Can a Maryland state agency sign a contract or accept goods and services when it doesn't currently have a budget appropriation to pay for them?

Plain-English summary

The Chief Deputy Comptroller asked the Attorney General whether a state agency violates the law if it contracts for and receives goods or services at a time when it has no appropriation available to pay for them, a practice the Legislative Auditor had flagged after agencies simply deferred paying bills into the next fiscal year once funding became available.

The opinion distinguished between three moments: signing a contract, accepting delivery of goods or services, and actually paying for them. It concluded that merely signing a contract does not itself violate the Constitution's requirement (Article III, §32) that money be drawn from the Treasury only under an appropriation, because the possibility that the General Assembly might not appropriate funds is treated as an implied term of every state contract; the contractor bears that risk. But once an agency accepts goods or services, the opinion concluded it can no longer treat the lack of an appropriation as an excuse not to pay, so under SF §7-234 an agency may not accept goods or services unless it has, or will have before payment is due, an appropriation available to cover the cost. A separate and stricter statute, SF §7-237, applies specifically to officials responsible for construction, building maintenance, or management of state institutions: those officials may not even sign a contract that purports to bind the state to pay money unless an unspent appropriation is currently available, regardless of when goods or services would later be accepted, and a willful violation makes the official personally liable on the contract. The opinion illustrated the rules with a timeline example: an agency may sign a supply contract in February without an appropriation yet in hand, but it can accept delivery only once a budget bill is enacted that actually funds the payment, whether through a deficiency appropriation, a next-fiscal-year appropriation with a deferred payment date, or otherwise; absent any of those, the agency must cancel the contract rather than accept the goods.

Currency note

This opinion was issued in 1991. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify the current text of SF §§7-234, 7-237, 13-217, and 15-103 of the State Finance and Procurement Article, and any subsequent case law on state contract liability and appropriations, before relying on any specific rule described here.

Common questions

Can a Maryland state agency sign a contract before it has money appropriated to pay for it? Generally yes. The opinion concluded that the constitutional requirement of an appropriation before spending money is treated as an implied condition of every state contract, so merely entering into a contract does not itself violate Article III, §32, and the contractor bears the risk that funding might not materialize.

Can the agency then accept the goods or services without having the money? No. The opinion concluded that once an agency accepts goods or services under a contract, it can no longer point to a lack of appropriation as a justification for not paying, so under SF §7-234 the agency may not accept them unless an appropriation is or will be available to pay for them when the bill comes due.

Are the rules different for officials who manage state buildings or institutions? Yes, and stricter. The opinion explained that officials covered by SF §7-237, those responsible for construction, improvement, or maintenance of a building or work, or management of a state institution, may not even sign a contract that purports to bind the state to pay unless an unspent appropriation is currently available for that purpose, and a willful violation makes the official personally liable on the contract.

What sanctions did the opinion identify for spending or contracting without an appropriation? Violation of SF §7-234 is neglect of duty and can lead to removal. For officials covered by SF §7-237, creating a deficiency or incurring a liability or expenditure beyond the appropriation under subsection (b)(2) or (3) is criminal and also violates §7-234. Willfully or knowingly signing a contract that purports to bind the State without an available appropriation under subsection (b)(1) instead makes the official personally liable on the contract.

Background and statutory framework

Article III, §52 of the Maryland Constitution establishes the Budget Amendment's appropriations process, and Article III, §32 provides that no money may be drawn from the Treasury except under an appropriation made by law. The opinion explained that this constitutional restriction is triggered only when unappropriated funds are actually drawn, or attempted to be drawn, from the Treasury, not by the mere incurring of a contractual obligation, a principle traced to an earlier Attorney General opinion approving multi-year leases and a Maryland court decision. Because a state contract always operates subject to the constitutional and statutory limits on appropriations as an implied covenant, a contractor bears the risk that the legislature might decline to fund the obligation.

