Was it legal for NC legislative leaders to direct how millions of dollars in 'Reserve Fund' grants got distributed by executive branch agencies, after the regular appropriations process was over?

Plain-English summary

State Auditor Leslie Merritt produced a report in June 2005 investigating "Reserve Funds" in the 2004-2005 revised certified budget. The factual story was striking. During the 2004 budget conference between the House and Senate, the negotiators couldn't agree on a list of specific grants, so they parked roughly $13.8 million in three lump-sum Reserve Funds: $1.34 million in the Office of State Budget and Management, $10.1 million in the Department of Cultural Resources, and $2.4 million in the Department of Health and Human Services. These funds went into the final Appropriations Act with no line items naming specific recipients.

After the session ended, control over distributing the Reserve Fund money was effectively held by three legislative leaders: the Senate President Pro Tempore (controlling about $6.5 million), one House Co-Speaker ($4.6 million), and the other Co-Speaker ($2.9 million). The three executive-branch agencies cut checks to a wide variety of organizations across the state when directed to do so by legislative staff. The agencies kept accounting records mirroring those kept by each legislator's office.

The Auditor flagged two legal questions: did the process violate the state Constitution's separation of powers, and did it violate N.C.G.S. § 143-16.3, which prohibits expenditures for purposes the General Assembly "considered but not enacted"?

The AG's analysis:

Separation of powers. No clear violation. The AG noted that the NC Supreme Court has been strict about preventing the legislature from exerting direct authority over executive branch implementation (citing State ex rel. Wallace v. Bone and the 1982 separation-of-powers advisory opinion). But the Reserve Funds were appropriated to executive branch agencies through the normal appropriations process. No statute authorized the legislative leaders to direct disbursement. The agencies had statutory discretion to distribute the funds; they chose to follow the legislators' direction even though the law didn't require them to. The AG concluded: "Independent actions of individual members of the General Assembly, regardless of the member's position of leadership, do not constitute the exercise of official legislative power triggering constitutional safeguards."

N.C.G.S. § 143-16.3. Possibly violated in spirit, but not a clear-cut breach. The statute prohibits expenditures for purposes the General Assembly "considered but not enacted." Eleven specific grants funded through the Reserve Funds had appeared in House or Senate bills but were dropped in the Joint Conference Committee Report. A literal reading would say § 143-16.3 was violated. But the AG noted the practical reality: the conference committee had reconciled the budget through compromise, treating Reserve Funds as a substitute for line-item special appropriations. The full legislature, however, was not necessarily aware of these compromises. The AG declined to find a clear violation but acknowledged the practice "likely contravenes the intent of the General Assembly" and recommended clarifying amendments.

The Michael Decker hiring. A more politically charged piece. DCR used $45,000 of Reserve Fund money to create a "Community Development Specialist I" position, which was filled by former NC House member Michael Decker, Sr. The Auditor's report described how the position description was "tailored" for Mr. Decker by working with the Co-Speaker's office. The AG could not identify any specific legal violation in the chain of events but noted that the State Personnel Commission's rules under § 126-14.3 require open and fair competition for state jobs. The AG wrote: "the appearance of impropriety detailed by the Report reflects a process that was neither open nor fair."

The opinion concludes with reform recommendations from Roy Cooper: detailed bills filed through Appropriations committees, OSBM review for emergency appropriations, fiscal-research disclosure of legislator-initiated appropriations, OSP limits on job creation to executive branch requests, and yearly performance reporting from reserve fund recipients.

Currency note

This opinion was issued in 2005. 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 current law before relying on any specific rule, deadline, or remedy mentioned here.

NC has substantially revised its appropriations process since 2005. § 143-16.3 has been amended, and the State Personnel Act has been reorganized into Chapter 126 with the State Human Resources Act. Anyone studying current budget transparency practices in NC needs to consult the present law and any post-2005 AG opinions and court decisions.

Common questions

Q: Did anyone go to jail or pay fines as a result of this opinion?
A: The opinion identified no specific legal violation. It is advisory; it doesn't impose penalties. Subsequent federal criminal proceedings involving former Speaker Jim Black and others touched some of the underlying conduct but were prosecuted under different theories.

Q: What is N.C.G.S. § 143-16.3 supposed to prevent?
A: The statute is designed to stop the executive branch from spending money on a purpose that the legislature actively rejected. The classic concern is a program that fails to get a vote, then gets funded under a vague line item. The AG read the statute strictly: a purpose is "considered" when it appears in a bill, amendment, petition, or committee deliberation.

