Today's Paper State News Hutchinson 2024 LEARNS Guide Newsletters Opinion Sports Obits Games Archive Notices Core Values

$100,000 state gift turns spotlight on ‘cash funds’

by Bill Simmons | July 4, 2010 at 7:30 a.m.

— Attorney General Dustin McDaniel has announced that his office will donate $100,000 to help fund the Arkansas Fallen Firefighters Memorial to be built on the state Capitol grounds.

The McDaniel gift didn’t come out of his pocket, but out of public funds - proceeds from the state’s 2008 lawsuit settlement with Pfizer Inc.

Firefighters who died in the line of duty deserve to be honored with a “permanent reminder of our fallen firefighters’ heroic efforts,” Mc-Daniel said.The memorial also is to be a place for teaching about fire safety and prevention.

The donation puts the memorial fund within $64,000 of its $1.1 million goal, he said.

The expenditure is an example of a little-realized - and relatively small - part of state government spending: spending without a legislative appropriation authorizing the expenditure.

That may surprise people who have read Article 5, Section 29 of the Arkansas Constitution, which provides that funds in the Arkansas treasury may only be withdrawn in accordance with an appropriation by the General Assembly.

Another provision, Article 16, Section 12, says: “No money shall be paid out of the treasury until the same shall have been appropriated by law, and then only in accordance with said appropriation.”

The General Assembly’s budgeting process involves having public officials come before legislative bodies to present budget proposals, defend spending plans, explain why they want that much for that purpose, and see whether they can persuade the lawmakers to agree. Appropriation bills set limits and, sometimes, conditions on spending public funds.

But when asked for the authority for making the firefighter’s memorial expenditure, McDaniel’s office cited not an appropriation law but a court ruling.

The Arkansas Supreme Court has held, said McDaniel spokesman Aaron Sadler, that “cash funds” not deposited into the state treasury, such as money from the settlement of a lawsuit, may be spent even when there is no appropriation by the Legislature to authorize the expenditure.

That ruling came in 1949 in the case of Gipson v. Ingram.

“Cash funds” are money various parts of government generate out of their own activities, such as, in McDaniel’s case, a court settlement, rather than from taxes.

In that 1949 lawsuit, examples of such funds were the money universities received as dormitory charges and sums they obtained through student fees, or that the prisons received from the sale of prison crops. Defendants included the higher-education institutions and many other state government agencies as well as the state’s top fiscal officials.

The plaintiffs were taxpayers contending that each defendant agency and institution had a cash fund and that all such cash was public money. They argued it should be deposited in the state treasury and expended only after appropriation acts by the Legislature. Instead, they said the agencies and institutions were spending it as their governing boards saw fit, without legislative appropriation.

It was recognized at the time simply as the “cash fund” case, a name even the Supreme Court acknowledged in the opening line of its ruling. That 5-1 decision noted that the court had ruled in earlier cases that “the treasury” in those constitutional provisions means the state treasury.

But the majority opinion by Justice Ed McFaddin did not stop the cash-fund spending.

It held, instead, that the money never made it to the treasury, so provisions restricting taking money from the treasury didn’t apply.

Further, the Legislature had the power to stop cash-fund spending and to require that cash funds be deposited in the treasury to await legislative appropriation but had not done so, the court said.

And it added that the Legislature was generally aware that cash-fund spending was going on and had chosen not to stop it.

The path not taken in that ruling a half-century ago was colorfully advocated in a dissent by Chief Justice Griffin Smith.

The majority ruling, he wrote, marked “the first time since 1836 ... that there has been judicial affirmation of the proposition that a public fund belonging to the people ... may be dealt with by boards, commissions, institutions and agencies ... with complete indifference to the public treasury, absent the formality of appropriation.”

Smith said it was “fanciful” and “novel to the point of seeming incredibility” for the court to treat any portion of public money as “an asset subject to the discretionary use of those who have been appointed, selected, elected or employed,” rather than being deposited in the state treasury and disbursed only by legislative appropriation. He noted that the Supreme Court, itself one of the defendants, had its own cash funds, received through fees, deposited in banks and drawn for library purposes.

“But the fact that this has been done under unofficial judicial sanction for nearly a century does not make it legal,” Smith wrote. “On the contrary, it serves to emphasize the fruits of prolonged legislative procrastination, and the unwholesome consequences that can follow.”

Nowadays, agency officials generally do not feel free - at least in practice -to spend cash funds at will. And some of them are keenly aware of limits imposed by the Legislature and needing the authority of a legislative appropriation in order to spend public money.

For example, the War Memorial Stadium Commission recently made a deal with AT&T to allow the company’s name to be on the football field of the stadium in Little Rock, a deal that the commission said could net $1.8 million over 10 years. But the commission isn’t free to spend it without legislative appropriation, said the commission chairman, Gary Smith.