SF §7-234 separately bars any state officer or unit from spending money in excess of its total appropriation or the current schedule for apportionment, with violations treated as neglect of official duty subject to removal. The opinion read this provision to reach not just literal cash disbursements but also an agency's acceptance of goods or services that it cannot pay for when due, since accepting delivery effectively locks in a payment obligation the Governor and General Assembly might not choose to fund, citing Maryland Port Admin. v. I.T.O. Corp. and State v. Attman/Glazer P.B. Co. on the state's obligation to pay for property or services it has actually accepted. A separate, narrower statute, SF §7-237, singles out officials responsible for construction, building maintenance, or state institution management. Its subsection (b)(1) forbids contracts that purport to bind the State without an available appropriation; a willful or knowing violation brings personal liability on the contract. Violations of subsection (b)(2) or (3), concerning deficiencies and excess liabilities or expenditures, are criminal and also violate §7-234. A related provision, SF §13-217, requires multi-year contracts to include a termination-for-non-appropriation clause.

Citations and references

Statutes:

• Article III, §52 of the Maryland Constitution, the Budget Amendment's appropriations process
• Article III, §32 of the Constitution, prohibiting spending money not drawn under an appropriation
• Article III, §40 of the Maryland Constitution, requiring just compensation for taking private property for public use
• §12-204 of the State Government Article, requiring the Governor to include funding for final contract judgments in the budget bill
• SF §7-234, prohibiting spending in excess of an appropriation or apportionment schedule
• SF §7-234(a), the core spending prohibition
• SF §7-234(b)(1), prohibiting reimbursement of a prohibited expenditure
• SF §7-234(b)(2), providing the state is not obligated to appropriate money for a violating expenditure
• SF §7-234(c), the neglect-of-duty and removal sanction
• SF §7-237, the stricter rule for officials managing construction, buildings, or state institutions
• SF §7-237(a), defining which officials the section covers
• SF §7-237(b), listing the prohibited actions
• SF §7-237(b)(1), prohibiting a contract that purports to bind the state to pay without an available appropriation
• SF §7-237(c)(2), personal liability for a willful violation of subsection (b)(1)
• SF §7-237(d), the criminal-offense sanction for violating subsection (b)(2) or (3)
• SF §13-217, requiring termination-for-non-appropriation clauses in multi-year contracts
• SF §13-217(d)(1), automatic termination if funding is not appropriated
• SF §13-217(d)(2), reimbursement of nonrecurring costs upon termination
• SF §13-217(e), requiring the termination clause in every multi-year contract
• SF §15-103, State policy on 30-day payment after the contractual due date or invoice receipt
• Article 31, §3 of the Maryland Code, the 1914 predecessor prohibiting officials from binding the state to pay unappropriated money
• Chapter 11, Laws of Maryland 1985, removing state officials from the old Article 31, §3 language when SF §7-237 was enacted
• §6 of Chapter 597, Laws of Maryland 1933, the original budget-bill spending limit
• Chapter 64, Laws of Maryland 1939, codifying the spending prohibition
• Former Article 15A, §14, an earlier statutory prohibition on exceeding total appropriations
• COMAR 21.07.01.10, the procurement regulation on multi-year contract termination clauses

Cases:

• Thomas v. Owens, 4 Md. 189 (1853), on the constitutional appropriations restriction applying only when unappropriated funds are actually drawn or attempted to be drawn
• Denice v. Spotswood I. Quinby, Inc., 248 Md. 428, 433, 237 A.2d 4 (1968), on constitutional and statutory law being part of every contract as though expressly stated
• Maryland Port Admin. v. I.T.O. Corp., 40 Md. App. 697, 711, 395 A.2d 145 (1978), on sovereign immunity and enforcement of an alleged contractual payment promise
• State v. Attman/Glazer P.B. Co., 323 Md. 592, 594 A.2d 138 (1991), holding the state was required to pay fair rental value once it elected to continue occupying leased property
• State v. Ambrose, 191 Md. 353, 368, 62 A.2d 359 (1948), on personal liability of officials, rather than the state, for uncompensated takings
• Dunne v. State, 162 Md. 274, 284-86, 159 A. 751 (1932), on liability borne by the official rather than the state for advance appropriation of property
• Anne Arundel County v. Board of Educ., 248 Md. 512, 527-28, 237 A.2d 426 (1968), on issuing purchase orders without available funds to pay for them

