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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. 6154 June 17, 1983 MUNICIPALITIES: Deficit condition of fund under State Revenue Sharing Act WORDS AND PHRASES: 'Deficit condition' A local unit of government must file a financial plan to eliminate a deficit for any fund required for compliance with statutory uniform accounting requirements if the fund ends its fiscal year in a condition where the total expenditure for that fund, including an accrued deficit, exceed total revenues in that fund for the fiscal year, including any surplus carried forward. Any surplus in such fund may not be used to correct a deficit condition in the general fund of the municipality, and the local unit of government must file a financial plan to eliminate the deficit. Honorable Robert A. Bowman State Treasurer Treasury Building Lansing, Michigan Your predecessor asked for my opinion as to the following question: 'Does PA 275 of 1980 . . . require local units of government to file a financial plan to eliminate the deficit for any fund which ends its fiscal year in a deficit condition?' To illustrate the scope of the question, the inquiry states the following hypothetical question: If the Library Fund receives its revenue from extra voted millage and the Library Fund has a fund balance of $50,000 at the end of the fiscal year, but the General Fund has a $40,000 deficit at the end of the same fiscal year, can this local unit report a net fund balance of $10,000 and be excluded from the requirements of PA 275 of 1980, even though the Library Fund cannot by law appropriate money to the General Fund? Or, must they report the deficit of $40,000 and file a financial plan within 90 days to correct the deficit condition in the General Fund? Your hypothetical question assumes the extra voted millage was earmarked for library fund purposes. 1980 PA 275 amended several sections of the State Revenue Sharing Act of 1971, 1971 PA 140; MCLA 141.901 et seq; MSA 5.3194(401) et seq, and added section 21, which provides: '(1) If a city, village, township or county fails to provide an annual financial report or audit which conforms with the minimum procedures and standards prescribed by the state treasurer and is required under Act No. 2 of the Public Acts of 1968, as amended, being sections 141.421 to 141.440a of the Michigan Compiled Laws, or Act No. 71 of the Public Acts of 1919, being sections 21.41 to 21.53 of the Michigan Compiled Laws, the payments required under this act may be withheld until the financial report or audit is submitted as required by law. '(2) For a fiscal year of a unit of local government ending on or after October 1, 1980 or any year thereafter, if a local unit of government ends its fiscal year in a deficit condition, the local unit of government shall formulate and file a financial plan within 90 days after the beginning of the fiscal year to correct this condition. Upon request of a local unit of government the department of treasury may assist that local unit in the formulation of the financial plan to correct the deficit condition. The local unit of government shall file the financial plan with the department of treasury for evaluation and certification that the plan ensures that the deficit condition is corrected. Upon certification by the department of treasury, the local unit of government shall institute the plan. An amount equal to 25% of each payment to a local unit of government entitled to payments under this act may be withheld until requirements of this subsection are met. '(3) The department of treasury shall notify each house of the legislature of any local unit of government that fails to provide a financial report or an audit required by subsection (1) and of any local unit of government required to file a financial plan under subsection (2). '(4) As used in this section, 'deficit condition' means a situation where, at the end of a fiscal year, total expenditures, including an accrued deficit, exceeded total revenues for that fiscal year, including any surplus carried forward.' (Emphasis added.) In order to respond to the question, consideration must be given to the term 'deficit condition,' as used in the State Revenue Sharing Act of 1971, Sec. 21, supra, since the term may apply to accounted fund activity of self-balancing groups of accounts required by law and disclosed in financial reports, on the one hand, or the term might apply to the net deficit derived by calculating surpluses and deficits of all funds disclosed by financial report, (1) on the other hand. As noted in the question, various funds of a local unit are to be used for restricted purposes established either by statute or by contractual undertaking. Since subsection 1 of 1971 PA 140, Sec. 21, supra, requires that local units provide annual financial reports or audits conforming to the minimum procedures and standards prescribed by the State Treasurer and required by 1968 PA 2; MCLA 141.421 et seq; MSA 5.3228(21) et seq, the reporting requirements of that Act as to the condition of the funds of a local unit should be consulted. 