Opinion #5204

The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)

STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5204

June 15, 1977

CONSTITUTION OF MICHIGAN, Art 4, Sec. 31; Art 5, Sec. 18:

Creation of a special fund for economic stabilization

APPROPRIATIONS:

Creation of a special fund for economic stabilization

BUDGET:

Creation of a special fund for economic stabilization

The determination of what constitutes a public purpose is primarily for the legislature.

The legislature may enact a law creating a special fund for the public purpose of providing economic stabilization for the state and may appropriate monies from the general fund to this special fund.

A special fund for the economic stabilization may not be financed by automatic transfer of the general fund surplus into the special fund at the close of each fiscal year.

Honorable Larry E. Burkhalter

State Representative

The Capitol

Lansing, Michigan 48901

You have requested my opinion on the following question:

May the legislature create a special purpose fund for economic stabilization financed by deposits of any surplus in the general fund at the close of the fiscal period?

As the Substitute for 1977 Senate Bill 42 contains such provisions, I will respond to your question within the context of this proposal.

The substitute for SB 42 provides for the creation of a counter-cyclical budget and economic stabilization fund which would serve as a repository for any surplus generated by the state during each fiscal year. During periods of high unemployment and recession expenditures would be made from the fund to help stimulate the state's economy. During periods of recession, the money would be used for capital outlay, public works and public service jobs, tax credits, or any other purpose which provides employment. Substitute for SB 42, Sec. 4(2).

Partial funding of the fund would be accomplished as follows:

'The surplus in the general fund at the close of each fiscal year shall be deposited in the fund.' [Substitute for SB 42, Sec. 11]

The remainder is to be funded by an appropriation based upon a formula tied to the state's economic growth rate.

It should first be noted that it is against the policy of the state to levy taxes to accumulate funds for future use. Michigan Land and Iron Co v Township of L'Anse, 63 Mich 700; 30 NW 331 (1886); Township of Roscommon v Township of Midland, 39 Mich 424 (1861). This policy has been reinforced by provisions of the 1963 Constitution which provide for a balanced state budget. See Const 1963, art 4, Sec. 31; art 5, Sec. 18. During the constitutional debates, it was stated that:

'The tone of this language is that each year the budget shall be balanced. I think there may be tendencies . . . when a legislative body in a good year might wish to set aside a surplus for the lean year. I think, psychologically, this [Const 1963, art 5, Sec. 18] tends to discourage it.' [1 Official Record, Constitutional Convention 1961, p 1645]

Elsewhere in the debates it was stated that:

'Further, we propose that the expenditures should not exceed estimated revenues. This is a must in any good budget; the 2 should balance.' [1 Official Record, Constitutional Convention 1961, p 1639]

The legislature may, however, create a special fund for public purposes. For example, 1941 PA 258, Sec. 1; MCLA 21.101; MSA 3.606(1), provides for the creation of the following funds: Operating funds, trust and agency funds, sinking and redemption funds, bond funds, revolving funds, and common cash funds. Another example of the creation of a special fund is the Uninsured Motorist Vehicle Fund, 1965 PA 198; MCLA 257.1103; MSA 9.2803.

The question may then be asked: Is an appropriation to a special fund for economic stabilization for a public purpose?

The determination of what constitutes a public purpose is primarily for the legislature. Gregory Marina v Detroit, 378 Mich 364; 144 NW2d 503 (1966); OAG, 1973-1974, No 4808, p 130, 137 (April 25, 1974). Over the years, this concept has steadily taken on a broader definition. City of Gaylord v City Clerk, 378 Mich 273; 144 NW2d 460 (1966). The Michigan Supreme Court in Advisory Opinion re Constitutionality of PA 1970, No 100, 384 Mich 82; 180 NW2d 265 (1970), quoted with approval Justice Cooley's formulation of the concept of public purpose:

'I do not understand that the word public, when employed in reference to this power, is to be construed or applied in any narrow or illiberal sense, or in any sense which would preclude the Legislature from taking broad views of State interest, necessity or policy, or from giving those views effect by means of the public revenues. Necessity alone is not the test by which the limits of State authority in this direction are to be defined, but a wise statesmanship must look beyond the expenditures which are absolutely needful to the continued existence of organized government, and embrace others which may tend to make that government subserve the general well-being of society, and advance the present and prospective happiness and prosperity of the people.' [Advisory Opinion, supra, at p 96]