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1991/Volume76_1991.pdf (this opinion appears at printed pages 72-80 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Budgetary Administration - Appropriations - Procurement - Effect of Unavailability of Appropriations

November 12, 1991

Mr. J. Basil Wisner
Chief Deputy Comptroller

You have requested our opinion whether an agency violates current law if, at a time when the agency has no appropriation available for the acquisition of goods or services, the agency nevertheless contracts for and receives those goods or services.

For the reasons stated below, we conclude as follows:

1. In general, an agency is not prohibited from entering into a contract at a time when no appropriation is available to pay for obligations incurred under the contract. However, certain officials responsible for public buildings or works and State institutions, described in §7-237 of the State Finance and Procurement Article ("SF" Article), may not sign a contract that purports to bind the State to make a payment when no appropriation is available.

2. An agency may not accept goods or services if it has no appropriation available to pay for them when the bill comes due.

I

Background

The Legislative Auditor has identified situations in which agencies incurred obligations for goods and services received during a fiscal year when no appropriation was available to fund the obligation. In most cases, the agencies simply deferred paying the bill until the next fiscal year, when an appropriation was available.

Although the Legislative Auditor has expressed concerns about this practice on policy grounds, quite apart from any policy issue you and the Legislative Auditor have asked whether the practice violates current law. In a 1979 letter of advice to the Comptroller's Chief of the General Accounting Division, Assistant Attorney General Gerald Langbaum advised that "a purchase commitment by an agency in excess of its remaining appropriation balance" neither created any State liability for the commitment nor violated any law. Letter to Arnold G. Holz (July 20, 1979). Mr. Langbaum's advice did not address the legal consequences of an agency's receipt of goods or services, as distinct from its contractual commitment as such. Your opinion request asks that we review the issue, particularly in light of any changes in the law since 1979.

II

Constitutional Restriction

The process by which appropriations are made is set out in Article III, §52 of the Maryland Constitution. With a few exceptions not pertinent here, the Governor has discretion to omit proposed appropriations from the annual budget bill, and the General Assembly has power to "strike out or reduce" items that are included by the Governor in the budget bill.

Money may not be spent without an appropriation. Article III, §32 of the Constitution provides, in pertinent part, that "[n]o money shall be drawn from the Treasury of the State ... except in accordance with an appropriation by Law .... "

The incurring of an obligation alone is not encompassed by this prohibition, however. That is, Article III, §32 is not violated "unless unappropriated funds are actually drawn or attempted to be drawn from the Treasury." 57 Opinions of the Attorney General 88 (1972). See Thomas v. Owens, 4 Md. 189 (1853). Thus, Attorney General Burch concluded that Article III, §32 did not prohibit multi-year leases:

As long as the Treasury is not called upon to pay unappropriated moneys we know of no constitutional impediment to an agreement or other commitment for the expenditure or disbursement of State funds that have not been appropriated in their entirety for the fiscal year in which the contract is executed. Every obligee is presumed to know that the State will make payment, according to the tenor of the contract, out of appropriated funds and in no other way.