1968 PA 2, supra, clearly contemplates that each fund of a local unit is to have its own balance: (1) In the definition of 'budget' reference is made to a number of funds of the local unit with discussion of, but not inclusion of, fiduciary funds, intergovernmental service funds, enterprise funds, public improvement or building and site funds, and special assessment funds. 1968 PA 2, supra, Sec. 2a(4). (2) Deficit is defined to be an excess of liabilities and reserves of a fund over its assets. 1968 PA 2, supra, Sec. 2b(4). (3) Expenditure is defined to mean the cost of goods delivered or services rendered, whether paid or unpaid, including expenses, debt retirement not reported as a liability of the fund from which retired, or capital outlay. 1968 PA 2, supra, Sec. 2c(1). (4) Revenue is defined to mean an addition to the assets of a fund under certain circumstances. 1968 PA 2, supra, Sec. 2d(4). (5) Surplus is defined to mean an excess of the assets of a fund over its liabilities and reserves. 1968 PA 2, supra, Sec. 2d(5). Under 1968 PA 2, supra, Sec. 4, each local unit is to make an annual financial report for each fiscal year showing, among other things, the 'balance of funds on hand at the close of each fiscal period.' 1982 PA 451 deleted the reference in section 4 to 'balance of funds on hand' and substituted 'the fund balances at the close of each fiscal year.' In addition, this report is recognized by 1968 PA 2, supra, Sec. 4, to be acceptable as a substitute for the reporting requirement imposed by 1943 PA 202, Sec. 5, as amended; MCLA 133.5; MSA 5.3188(10), of an annual report to the state of outstanding debt. Since the reporting requirements of 1971 PA 140, Sec. 21, are pursuant to 1968 PA 2, supra, which provides for calculation of surpluses and deficits for each fund (2) of a local unit of government, it follows that the proper interpretation of the term 'deficit condition' in that section is that each fund of a local unit must be individually reviewed annually in order to determine whether it is in such condition. When a ballot proposition for an increase in the tax limitation contains a statement of the purpose for which such funds may be used, the moneys derived therefrom may be expended only for such purpose and no other. Rentschler v Detroit Board of Education, 324 Mich 603; 37 NW2d 645 (1949); 1 OAG, 1955, No 2320, p 501 (October 3, 1955). It is my opinion, therefore, that a local unit of government must file a financial plan to eliminate a deficit for any fund required for compliance with the State Revenue Sharing Act's uniform accounting requirements which ends its fiscal year in a condition where the total expenditures for that fund, including an accrued deficit, exceed total revenues in that fund for the fiscal year, including any surplus carried forward. It is my further opinion, in answer to the hypothetical question, that the local unit would be required to file a financial plan to correct the deficit condition in its general fund. Frank J. Kelley Attorney General (1)
'Governmental accounting systems should be organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.
'The diverse nature of governmental operations and the necessity of assuring legal compliance preclude recording and summarizing all governmental financial transactions and balances in a single accounting entity. Unlike a private business, which is accounted for as a single entity, a governmental unit is accounted for through several separate fund and account group entities, each accounting for designated assets, liabilities, and equity or other balances.
'Thus, from an accounting and financial management viewpoint, a governmental unit is a combination of several distinctly different fiscal and accounting entities, each having a separate set of accounts and functioning independently of other funds and account groups.'
(2)
In the Bulletin for Audits of Local Units of Government in Michigan, published by the State Treasurer in 1982 following the approval of the Michigan Committen on Governmental Accounting and Auditing Committee of the Whole, Appendix B, Note 1, provided as follows:'Deficits in each individual fund (not fund type) are to be considered when applying this section. Materiality should not be a determining factor in deciding which fund deficits are to be disclosed. All fund deficits are to be disclosed.'
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