Encumberances – South Dakota’s plan to shift federal stimulus money from one budget year to the next

Added November 12th, 2010 by

When reserves are not reserves…

Sometimes transparency is about helping citizens, or even legislators, understand exactly how certain budgeting procedures work.

Right now there is political discussion about the option of encumbering South Dakota general funds for k-12 and higher education. Here’s what happens …

In accounting, an encumbrance occurs when someone needs to hold money for a specific purpose. Governments create an encumbrance when they contract to buy particular goods or services. The money has not yet been spent, but is “earmarked” for that purchase, so no one else can use it. As the state moves from one fiscal year to the next, it’s usual for funds from the previous fiscal year to be encumbered to cover outstanding bills or contracts that have not yet been paid. 

But South Dakota uses encumbrances in another way. When the state does not spend all the funds appropriated to an agency or function in a particular fiscal year, it sometimes encumbers those funds to lower the amount of money it will appropriate in the next fiscal year for the general operation of that agency or function. By encumbering the funds ― the money appears to be “spent” in the fiscal year they are encumbered, even though all parties involved understand the dollars are to be held as replacement funds for planned underfunding in the next fiscal year.

At the November 12, 2010 interim meeting of the Joint Appropriations Committee, Bureau of Finance and Management Commissioner Jason Dilges explained the administration’s plan to encumber fiscal year 2011 general fund dollars for use in FY12. The missing dollars in FY11 would be replaced with $26.3 million in newly available federal stimulus dollars for k-12 education ― despite the condition that those federal funds be spent in fiscal year 2011 and that the state not increase its budget reserve.

The state proposal, approved by the US Department of Education, is to spend the stimulus dollars this year, and then encumber, or obligate, an equal amount of previously allocated FY11 general funds dollars for use in FY12. Those encumbered dollars will be available in FY12 for funding k-12 education.  This provides the legislature with the option of  lowering the FY12 general fund appropriation for k-12 education by $26.3 million without actually cutting the amount of dollars available to school districts.

State law requires that appropriations unspent at the end of a fiscal year revert to the state’s Budget Reserve Fund. But an increase in the reserve fund would make South Dakota ineligible for the federal stimulus dollars. So the encumbrance budget maneuver “reserves” the funds without them showing up in the state’s official Budget Reserve Fund. It’s much like putting money in a coffee can and burying it in the back yard instead of putting it in your checking account. You have the money, you know what you are going to use it for, but you can point to your checking account and show that you don’t have the money there…

Now, South Dakota lawmakers will debate how and when these funds should be used ― this year (FY11) to actually increase education funding, or next year (FY12) to help offset a pending budget deficit. The Budget & Policy Project’s goal is to provide objective clarification ― explaining what budgeting procedures are being proposed and how they work ― so citizens can understand and participate in the debate.

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