Q: Why didn't the AG find a separation-of-powers violation?
A: Because the executive agencies had legal discretion. They chose to follow legislative direction, but they weren't compelled to. Separation of powers is violated when the legislature uses official power to control executive branch action. Informal direction, even when followed in practice, is a different question.

Q: What is a "Reserve Fund" in NC budgeting?
A: An appropriation to an executive agency in a lump sum, intended to be allocated by the agency to specific recipients or purposes later. Reserve funds exist for legitimate reasons (e.g., flexibility for emergent needs), but as the Auditor's report showed, they can also be used to obscure legislator-directed earmarks.

Q: What rules govern hiring like the Decker situation?
A: The State Personnel Act and Commission rules require open competition for state jobs. § 126-14.3 specifically directs the Commission to adopt rules encouraging open and fair competition. The AG didn't find a rule violation in the Decker hiring, but signaled the appearance of impropriety.

Q: Were the underlying grants recouped?
A: The opinion does not address recoupment. The legal-status conclusion was that the agencies' disbursements weren't clearly unlawful, which makes recoupment difficult absent additional fact-finding.

Background and statutory framework

NC's appropriations process is built on Chapter 143, Article 1 (the Executive Budget Act). The Governor proposes a budget under § 143-12; the General Assembly enacts it with modifications under § 143-15; the Governor administers it under Article III, Section 5(3). Section 143-16.3 polices the gray area where money is spent on something the legislature didn't actually appropriate.

The Reserve Funds practice the Auditor described used a structural ambiguity. Money was appropriated to executive agencies in a way that gave them nominal discretion, but the practice of legislator-directed disbursement meant the spending decisions were really being made by individual legislators (or their staff), outside the official appropriations process. The AG could not call this clearly unconstitutional, because there was no statute or formal action of the General Assembly compelling the executive agencies. But the AG was also not willing to bless the practice.

The opinion is signed by Roy Cooper (Attorney General) and Grayson G. Kelley (Chief Deputy AG). It was part of a broader political moment in NC state government when budget transparency was getting heightened scrutiny.

Citations

• N.C.G.S. § 143-12 (budget submission to General Assembly)
• N.C.G.S. § 143-15 (legislative modification of budget)
• N.C.G.S. § 143-16.3 (prohibition on expenditures for unenacted purposes)
• N.C.G.S. § 126-14.3 (open and fair competition in state hiring)
• N.C. Const. art. I, § 6 (separation of powers)
• N.C. Const. art. II, § 1 (legislative power)
• N.C. Const. art. III, § 5(3) (Governor's budget administration)
• State ex rel. Wallace v. Bone, 304 N.C. 591, 286 S.E.2d 79 (1982)
• Advisory Opinion in re Separation of Powers, 305 N.C. 767, 295 S.E.2d 589 (1982)
• N.C. Monroe Construction Co. v. State, 155 N.C. App. 320 (2002)

Source

• Landing page: https://ncdoj.gov/legal-services/archived-opinions/

Original opinion text

September 12, 2005

The Hon. Leslie Merritt
Auditor State of North Carolina
20601 Mail Service Center
Raleigh, N. C. 27699-0601

Re: Advisory Opinion: Review of Reserve Funds in the 2004-2005 Revised Certified Budget

Dear Auditor Merritt:

On June 28, 2005, this Office received from you a report entitled "Review of Reserve Funds in the 2004-2005 Revised Certified Budget" (the Report). This Report contains the findings and conclusions of your office regarding certain Reserve Funds appropriated to the Office of State Budget and Management, the Department of Cultural Resources and the Department of Health and Human Services in the 2004 Appropriations Act, and the subsequent allocation, control and disbursement of those funds by the agencies. The Report states that the investigation was generated by requests from private citizens and elected officials for a review of these Reserve Funds. The Attorney General has received similar requests. This opinion will therefore address certain legal questions which have been generated by the factual findings of the Report.

FACTUAL SUMMARY

The Report states that during the 2004 legislative session a near impasse between the Senate and House of Representatives during the Joint Conference Committee's budget reconciliation negotiations resulted in the establishment of certain reserves for grants ("Reserve Funds") which were included in the final 2004 Appropriations Act. The Joint Conference Committee Report on the Continuation, Expansion and Capital Budget, dated July 17, 2004, designated these appropriations as follows:

• (1) Office of State Budget and Management (OSBM) — $1,338,382
• (2) Department of Cultural Resources (DCR) — $9,161,618 and $925,000
• (3) Department of Health and Human Services (DHHS) — $2,400,000

The Reserve Funds as appropriated were not directed to line item recipients or specifically identified uses.

