DEFICIENCIES - GENERAL

I. DEFINITION

The term "deficiency" has three different meanings in the State’s fiscal processes. Each deals with the lack or shortage, but this deficiency or insufficiency takes on different forms, urgency and remedies.

The three common types of deficiencies are:

· Shortage of Money in a Fund

· Shortage of Expenditure Authority (Cash Flow Problem)

· Shortage of Appropriation Authority (Expenditure Authority). This is the most common type of deficiency.

Each of these types of deficiencies is discussed separately in the following pages. General questions regarding deficiencies may be directed to the Financial Operations Unit in the Department of Finance (Finance).

2. SHORTAGE OF MONEY IN A FUND

A. Background and Creation of Fund Deficit

The State’s fiscal system revolves around the management of specific legal entities called funds. This is a big difference between government and the private sector. Even the largest private corporation is essentially void of a fund structure. Its financial accountability could be viewed in terms of a single fund entity with one set of financial statements, one balance sheet and one profit and loss statement for each fiscal period.

The State of California has over 1,000 separate funds with statutory requirement to maintain accountability for revenues, expenditures, etc., for each fund. The General Fund is used to account for those transactions not identified to a specific fund.

A fund may become deficient due to decreased revenues, increased expenditures or a combination of the two. When a fund’s cash becomes exhausted, the State Controller will not issue a warrant against the fund. In this situation, if the State incurs obligations against the fund, the fund is said to be in a deficit.

B. Remedies for Fund Deficit

1. Are there prior year adjustments to revenues or expenditures which can help? For example, can an agency pursue recovery from the federal government for expenditures which were previously made from State funds?

2. Increase in taxes, licenses and fees.

3. Can moneys be legally transferred from another fund?

4. Can funds be borrowed internally from other state funds or externally from the sale of notes to the financial markets?

Government Code 16351 - This section provides that the State Controller shall report to the Governor and the State Treasurer when any special fund is exhausted. If all concur that money is not needed in the General Fund, the Governor may order the Controller to loan money to the special fund.

5. Can administrative steps be taken to reduce expenditures? 

3. SHORTAGE OF EXPENDITURE AUTHORITY (Cash Flow Problem)

For appropriations with a significant level of scheduled reimbursements or payables (such as amounts payable from federal funds), there is always the potential for the "net appropriation" to become exhausted even though the program expenditure authorization may still be adequate. This situation is caused by the reimbursements or payables not being collected in a timely manner, thereby creating a cash flow problem.

The following table illustrates how an appropriation has reached this cash flow deficiency situation.

Appropriation Schedule	Authorized	Expended To Date	Balance
Program A	200	150	50
Program B	100	70	30
Program C	100	80	20
Reimbursements	-200	-100	-100
Net Appropriation	200	200	0

Although this appropriation still has expenditure authority remaining for all of its programs, the Controller will not honor any additional expenditure as the net appropriation balance is zero.

Assuming that the remaining expenditure authority is adequate, the first option to solve this problem should be an effort to collect the budgeted reimbursements.

The next option would be to provide an augmentation in the form of a temporary loan to an "unallocated category" which would provide funds for the item without increasing program expenditure authority. The reason an "unallocated category" does not add expenditure authority is that the Controller will not charge expenditures to such a category.

The following table illustrates the condition of the same appropriation above after an augmentation of $100 to an "unallocated category". (Note: This type of augmentation is usually provided by an Executive Order issued by the Department of Finance.)

Appropriation Schedule	Authorized	Expended To Date	Balance
Program A	200	150	50
Program B	100	70	30
Program C	100	80	20
Unallocated	100	0	100
Reimbursements	-200	-100	-100
Net Appropriation	300	200	100

The augmentation could be from Budget Act Item 9850-011-0001 which is a statewide item for loans, from a special authorization such as that provided to the Department of Veterans’ Affairs (Vets Home Item 8960-011-0001), or special legislation which may need to be enacted. 

4. SHORTAGE OF APPROPRIATION AUTHORITY (Insufficient Appropriation)

1. Background

While departments are required by the Government Code, Budget Act and California Victim Compensation and Government Claims Board Rules to operate within their appropriations, sometimes unabsorbable unanticipated expenses occur. Deficiency requests are given close scrutiny by Finance and the Legislature. Generally, the unanticipated expense must be no fault of the department, cannot be absorbed, and the department cannot have other funding alternatives.

The Legislature has always recognized that the enacted budget is a point-in-time estimated plan and that the executive branch needs a process to provide for unforeseen deficiency funding needs.

Early Years

The Budget Act has traditionally included a General Fund appropriation (called the Emergency Fund in the early years) to provide deficiency funding. The amount was minimal and had to be augmented annually through enactment of an "omnibus deficiency bill." Special Fund deficiencies were funded through the continuous appropriation provided in Government Code Section 11006.

From the late 1970s through 2003

In addition to the General Fund, the Legislature included appropriations in the Budget Act to fund deficiencies from Special Funds and Nongovernmental Cost Funds. These items had minimal funding and required augmentations through passage of an omnibus deficiency bill(s). Language in the items precluded the use of Government Code Section 11006 for deficiencies. The deficiency items were coded with the Organization Code 9840, Augmentation for Contingencies or Emergencies and the Governor’s Budget included a summary informational presentation of the actual past year and estimated current year deficiencies under code 9840.

Beginning with the 2004/05 fiscal year

The process for funding a deficiency was once again revised for the 2004-05 fiscal year. The Legislature increased the Budget Act appropriations for the 9840 items to $50 million General Fund, and $15 million each for special funds and nongovernmental cost funds. Government Code Sections 11006 and 13332.04 and the Statewide Section 27.00 were repealed. Deficiencies will be funded either by an allocation of the 9840 amounts or through the passage of a supplemental appropriations bill.