57 Opinions of the Attorney General at 91.

In general, the law applicable to a contract, "including constitutional and statutory provisions and judicial precedents, is as much a part of the contract as though it were expressly referred to." Denice v. Spotswood I. Quinby, Inc., 248 Md. 428, 433, 237 A.2d 4 (1968) (quoting 17A C.J.S. Contracts §330 (1963)). The constitutional prerogative of the Governor and the General Assembly not to appropriate money to fund a contract is, therefore, "an implied covenant in [any] contract." 57 Opinions of the Attorney General at 92. Cf. 68 Opinions of the Attorney General 382, 395 (1983) (limits on waiver of contract immunity are read into contracts).1 Because the contingency is part of a State contract even if unstated, a contractor bears the risk that his or her expectation that the contract will be carried out might be defeated by a lack of appropriations. Cf. Maryland Port Admin. v. I.T.O. Corp., 40 Md. App. 697, 711, 395 A.2d 145 (1978) (assertion of sovereign immunity to prevent enforcement of alleged contractual promise to pay does not violate Contract Clause of United States Constitution).

III

Statutory Restrictions

A. SF §7-234

SF §7-234 provides as follows:

(a) An officer or unit of the State government may not spend money:

(1) in excess of the total appropriation to the officer or unit; or

(2) in excess of the amounts set forth in the current schedule for apportionment and disbursement of the appropriation.

(b) (1) The expenditure to the extent that the expenditure violates subsection (a) of this section.

(2) The State is not obligated to appropriate money to pay an expenditure that violates subsection (a) of this section.

(c) Each employee or member of a unit and each officer of the State government who makes an expenditure that violates subsection (a) of this section is guilty of neglect of official duty and is subject to removal.

The prohibitions on "spend[ing] money" in excess of available appropriations originated as budget bill language. See §6 of Chapter 597, Laws of Maryland 1933.2 Later the General Assembly codified the prohibition. See Chapter 64, Laws of Maryland 1939.3

The scope of SF §7-234(a) is not entirely clear. On the one hand, surely the subsection is meant to prohibit an official from submitting a payment voucher or otherwise laying claim to money from the Treasury in the absence of an appropriation.4 Further, SF §7-234 is apparently intended to block other actions that might result in the State's owing money beyond available appropriations. For example, the prohibition against "reimburs[ing] any [prohibited] expenditure," SF §7-234(b)(1), evidently addresses the contingency of an officer paying for something privately (while traveling, perhaps) with the expectation of later reimbursement from the State.

On the other hand, an official does not "spend money," even in the broader sense of taking an action that gives rise to a claim against the Treasury, merely by signing a contract that promises to do so. As explained in Part II above, the constitutional prerequisite to the spending of State money, that there be an appropriation, is a part of every contract, so the formation of a contract does not itself necessarily lead to a claim against the Treasury. In fact, an entirely separate provision

• SF §7-237(b)(1), to be discussed below in Part III B - deals with the
  problem of contractual promises to pay money in the absence of an appropriation.

  A more difficult issue is whether the prohibition in SF §7-234 is
  invoked when an agency not only enters into a contract but also accepts goods or services under the contract.5 Once the agency accepts the goods or services, the agency's subsequent failure to pay the bill can only be viewed as a breach of the contract, even if the agency's cancellation of the contract before tender of the goods or services would not be a breach. That is, an agency cannot point to the absence of available appropriations as a justification for using goods or services without paying for them.

  In State v. Attman/Glazer P.B. Co., 323 Md. 592, 594 A.2d 138
  (1991), one issue, simplifying the facts somewhat, was whether the State was required to pay rent for the use of space in a privately owned building while a condemnation proceeding was pending. The State argued, in part, "that the [circuit] court had no power to order it to pay rent since no money had been appropriated by the General Assembly for that purpose." 323 Md. at 611. Finding "no merit in that contention," the Court of Appeals observed that although "the State could have vacated the leased premises at any time without further liability for rent if no funds were appropriated for that purpose ...," nevertheless when "the State elected to continue to occupy the premises, it was required by the Fourteenth Amendment to the United States Constitution and Article III, §40 of the Maryland Constitution to pay the fair rental value of the property." Id.6 But see State v. Ambrose, 191 Md. 353, 368, 62 A.2d 359 (1948) (if State officials take property without compensation, "the officials would have been tort-feasors, personally liable, but the state could not have been sued"); Dunne v. State, 162 Md. 274, 284-86, 159 A. 751 (1932) (appropriation of property in advance of condemnation proceeding results in liability borne by official, not by State).