The Report states that the Reserve Fund appropriations were subsequently disbursed from OSBM, DCR and DHHS to a wide variety of organizations throughout North Carolina, usually in the form of grants. The Report further concludes, through extensive interviews with OSBM, DCR and DHHS management, as well as with legislative staff members and legislators, that control of the disbursement of these grant funds was, as a practical matter, retained and exercised by the legislative leadership.

Control over the Reserve Funds was divided between the President Pro Tempore of the Senate and the Co-Speakers of the House of Representatives. Documents reviewed indicated that the President Pro Tempore controlled $6,507,500, one of the Co-Speakers controlled $4,606,250, and the other controlled $2,891,250. OSBM, DCR and DHHS each maintained accounting records documenting amounts controlled and disbursed by the three legislators. Similar accounting records were maintained by staff in each legislator's office.

Requests for disbursement of grants were generally received by agency officials from legislative staff members. The three agencies were advised which organizations should receive funds and the dollar amounts to be allocated. The agencies neither solicited, recommended nor awarded grants from the Reserve Funds without direction from the three legislative leaders. Managers at DCR and DHHS stated that they did not believe their agencies had any discretionary authority in regard to the award of these grant funds. As of the date of the Report there remained a total of $1,232,200 in Reserve Funds which had not been disbursed.

LEGAL ANALYSIS

Two primary legal issues have been raised by the findings of the Report. The first is whether the appropriation and grant disbursement process utilized in connection with the Reserve Funds raises separation of powers or other issues under the North Carolina Constitution. The second is whether the Reserve Funds have been disbursed in violation of N.C.G.S. § 143-16.3 or other statutory provisions.

A. CONSTITUTIONAL ISSUES

As previously discussed, the Joint Conference Report on the Continuation, Expansion and Capital Budget described four reserves for grants which were included in the 2004-2005 Appropriations Act. Page J-30, Item 70 appropriated $1,338,382 to OSBM as a "Reserve for Grants." Page G-13, Item 94 appropriated $2,400,000 to DHHS as a "Grants Reserve" for health and human services grants. Page J-5, Item 13 appropriated $925,000 to DCR as a reserve for "Historical Cultural and Arts Organizations." Page J-5, Item 14 appropriated $9,161,618 to DCR as a "Grants Reserve." These provisions of the Joint Conference Committee Report were incorporated into the 2004 Appropriations Act by Section 33.2(a) of the Act.

The Reserve Funds in question were therefore appropriated to three Executive Branch agencies in accordance with the normal appropriations process. The Report does not point to, and we have not found any provision in the Appropriations Act, Joint Committee Report or any other provision of law enacted by the General Assembly which restricts OSBM, DCR or DHHS from distributing these Reserve Funds other than in accordance with their general statutory authority and normal grant procedures. Nor has any provision of law been identified which authorizes the President Pro Tempore of the Senate, the Co-Speakers of the House of Representatives or any other individual member of the legislature to direct or control the distribution of the Reserve Funds appropriated to OSBM, DCR and DHHS.

The North Carolina Constitution provides in part:

The legislative, executive, and supreme judicial powers of the State government shall be forever separate and distinct from each other.

N.C. Constitution, Article I, § 6. This section is commonly referred to as the "separation of powers" clause of our Constitution. The North Carolina Supreme Court has reiterated that "the principle of separation of powers is a cornerstone of our state and federal governments." State ex rel. Wallace v. Bone, 304 N.C. 591, 601, 286 S.E.2d 79, ___ (1982).

In State ex rel. Wallace v. Bone, the North Carolina Supreme Court struck down legislation authorizing the appointment of members of the General Assembly to the Environmental Management Commission. The Court unanimously concluded that the General Assembly lacked the constitutional authority to mandate the appointment of legislators to bodies in the executive branch.

The Court has also rendered an advisory opinion on the constitutionality of a now-repealed statute which required the approval of the Joint Legislative Commission on Governmental Operations for the Governor to transfer or change certain line items in the state budget. The Court determined that, in light of the constitutional mandate of separation of powers, the statutory authority given to the legislator members of that commission "exceeds that given to the legislative branch by Article II of the Constitution. That statute also constitutes an encroachment upon the duty and responsibility imposed upon the Governor by Article III, Section 5(3), and, thereby violates the principle of separation of governmental powers." Advisory Opinion in re Separation of Powers, 305 N.C. 767, 776-777, 295 S.E.2d 589, ___ (1982).

