~e oLt:-illJal OpportunityPers9nnel~LJL~h9~iD.g

EXHIBIT B

http:// oa.mo .gov1co/releases/20 11IGov _Nixon_Reserves _25_Million_for _Joplin_Tornado... 8/26/2011

THOMAS A. SCHWEICHMissouri State Auditor

August 19,2011

Honorable Jeremiah W. (Jay) NixonGovernorState CapitolJefferson City, Missouri

Dear Governor Nixon:

As you know, the extraordinary events and damage associated with the Joplin tornado, otherstorms, and the flooding on the both the Missouri and Mississippi rivers have created a significantfinancial obligation on our state. While I firmly agree with your position that communities and citizensaffected by these disasters should receive state and federal assistance needed for a comprehensive andrapid recovery, I also want to ensure necessary resources are provided in a transparent and lawful manner.

This letter, in fulfillment of our duties under Chapter 29, RSMo, communicates the results of ourcomprehensive review of your actions to withhold state fiscal year (FY) 2012 appropriated expenditures.The objectives of our review were to determine whether:

1. The amount withheld from FY 2012 appropriated expenditures was accurately calculatedand adequately supported.

2 The methods used to make the withholdings were in compliance with applicable legalprovisions.

3. The budgetary process, as it relates to withholdings, is in need of improvement.

Our review has determined that my office cannot audit the accuracy of amounts withheld becauseyour office prepared no calculation. Additionally, the reason provided for the withholdings does notappear to meet constitutional provisions. We are aware of no constitutional or statutory authority towithhold from appropriated expenditures based on state obligations that were unanticipated at the time thebudget was passed by the General Assembly. To the contrary, the relevant constitutional provisionallowing withholdings deals only with shortfalls of revenue, not increased costs. In addition, budgetaryand related withholding processes need to be re-evaluated and/or state law revised.

Applicable Legal Provisions

Article IV, Section 24, Missouri Constitution, requires the Governor to submit to the GeneralAssembly, within 30 days of it convening, a budget that contains the estimated available revenues and acomplete and itemized plan of proposed expenditures of the state, with any recommendations of lawsnecessary to provide sufficient revenues to meet expenditures.

P.O. Box 869 • Jefferson City, MO 65102 • (573) 751-4213 • FAX (573) 751-7984

EXHIBIT C

Article IV, Section 27, Missouri Constitution, grants the Governor the power to reduce theexpenditures below appropriated amounts (withhold) when actual revenues are less than the revenueestimates upon which the appropriations were based. Article IV, Section 27(a), Missouri Constitution,also establishes the Budget Reserve Fund (commonly referred to the Rainy Day Fund). The Governormay request the General Assembly to appropriate emergency funds from this fund with certainrestrictions, if there is a budget need due to a disaster. In addition, Article IV, Section 28, and Article III,Section 36, Missouri Constitution, allow monies in the state treasury to be spent only if appropriated.

Recent Disasters

Prior to the beginning of FY 2012, citizens and communities in the state suffered significantdisasters. In April and May, flooding occurred in the southeastern section of the state along theMississippi River, on May 22 a massive tornado destroyed a significant portion of Joplin, and beginningin June flooding occurred in the northwestern section of the state along the Missouri River. On June 10,2011, you directed the Office of Administration (OA) to withhold over $172 million, approximately $57miIIion from the state General Fund (to be used for disaster recovery) and $115 million from FY 2012appropriated expenditures of other funds. On July 1,2011, based on your instructions, the OA committedan additional $100 million for disaster aid to be paid for with the better-than-expected revenues carriedforward from FY 2011. You subsequently ordered the release of over $1.2 million of withholdings.

Withholding Procedures and Methodology

According to the state Budget Director, assumptions/predictions from the following categories areconsidered when determining withholdings: 1) actual and estimated revenues, 2) state spendingobligations, 3) approved legislation which involves revenues/costs not considered in the current budget,and 4) legislation which involves revenues/costs considered in the budget but not approved. Obligationsare items, with and without appropriations, which involve the state's share of expenses/costs, and mayinvolve items difficult to estimate/predict such as natural disaster expenditures. Obligation/spendingissues may be handled in several ways, including using an estimated (E) appropriation, supplementalbudgets, withholdings, or a combination of these items. An example of an item approved by the GeneralAssembly but not considered in FY 2012 appropriations is the legislation which approved the gradualrepeal of the franchise tax. An example of an item not approved by the General Assembly, but included inthe FY 2012 available revenue amount, is the tax amnesty program estimated to generate approximately$34 million.

According to the Budget Director, the OA does not prepare a formal documented withholdingcalculation, and does not use a formula to establish withholding amounts. Instead the Governor's officeand the Budget Director negotiate withholding amounts and the amount is ultimately based on what theGovernor believes is necessary. Each month the OA tracks and evaluates the actual revenues andpredictions for future revenues to determine if revenue estimates are on target for the year. The OA alsoevaluates gaming and lottery revenues monthly because these monies affect the appropriations foreducation. Withholdings may also be necessary due to the amount of actual expenditures from Eappropriations and supplemental budgets, according to the Budget Director. The Governor and GeneralAssembly use E appropriations in the budgetary process. A $1 E appropriation is typically used forexpenditures that cannot be readily estimated such as disasters or costs of the National Guard whenordered by the Governor to respond to emergency situations. Disaster recovery costs often are partiallyfunded by federal monies; however, the federal participation rate is often unknown until weeks after thedisaster occurred.