  To be sure, SF §7-234(b)(2) provides that "[t]he State is not
  obligated to appropriate money to pay an expenditure that violates subsection (a) of this section." But if the contractor's action to enforce the agency's contractual payment obligation were reduced to final judgment, the Governor would be compelled to include in the budget bill money to fund the judgment. §12-204 of the State Government Article. Although the agency will not literally have "spent money," and the General Assembly might decide not to appropriate the money, the agency at least will have skewed decisionmaking about how money should be spent by incurring a new liability. In our view, SF §7-234 is intended to prevent such a diminution of the Governor's discretion about resource allocation. Cf. 71 Opinions of the Attorney General 274, 278- 79 (1986) (contracting officer may not impinge on Governor's budgetary discretion by signing contract with overbroad indemnity provision). Hence, an agency may not accept goods or services unless it has an appropriation available to pay for them when the payment comes due.7

  Our analysis of SF §7-234 can be summarized through an example.
  Suppose an agency signs a contract for some supplies in February 1992, with payment due 30 days after delivery. The mere signing of the contract would not violate SF §7-234, regardless of the status of the agency's appropriations.

  The agency's next step would be governed by legislative action on
  the budget bill for fiscal year 1993, assuming that no appropriation had been made available in the meantime. If the budget bill contained a deficiency appropriation available for contracts, the agency could accept delivery of the supplies as soon as the budget bill became law, upon passage by the General Assembly. If the budget bill contained no applicable deficiency appropriation but did contain an appropriation for fiscal year 1993 for such contracts, the agency could accept delivery of the supplies in June, for then the payment obligation would not arise until an appropriation was available. If the budget bill contained no appropriation to fund the contract, the agency would be obliged to cancel the contract.

  What the agency may not do, under the circumstances outlined here,
  is accept delivery of the supplies before it knows the status of its appropriation, that is, until enactment of the budget bill. If an official nonetheless does accept delivery of goods or services without having an appropriation available to pay the bill when it is due, the official will have violated SF §7-234(a) and is subject to the sanction of SF §7- 234(c).8

B. SF §7-237

The General Assembly specifically addressed the relationship between contractual undertakings and available appropriations in another section, SF §7-237.9 This section applies to some, but not all, State contracts:

This section applies to any officer or agent of the State who is charged with:

(1) construction, improvement, or maintenance of a building or work; or

(2) management of or provision for a State institution.

SF §7-237(a). Those covered by SF §7-237 are prohibited from the following actions:

(1) mak[ing] or participat[ing] in making for any purpose a contract that purports to bind the State to pay any amount unless money has been appropriated for that purpose and remains unspent;

(2) creat[ing] a deficiency; or

(3) incurr[ing] a liability or spend[ing] money in excess of the applicable appropriation.

SF §7-237(b).10

To some extent, then, this provision overlaps SF §7-234: An official who violates SF §7-237(b)(2) or (3) will also have violated SF §7-234.11 But SF §7-237(b)(1) prohibits something not prohibited by SF §7-234: entering into a contract that even "purports to bind the State to pay" money in the absence of an unexpended appropriation. Although the State would in reality not be bound to pay, at least if goods or services had not been accepted, nonetheless an official described in SF §7-237(a) may not sign a contract that gives the contrary impression. SF §7-237(b)(1) would be violated if, for example, an official responsible for renovating a building "issued purchase orders for materials, supplies or equipment for which [the agency] did not have the money to pay ...." Anne Arundel County v. Board of Educ., 248 Md. 512, 527-28, 237 A.2d 426 (1968).