“We need [legislative] approval for every penny we spend,” Smith said. “We can’t move money out of one account, if we have more than we need there, to another where we need more [money]. Shoot, no. Nothing happens without the Legislature giving the OK.”

In the attorney general’s case, court rulings or settlements are the major, perhaps sole, reason the attorney general has “cash funds.”

“I can’t think of any instance where we have any not directly tied to a court order,” McDaniel said.

The consent judgment with Pfizer was entered in October 2008 in Pulaski County Circuit Court by Judge Ellen Brantley. As if the 1949 ruling didn’t provide enough leeway, the 2008 judgment said the money could be spent for specified purposes, and also for “other uses permitted by state law at the sole discretion of each signatory attorney general.”

Today, cash funds are a big part of the state’s overall spending. In the fiscal year that started Thursday, they are $6.5 billion, or 27 percent of the $24.3 billion budget, said the state’s budget director, Mike Stormes.

“There is no law that requires deposit [of cash funds] in the state treasury, although doing so is encouraged,” he said.

And many agencies put their cash funds in the treasury, Stormes said.

“All cash funds, whether in the state treasury or not, require appropriation by the General Assembly,” he maintained.

Stormes said about 56 percent of cash funds go through the treasury and appropriation process.

The other 44 percent go into commercial banks, but, for the most part, also go through the legislative process, he said.

But when the attorney general’s position on its firefighter fund expenditure was called to his attention, Stormes said, “My answers to your previous questions were within the normal operations of state government. Lawsuits are entirely different matters and involve the direction and orders of the courts, either state or federal.

“Everything - except the rare times courts are involved - is appropriated,” he said.

The Pfizer settlement isn’t the only one that brought money the attorney general’s way.

There have been big settlements with Merck over the drug Vioxx and smaller settlements with others. McDaniel said he’s proud of the performance of the office employees who’ve handled the cases, including some in which Arkansas was the leading force.

In February, McDaniel announced another major settlement, this one with the Eli Lilly pharmaceutical company over its drug Zyprexa. That settlement required the firm to pay $18.5 million to the state. Of that, about $2 million will go to the attorney general’s consumer education and enforcement fund to support future consumer investigations and prosecutions, McDaniel said.

He said he didn’t know whether the Legislature had ever “expressly addressed” the office’s use of its cash funds, but he pointed out that the expenditures are duly noted in the annual legislative audit of the office.

“They’re apprised of how much money is in these funds and how it’s been expended, and we’re subject to any questions they have about it,” he said.

This process of taking in and using money apart from the legislative appropriation process, though little-known, isn’t new, as the 1949 case attests, particularly at the attorney general’s office.

Shortly before McDaniel took over as attorney general in 2007, the office already had $691,598 of cash funds in certificates of deposit and $2,256,894 of cash funds in other accounts left over from past attorneys general.

During McDaniel’s time in the office, those sums have grown to $1,045,897 in CDs and $6,257,287 in other accounts as of Monday, he said.

“I didn’t realize that until we checked as a result of [the Arkansas Democrat-Gazette’s] inquiry,” McDaniel said. “I was pretty impressed.”

Along the way there have been payments of many thousands of dollars from the cash funds for restitution to wronged consumers and for other reasons, as well as to pursue other consumer-protection cases, among other things. Even more from other state funds has been expended to operate and maintain the office.

He counts cash funds as “zero percent” of what he estimated to be a $13 million-a-year office budget, using cash funds only for court-approved expenditures and “supplementing the office budget,” he said.

More than $350,000 went to Little Rock ad man Craig Douglass over recent years for professional services. Most of that was for television time for public service announcements for such things as Internet safety, health care, and guarding against scams, Sadler said. More recently the office has made its own buys for public service announcements, such as for reporting census information.

McDaniel used some of it to contribute to causes he chose to help, such as the firemen’s memorial fund and programs to help children, and for some causes that other attorneys general started, such as a “beat the heat fans program” to help poor people cool off in hot weather, a program he says former Attorney General Mark Pryor started.

Why hasn’t McDaniel run the money through the state treasury and subjected it to the legislative appropriation process?

Because it wasn’t being done that way when he took over the office, he said.

And, he said, he aims to comply with court orders when they impose requirements.

And, he acknowledged, the long-standing practice gives the attorney general considerable flexibility in deciding what to do with the money.

“Part of running for attorney general is convincing the voters that you’re a pretty good lawyer, and no pretty good lawyer is going to ask to give up the flexibility of handling the funds the way we do,” McDaniel said.

Information for this article was contributed by Seth Blomeley of the Arkansas Democrat-Gazette.

Front Section, Pages 1 on 07/04/2010

Print Headline: $100,000 state gift turns spotlight on ‘cash funds’


Sponsor Content