Highway Trust Fund Lawsuit: Power to the People

Updated October 20, 2009

Background: The Taxpayers's Role
You may remember a previous decision by the North Carolina Supreme Court in the same case, which ruled that if you are a North Carolina taxpayer you can, contrary to the State’s preference, sue the State of North Carolina for violating the North Carolina Constitution (the State had contended that taxpayers should not be able to sue when the State violates the Constitution).

In any case, the State actually made the Supreme Court utter this sentence in the first round of Goldston: “taxpayers have standing to [sue] when alleging government officials violated statutory or constitutional provisions by diverting tax levies appropriated for one purpose but disbursed for another.”

Glad we finally cleared that up.

Now that the two primary parties paying the litigation expenses in Goldston – the taxpayers (via the courts and the Attorney General’s office) and the taxpayers (the two citizens fighting the law) – have resolved this important question, the courts moved on to address the real constitutional question in the lawsuit.

Phase Two: Who's in Charge?
In round two of Goldston v. State, the court weighed in on the constitutional limits of the Governor’s power to balance the budget.

In 1989, the legislature increased the amount North Carolinians pay for gas taxes and vehicle taxes & fees. These monies were, we were told, supposed to fund something called the Highway Trust Fund (HTF), which was to pay for new construction of major routes and urban outer loops. That’s how the revenue increase was marketed and sold to the people, anyway.

That purpose, however, was revised when, as plaintiffs Bill Goldston and Jim Harrington wrote in 2002, “elected officials in Raleigh began siphoning off dollars to help cover other debts resulting from poor planning and unwise budget decisions.” This bi‐partisan pair (Goldston is a former Democrat state Senator and Harrington is a former Republican Secretary of the NCDOT) sounded the alarm when then‐Governor Easley decided to transferred $80 million in Highway Trust Fund cash, put it in the general fund, and spend it on programs he thought more worthy. He did so, he said, to balance the budget.

Since then, Governor Perdue showed a similar propensity by raiding the “education lottery” fund, which she alleged was necessary at the time to fund more worthy causes. She did so, she said, to balance the budget. She gave it back later, although not because she thought the law required her to do so.

While the Goldston case only addresses Governor Easley’s previous transfers of government funds, the justification the last two Governors have used to explain the necessity of their transfers of budgeted funds is the same. A provision in the North Carolina Constitution requires the Governor to “effect the necessary economies in State expenditures” when it looks like State expenditures will exceed receipts during a budget cycle.

Certainly, the Governor is required to balance the budget. But does the Constitution allow the Governor to balance the budget by making “transfer” of funds instead of making an “economy” of expenditure?

The plaintiffs in this case argued that a transfer is just a transfer. Moving money from one place to another is not a reduction of expenditures. Regardless, said the plaintiffs, the Highway Trust Fund is not like the general fund, it is a “trust” fund – whatever the Governor can do, he can’t treat the Highway Trust Fund like the general fund.

And more importantly, the plaintiffs pointed out that the Governor’s requirement to balance the budget appears to contradict other constitutional requirements, such as those mandating the Governor to administer the budget “as enacted by the General Assembly” and to “take care that the laws be faithfully executed.”

For the record, the State budget is a law.

The Governor, on the other hand, argued that the balanced budget provision gives broad authority to re‐organize, re‐allocate, and reduce the budget. If the Governor deems the budget to be out of balance, then the Governor may transfer and re‐distribute money as well "effecting the necessary economies in State expenditures.”

When is the budget technically out of balance, you may ask? The words in the previous sentence were intentional.  When the Governor deems it to be so.

We're sure the Governor wouldn’t say it this way, but the State’s characterization of the Governor’s powers makes them a little like the power to impose fiscal martial law – in a fiscal emergency, other laws may have to be suspended for the good of society.

So the Court was asked to answer this question: how broad are the Governor’s powers to re‐scramble the budget when the budget appears to be (or in fact is) out of balance?

The Court of Appeals answered that question by holding that the Constitution did not give the Governor sweeping powers to balance the budget. The Governor, said the Court, could reduce expenditures but could not raid, transfer, and re‐spend special funds, like the Highway Trust Fund. The Court ruled that “Diverting the Highway Trust Fund to the General Fund and expending that money does not reduce the ‘total expenditure’ of state government but merely transfers money contrary to the budget appropriation statute.”