The North Carolina Constitution sets forth the duties of the Governor and of the General Assembly. Among the duties of the Governor is the duty to "prepare and recommend to the General Assembly a comprehensive budget of the anticipated revenue and proposed expenditures of the State for the ensuing fiscal period." N.C. Constitution, Article III, § 5(3). Additionally, "[t]he budget as enacted by the General Assembly shall be administered by the Governor." Id. However, "[t]he legislative power of the State shall be vested in the General Assembly, which shall consist of a Senate and a House of Representatives." N.C. Constitution, Article II, § 1.

Chapter 143, Article 1 (The Executive Budget Act) sets forth the statutory budget process in North Carolina. N.C.G.S. § 143-12 requires the Governor, through the Director of the Budget, to submit a proposed budget to the General Assembly. N.C.G.S. § 143-15 authorizes the General Assembly to modify the Governor's proposed budget prior to enactment. Upon enactment by the General Assembly, both the Constitution and the Executive Budget Act require that the Governor administer the budget as enacted. The extent to which the General Assembly can enact laws which interfere with the Governor's administration of the budget without violating the separation of powers principle, however, has not been clearly delineated by our courts.

The Report, however, does not reference the enactment of any law which granted to individual legislators the legal authority to direct Executive Branch officials in the disbursement of Reserve Fund grants. We have likewise been unable to identify such legislation. Nor are we aware of any action of the General Assembly which restricted the general authority of agency officials to administer the Reserve Fund grant disbursement process in accordance with normal rules, regulations and policies, or required them to disburse funds as directed by legislative leaders. Executive Branch officials were therefore not required by law to distribute grant funds as requested by individual legislators.

Independent actions of individual members of the General Assembly, regardless of the member's position of leadership, do not constitute the exercise of official legislative power triggering constitutional safeguards. The process described in the Report therefore does not raise separation of powers issues under Article 1, § 6 of the Constitution.

B. STATUTORY ISSUES

The Report also includes a review of certain "special appropriations" which were included in committee reports, excluded from the final Appropriations Act, and ultimately funded from Reserve Funds. Specifically, the Report has identified eleven OSBM, DCR or DHHS grant recipients for whom funding in a total amount of $6,500,000 was included in either the House Appropriations Committee Report on the Continuation, Expansion and Capital Budgets dated June 5, 2004 or the Senate Appropriations/Base Budget Committee Report on the Continuation, Expansion and Capital Budgets dated June 22, 2004, but was deleted from the Joint Conference Committee Report on the Continuation, Expansion and Capital Budgets dated July 17, 2004, and the 2004 Appropriations Act. Questions have been raised as to whether such grants were funded in violation of N.C.G.S. § 143-16.3.

N.C.G.S. § 143-16.3 reads as follows:

Notwithstanding any other provision of law, no funds from any source, except for gifts, grants, funds allocated from the Repair and Renovations Account in accordance with G.S. 143-15.3A, and funds allocated from the Contingency and Emergency Fund in accordance with G.S. 143-12(b), may be expended for any new or expanded purpose, position, or other expenditure for which the General Assembly has considered but not enacted an appropriation of funds for the current fiscal period; provided, however, that in the event the Director of the Budget declares that it is necessary to deviate from this provision, he may do so after prior consultation with the joint Legislative Commission on Governmental Operations. For the purpose of this section, the General Assembly has considered a purpose, position, or other expenditure when that purpose is included in a bill, amendment, or petition and when any committee of the Senate or the House of Representatives deliberates on that purpose.

This statute appears to have been interpreted by our appellate courts only once, in the case of N.C. Monroe Construction Co. v. State, 155 N.C. App. 320 (2002). In that case the Court of Appeals held that N.C.G.S. § 143-16.3 was not violated when OSBM entered into a contract for prison construction prior to the appropriation of funds for that purpose because funds were subsequently appropriated prior to any work being performed. The analysis in this case therefore provides little guidance as to the application of the statute to the factual findings in the Report.

Based upon our review of the Report, it does appear clear that eleven specific line item appropriations included in the Senate or House budget bills were not included in the final Appropriations Act. A literal reading of N.C.G.S. § 143-16.3 therefore suggests that these expenditures were considered but not enacted by the General Assembly, thus prohibiting OSBM, DCR and DHHS from distributing grant funds for the same purposes. We believe this analysis is complicated, however, by the Report's further conclusion that, in order to reconcile the budget debate, the funds in question were actually appropriated indirectly through Reserve Funds, as a substitute for line item special appropriations.