Since the early 1990s, the state has used a consensus revenue estimate (CRE) to estimate GeneralFund revenues. The CRE is an amount agreed upon by the Governor and the General Assembly, based on

2

recommendations prepared by the state Budget Director and the Directors of the House Appropriationsand Senate Appropriations Committee Staff. The CRE comprises a significant portion of the resourcesavailable from the General Fund for appropriations by the General Assembly. A meeting is held inDecember each year to agree upon a CRE for the next fiscal year's budget and to revise the CRE for thecurrent fiscal year.

State Auditor Methodology

The methodology to accomplish our objectives included:

1. Interviewing key personnel from the Governor's office, the OA, House Appropriations,and the Senate (including Appropriations Committee staff) regarding the budgetary andwithholding process;

2. Reviewing and evaluating certain applicable legal provisions;

3. Reviewing Governor withholdings and related release of withholdings for FY 2012 andFY 2011; and

4. Reviewing the FY 2012 state budget, including the General Revenue summary of theestimated resources and obligations, and the FY 2011 consolidated revenue report whichprovides the actual revenues by type for the current and prior fiscal years.

Results and Conclusions

Because the OA did not document a calculation of the necessary withholding amount, it was notpossible.for us to determine whether the amount withheld from fiscal year 2012 appropriated expenditureswas accurately calculated.

The method used to make FY 2012 withholdings does not appear to comply with constitutionalprovisions. When the Governor ordered the withholdings in June 2012, FY 2012 had not begun, andtherefore, actual revenues could not have been lower than anticipated FY 2012 revenues. In addition,there is no provision in the Missouri Constitution, that allows the Governor to withhold amounts fromappropriated expenditures based on obligations that were unanticipated at the time the budget was passedby the General Assembly. Your actions are troubling because the legislative branch of govermnent wasnot provided appropriate checks and balances, and could result in the Governor basically rewriting thebudget without recourse by the General Assembly. To address withholding issues and the constitutionalseparation of powers question, on July 22, 20 II, several members of the General Assembly requested alegal opinion from the Office of Attorney General. The Attorney General has not yet issued an opinionrelated to this request.

One option available under state law would be to use the Rainy Day Fund to fund disaster relatedcosts. This would require you to request an emergency appropriation to be approved by two-thirds of themembers of the General Assembly. Utilizing the Rainy Day Fund would require both the Governor andGeneral Assembly to make budgetary decisions and provide greater accountability and transparency fordecisions related to funding unanticipated obligations needed for disaster recovery efforts.

State law provides little guidance regarding the proper manner and method to determinewithholding amounts, whether withholdings must be released should actual revenues subsequently exceedrevenue estimates, or how to determine if actual revenue shortfalls occur. During FY 2011, actualrevenues were less than the CRE by about $97 million yet withholdings totaled over $301 million, of

3

which only $17.5 million were ultimately released. Also, withholdings and subsequent release ofwithholdings may be based on the revised CRE; however, case law provides that a revenue estimateprepared after passage of the budget has no legal significance. Also, determining when actual revenueshortfalls occur is problematic. While actual revenues for a current year cannot be determined until June30, the current practice of comparing year-to-date revenues to prior years actual amounts and the CREappears reasonable.

Several mechanisms currently used in the budgetary process are not authorized by state law.Neither, the CRE nor the E appropriations are authorized by state law. The use of the CRE appears to be areasonable method to estimate revenues for budget purposes. However, the utilization of E appropriationsis subject to misuse as the executive branch has no spending limit as long as cash is available in the StateTreasury.

Recommendations

As noted above, my office does not question the need for the swift actions taken by you, asGovernor, to address the unprecedented disasters faced by the citizens of the state and the state'sresponsibility for certain costs. However, the method you used to make FY 2012 withholdings does notappear to comply with constitutional provisions, and amounts withheld were not supported by adequatedocumentation. In addition, I believe you need to work with the legislature to propose legislation toclarify and/or address the following issues:

1. Whether the Governor can withhold due to spending based on obligations resulting from adisaster or emergency, and were unanticipated at the time the budget was passed by the GeneralAssembly.

2. The establishment of well defined and measurable criteria to determine I) when to initiatewithholdings, 2) required documentation to support withholding amounts, and 3) whether and/orwhen withholding amounts are to be released.

3. Amending state law to provide for the use of the CRE and E appropriations in the budget process.

4 Consideration of a cap for estimated appropriations.

Sincerely,

Thomas A. SchweichState Auditor

CC: Members of the General Assembly

4

Documents

Schweich v Nixon 082611