Federal Funds

In the late 1970s, the Legislature started to include appropriations from federal funds in the Budget Act. Prior to this, federal fund appropriations were generally not included in the Budget Act and spending was authorized through the continuous appropriation provided in Government Code Section 16360. The Legislature recognized that there was a need for added flexibility because of a higher level of uncertainty regarding federal funding levels and has annually included Section 8.50 in the Budget Act. This section includes a statement of legislative intent to maximize federal funds and appropriates any additional federal receipts that were not considered in the Budget Act. These federal funds are subject to Section 28.00 reporting to the Legislature.

B. Limitations

Deficiency funding requests are limited to unanticipated expenses incurred during the current fiscal year for an existing program.

Deficiency funding is not available for:

§ Capital Outlay

§ Expenses attributable to a prior fiscal year

§ Expenses related to legislation enacted without an appropriation

§ Startup costs of programs not yet authorized by the Legislature

§ Costs the Administration had the knowledge of in time to include in the May Revision

§ Costs the Administration has the discretion to incur or not incur

C. Operating Departments’ Responsibility to Avoid Deficiencies

Section 32.00 of the Budget Act, California Victim Compensation and Government Claims Board Rule 614 and Government Code Section 13324 provide that state officers are expressly forbidden from making any expenditure in excess of their appropriation. Any officer or employee who over expends an appropriation can be held personally liable for the amount of such unlawful indebtedness. Departments must inform Finance promptly as they become aware of a deficiency situation. Standard Finance Form DF-580 plus any appropriate documentation are used for this reporting. Form DF-580 may be viewed and printed using the Word reader. Go to the Finance Budget Forms website and select the form.  Any questions regarding completion of the form may be directed to the Finance Budget Analyst.

4. The Process for funding a Deficiency

Departments that have a critical unanticipated funding need that meets the criteria established in the 9840 items must first take all legally permissible steps to reduce expenditures and avoid the deficiency. If the deficiency is unavoidable, then departments must notify Department of Finance immediately by submitting a “Request for Deficiency Funding” form DF-580. The information provided on the DF-580 must include a detailed explanation of what caused the need for additional funding, an explanation of what steps were taken to avoid a deficiency, and the date the funding will be needed.

Department of Finance will, within 15 days of the receipt of the request from the department, send a notice to the Legislature notifying them of the deficiency funding request. Finance will review the request to determine the necessity of the request and to determine if the request is in accordance with the provisions of 9840.

After the decision is made to proceed with the deficiency funding request, the next decision is whether the deficiency will be funded through the 9840 item or through a supplemental appropriations bill. The determination of the funding method will be determined based upon such things as the timing of the request, the fund from which the expenditures will occur, the amount of funding required, the balance available in the appropriate 9840 item (see Financial Operations Unit) and other pertinent data. Finance analysts must obtain approval from the Capitol Office before a deficiency can be funded through the 9840 items.

Deficiencies funded through an allocation from the 9840 items

After the decision has been made to fund a deficiency through the 9840 item, Finance will prepare a 30-day letter to the Legislature notifying them of the intent to fund the deficiency through an allocation from 9840. After the 30 days has elapsed, and if the Legislature does not object, Finance will prepare a budget executive order to make the allocation.

Deficiencies funded through a supplemental appropriations bill

Finance will send a letter to the Legislature informing them of the concurrence with a deficiency funding request. Finance will work with the Legislature to find an author for a supplemental appropriations bill. Finance will be the sponsor of the bill. Upon passage of the bill, the department’s appropriation will be augmented with the funding contained in the bill.

5. Capital Outlay Deficiencies

Language was added to the former statewide Section 27.00 in 1996 and incorporated into the provisions of 9840 item in the 2004-05 Budget Act that "No deficiency authorization may be made under this section for any expenditure for capital outlay".  This restriction does not hinder operations as deficiencies for capital outlay were not previously funded through the same process as other operational deficiencies.

Deficiencies for capital outlay are typically funded through Government Code sections which authorize reversions and augmentations of appropriations subject to approval of the Public Works Board.  The most common of these authorities is Government Code Section 16352 which provides a continuous appropriation from Special Funds for augmentation of deficient appropriations because of increased construction costs. Questions regarding capital outlay deficiencies should be directed to the Capital Outlay Unit in the Department of Finance.

5. AN ANALYTICAL PERSPECTIVE: IS DEFICIENCY FUNDING NEEDED?

Both the operating department and the Department of Finance have a responsibility to determine that there is an actual funding need.  The Legislature and the Governor have an expectation that departments live within their budgeted resources.  Departmental fiscal staff and Finance analysts should consider the following in their review/analysis of deficiencies.

· If there is a fund shortage or funding need, has the option of offsetting savings been fully explored?  The first question which should be raised is if the additional costs can be squeezed from existing budget resources.  Departments always have the option of setting priorities for expenditures.

· If the problem is one of cash flow, can the department increase its effort to collect reimbursement or federal funds? If this has been a recurring problem, should language be provided in future Budget Acts or in continuous appropriations authorizing loans for temporary cash flow problems?

· If the deficiency problem is a recurring problem because of unexpected caseload/workload increases, should there be special authorizations in the Budget Act (or in statute) similar to language provided for departments such as the Department of Social Services (CalWORKS) and the data centers?

· Is this a disaster-related deficiency which would allow use of allocations through the authorization provided in Government Code Section 8690.6?