The question is therefore whether the General Assembly did, in fact, appropriate funds which were intended to be distributed to the eleven grant recipients identified by the Auditor, even though the funds were not specifically identified in the Appropriations Act. An argument can be made that the statutory prohibition in N.C.G.S. § 143-16.3 is not implicated where House and Senate budget negotiators reached a compromise through which funds for specific purposes were, as a practical matter, appropriated as Reserve Funds, even though those purposes were not directly identified in the final budget act. On the other hand, members of the General Assembly who were not directly involved in the conference committee process may not have been made aware of the compromise agreement and thus the full legislature could not have knowingly enacted an Appropriations Act which was intended to fund the specific grants in question.

Under these circumstances we cannot conclude that the process described by the Auditor clearly violated N.C.G.S. § 143-16.3. We acknowledge, however, that the process utilized likely contravenes the intent of the General Assembly in enacting the statute and recommend that appropriate clarifying amendments be considered.

GRANT FOR COMMUNITY DEVELOPMENT SPECIALIST POSITION

The Report describes the use of $45,000 from the Reserve Funds appropriated to DCR for the establishment of a Community Development Specialist position in that agency. The position established was filled by former House of Representatives member Michael Decker, Sr. Questions have been raised regarding the establishment of this position and selection of Mr. Decker.

The chronology of events prepared by DCR and included in the Report reflects that DCR officials were contacted in January, 2004 by staff members of the Co-Speaker concerning the possibility of using Reserve Fund resources to establish a position to assist local communities in business and economic development planning around historic sites and local attractions. Michael Decker, Sr. was recommended for the position. The Co-Speaker's staff was informed that such a position could be established, but that Mr. Decker would be required to participate in the normal hiring process and be qualified for such a position.

DCR subsequently received substantial input from the Co-Speaker's staff concerning the position description, vacancy announcement and budget for the position. The Report concluded that specific language was included in the position description in order to "tailor" the position for Mr. Decker. A time-limited position labeled Community Development Specialist I was posted on February 2, 2005 and Mr. Decker's application was received by DCR on February 8, 2005. Mr. Decker was interviewed, along with two other candidates, and was offered the position on February 16, 2005. The Co-Speaker's office thereafter approved the transfer of a $45,000 grant from DCR's Reserve Fund to fund the position. Mr. Decker's position as a Community Development Specialist I was funded through grant funds until June 30, 2005.

We have been unable to identify any specific violation of law or regulation in the process outlined by the Report. We therefore cannot conclude that either the creation of the Community Development Specialist I position, the source of its funding or the selection of Mr. Decker were in violation of law. We note, however, that the State Personnel Commission, in accordance with N.C.G.S. § 126-14.3, has adopted rules designed to encourage open and fair competition for positions in State government. In our opinion, the appearance of impropriety detailed by the Report reflects a process that was neither open nor fair.

If we can be of further assistance, please contact me.

Very truly yours,

Roy Cooper, Attorney General

Grayson G. Kelley, Chief Deputy Attorney General

(Recommendations from this Office for reform of the budget process):

• All state appropriations should be detailed by bills filed and approved through the General Assembly's Appropriations committees, or within substantive legislation, and then included in an Appropriations Act for approval.
• Emergency appropriation needs that fail to meet a bill-filing deadline should be presented to the Office of State Budget & Management for review and subsequent recommendation by professional staff or in public session through the Joint Legislative Committee on Governmental Operations prior to being included in the final budget.
• The General Assembly's Fiscal Research Division should modify legislative committee financial reports to improve disclosure of legislator-initiated appropriations. A specific code, or related indicator, should be assigned to designate which appropriations are initiated by legislators, which are requested by state agencies and which are recommended by the Governor. A table or schedule summarizing these designations should be included in the committee financial reports to provide clear disclosure.
• The Office of State Personnel should limit creation of state jobs to the request of the Office of the Governor through a recommended budget, the request of state agencies, or by an action of the General Assembly through the full appropriations process.
• State agencies of any kind which are asked to disburse money through a reserve fund, such as the Tobacco Trust Commission and Health and Wellness Commission, should institute a reporting system that requires performance and accounting standards at least yearly.

Full, open deliberations can yield a better result for all of North Carolina. Partisan politics and personal vendettas can torpedo good ideas and promote bad ones. State taxpayers deserve full accountability of how the state spends their money. The latest 2005-2006 certified budget contains specifics on one-time grants for organizations across the state, which is certainly an improvement in the process. State government should continue to do more to provide for an open and responsible process.