Hence, an official covered by SF §7-237 may not enter into a contract unless an unspent appropriation is currently available to fund the contract, payment obligations under the contract are made contingent on the availability of appropriations, or a payment obligation arises only after an already enacted appropriation will become available.12

III

Conclusion

In summary, it is our opinion that:

1. An agency violates SF §7-234 if it accepts goods or services and is required by contract to pay for them when it lacks an appropriation to do so. If, however, payment is not required until an appropriation becomes available, the agency does not violate SF §7-234 by accepting the goods or services. Thus, an agency does not violate SF §7-234 if the agency accepts goods or services that are to be paid for after the start of the next fiscal year and the General Assembly has enacted a budget bill containing an appropriation that can be used to make the payment.

2. An official within the scope of SF §7-237 violates that section by entering into a contract if no appropriation were currently available to fund the contract, unless the contract included suitable contingency language deferring any payment obligation until an appropriation became available.

J. Joseph Curran, Jr.
Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice

1
The Governor's discretion is limited by a statutory requirement that he include in the budget bill amounts needed to pay final judgments in contract actions against the State. See §12-204 of the State Government Article. The General Assembly is free to strike that item, however. 68 Opinions of the Attorney General at 394.

2
Section 6 of that budget bill provided that "no State department, board, commission, officer, institution, or other agency, shall exceed the amount of its appropriation made herein ..."

3
Former Article 15A, §14 prohibited agencies from "spend[ing] in excess of the total amount of [their] appropriation ..."

4
Fiscal control procedures in the Comptroller's office would ordinarily block payment of such a claim. Presumably the General Assembly's concern, arising in an era before computers, was that control procedures would be imperfect. Thus, SF §7-234(b) speaks to the contingency of an expenditure having been made despite the lack of an appropriation.

5
We are referring here to goods or services that the agency accepts as within the scope of the contract, not to goods or services that the contractor provides but are the subject of dispute.

6
The Fourteenth Amendment prohibits deprivations of property without due process; Article III, §40 requires payment of "just compensation" if private property is to be taken for public use.

7
If payment is to be made on an invoice, the agency is free to seek the contractor's agreement that it will not send the invoice until an appropriation becomes available. Cf. SF §15-103 (State policy calls for payment within 30 days of contractual due date "or ... if later, after the day on which the unit receives an invoice"). See also note 8 below.

8
If an official routinely accepts goods or services late in the fiscal year, when the status of appropriations might be uncertain, the contract should specify that payment would be due when an appropriation to fund the payment is available. Such a provision would avoid any compliance problem with both SF §7-234 and SF §7-237, discussed immediately below.

9
Yet another provision, SF §13-217, addresses the issue of appropriations for multi-year contracts. It provides for automatic termination "[i]f money sufficient for the continued performance of a multi-year contract is not appropriated for any fiscal year..." SF §13-217(d)(1). If a contract is terminated for this reason the contractor is to be reimbursed for certain nonrecurring costs "from any appropriation available for that purpose." SF §13-217(d)(2). Each multi-year contract must include a termination for non-appropriation clause. SF §13-217(e). See COMAR 21.07.01.10.

10
Article 31, §3 of the Maryland Code enacted in Chapter 451 of the Laws of Maryland 1914, formerly prohibited both State and local officials "charged or entrusted with the construction, improvement or keeping in repair of any building or work of any kind, or with the management or providing for any public institution" from entering contracts "binding or purporting to bind" the government "to pay any sum of money not previously appropriated for the purpose for which such contract is made, and remaining unexpended, and applicable to such purpose ..." When SF §7-237 was enacted, the references to State officials in this section were deleted. See Chapter 11, Laws of Maryland 1985.

11
There is a significant difference in sanctions, however. A violation of SF §7-234 is neglect of duty, potentially leading to removal. A violation of SF §7- 237(b)(2) or (3) is a criminal offense. See SF §7-237(d).

12
An official "who willfully or knowingly violates subsection (b)(1) of this section is personally liable on the contract." SF §7-237(c)(2).