As noted, the purpose of creating an economic stabilization fund is to regulate expenditures of state funds in a manner which will moderate the effects of fluctuations of economic activity in the private sector. Absent this effort on the part of the state, economic activity will rise and fall in a pattern of extremes. During the high point of economic activity unemployment will be low and the public will have a comparatively large sum of money to spend. At such times there will not be a great demand made upon the public treasury for welfare payments and other forms of public services that are generally required during times of economic stress. Yet it is at this time that the public is best able to afford payment of taxes in anticipation of the economic downturns which are predictable.

Conversely, during periods of high unemployment and a general slow down in the economy, the demands made upon the public treasury are at the highest level. Payments must be made for the cost of social services which increases at a rapid pace but the ability of the taxpayers to meet this increased burden is then at a low ebb.

In my opinion, therefore, the legislature may enact a law creating a special fund for the public purpose of providing counter-cyclical budget and economic stabilization for the state.

It is clear, however, that a special fund may not be financed by automatic transfer of the general fund surplus into the special fund at the close of each fiscal year. Const 1963, art 5, Sec. 18, requires that a surplus in any fund at the end of a fiscal year be entered as an item in the following year's budget and included in an appropriation bill. This provision states:

'The governor shall submit to the legislature at a time fixed by law, a budget for the ensuing fiscal period setting forth in detail, for all operating funds, the proposed expenditures and estimated revenue of the state. Proposed expenditures from any fund shall not exceed the estimated revenue thereof. On the same date, the governor shall submit to the legislature general appropriation bills to embody the proposed expenditures and any necessary bill or bills to provide new or additional revenues to meet proposed expenditures. The amount of any surplus created or deficit incurred in any fund during the last preceding fiscal period shall be entered as an item in the budget and in one of the appropriation bills. The governor may submit amendments to appropriation bills to be offered in either house during consideration of the bill by that house, and shall submit bills to meet deficiencies in current appropriations.' [Emphasis added]

Thus the people have mandated that the surplus, if any, remains available for the purpose of the ensuing year's budget. This was established to provide the state with a responsible budgetary system whereby all revenues and expenditures for the upcoming fiscal year would be clearly delineated at the beginning of each legislative session. 1 Official Record, Constitutional Convention 1961, pp 1639-1651. Const 1963, art 5, Sec. 18, provides that any surplus in the preceding fiscal year is to be credited to the estimated revenues for the present fiscal year. 1 Official record, supra, p 1636; OAG, 1963-1964, No 4312, p 439 (April 8, 1964).

'. . . The majority report, of course, contemplates a balanced budget . . . This would be accomplished, of course, by requiring that the deficit and surplus reported for the previous fiscal year be the first item, respectively, on the appropriations or revenue side of the new year's budget.' [1 Official Record, supra, p 1646]

Thus, any surplus in the general fund recorded in the preceding fiscal year must appear in the next fiscal year's budget and therefore a special fund may not be financed by automatic transfer of this surplus at the close of the fiscal year regardless of the purpose of the fund. While there is no constitutional barrier to a transfer of monies from one fund to another, Michigan Sheriffs' Association v Michigan Department of Treasury, ---- Mich App ----; ---- NW2d ---- (May 4, 1977), any transfer to a special fund must be by an appropriation of a specified sum as part of the ensuing year's budget without reference to any surplus. It may also be noted that if a disproportionate share of the state's income is appropriated for the purpose of counter-cyclical budget and economic stabilization, it will be viewed as a device to accumulate funds for future use which may not be done. Michigan Land and Iron Company v Township of L'Anse, supra; Township of Roscommon v Township of Midland, supra.

In summary, it is my opinion that the legislature may create a special purpose fund for budget and economic stabilization, but that it may not be funded by deposits of any surplus in the general fund at the close of the fiscal period.

Frank J. Kelley

Attorney General