The Court said that Governor Easley could have, if he deemed it necessary, frozen the Highway Trust Fund monies, put them in an escrow‐like account, and waited for the General Assembly to decide what to do. But he could not, as he did in this instance, simply transfer them out of the Highway Trust Fund and use them for another project he thought was “more aligned with [his] political preferences.”

In reaching this conclusion, the Court not only curbed the Governor’s supposed powers but announced, as one commentator put it, that a generations‐old principle of North Carolina state government was alive and well: “Dating to Colonial days, the legislature has generally kept the governor on a short leash.”

The Court reasoned that “our history and experience with authority cautions against entrusting unbridled expenditure authority in any one person.” And while this sounds right, some important questions remain to be addressed in the appeal now headed to the North Carolina Supreme Court.

When you think about it, the battle boils down to a basic principle of government. As our state Constitution says, “the legislative, executive, and supreme judicial powers of the State government shall be forever separate and distinct from each other.”

Civics textbooks make it sound simple. The legislature makes laws. The executive branch executes laws. The courts interpret laws.

Who’s supposed to be doing what here, however, is not so simple. The legislature passes the budget; the Governor administers the budget. That much is clear. But what happens when the legislature thinks it can’t help but spend more than it is taking in?

Here’s where the plot thickens. Our Constitution says that the Governor must balance the budget (assuming, unfortunately, that the legislature won’t). To do that, said the Court in Goldston, the Governor may cut expenditures.

The question then becomes, in a nutshell, which expenditures? In the context of the Highway Trust Fund, the Court of Appeals has answered that question simply: not these funds. But for other expenditures, the answer may not be so simple.

If, as the Court appeared to imply in Goldston, monies allocated for designated purposes are outside the Governor’s reach, then what prevents the Legislature from designating every fund as available only for a special purpose? The legislature is already in the practice of designating the purpose for which funds can be appropriated. All they might need to add is restrictive language similar to that used for the Highway Trust Fund.

Then if the budget doesn’t balance, the Governor’s hands would be tied.

On the other end of the rope, if the Governor’s power is extremely broad, then a budget enacted by the legislature that is $1 out of balance (or, more problematic, if it is “deemed” to be out of balance) would empower the Governor to overhaul the entire budget. She would then be able to allocate funding as she saw fit for all the programs that made it onto her preferred list.

The only solution would be for the legislature to re‐convene to pass another budget – which would then be turned over to the Governor for another crack at administering it. And with no guarantee, of course, that it wouldn’t be deemed out of balance again.

That seems like a little too much power for the Governor. “If there is no limit to the Governor’s balanced budget power, then you have a very radical remedy for even a slight budget overage,” said Jason Kay, Senior Staff Attorney at the North Carolina Institute for Constitutional Law. “The budget as enacted would become irrelevant. Surely the legislature has the primary responsibility to balance the budget; the Governor is simply supposed to economize on expenditures,” he added.

But for now, the Appellate Court's decision is the law of the land unless it is overturned. Thus it applies to any non-specific use of funds from other special funds (Clean Water, etc.), and this should further hamstring the Governor from diverting funds to her pet projects.

Summary: It's Not Over
The North Carolina Supreme Court will ultimately decide this issue. Important constitutional questions are at stake. But this Constitutional contest has brought to light two larger bad budget habits:

• The Legislature didn’t pass a balanced budget and hasn’t done so on more than one occasion. It apparently knows how to raise taxes, but has outsourced the cutting of expenditures to the Governor.
• The Governor has, on more than one occasion, declared a budget emergency. The last one was declared just a few weeks after she signed the new budget. When this happens, it allows the Governor to sign a budget and then allocate funding not for the programs selected by the more closely accountable legislators – but for the programs most favored by the Governor.

Perdue has already indicated that she will seek an appeal, and in response, the NC Institute for Constitutional Law, in collaberation with Gene & Dan Boyce of the Boyce & Isley law firm, filed a Notice of Appeal & Petition of Discretionary Review on behalf of the plaintiffs Goldston & Harrington. 

This is clearly costing North Carolina taxpayers way too much money.  Perhaps our legislature needs some mathematical therapy – or more self‐discipline, since the Governor seems a bit quick on the trigger when an opportunity presents itself.

Regardless, if the budget is out of balance, here’s a solution for the Governor with all the constitutional and philosophical knots untied: just veto it.