The Pitfalls of Dedicated Revenues: State Auditor Edition

A 75% cut in the State Auditor’s general fund appropriation in 2013 helped raise the stakes for the post-session drama

Overlooked in the uproar over the State Auditor’s Office, the scope of its auditing responsibilities, and its role in the “session that won’t end” is an interesting fact. Two years ago, lawmakers cut the state’s general fund appropriation to the Office of the State Auditor by 75%, from $17.3 million in the FY 2012-13 biennium to $4.2 million in the FY 2014-2015 biennium. The reason? Through FY 2013, audit fees generated by the Audit Practice Division were deposited in the general fund as non-dedicated receipts. But starting in FY 2014, that revenue stream was instead moved to a brand new State Auditor’s Enterprise Fund and dedicated to paying for the cost of auditing services.

To understand its relevance to the situation, it’s important to understand what an enterprise fund represents in the public sector. Essentially, it’s a government run business. According to the Legislative Commission on Planning and Fiscal Policy, enterprise funds are used “to account for operations that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges.” The most familiar examples include municipal golf courses, municipal liquor stores, and municipal ice arenas. Beginning in 2014 we added state audits of local government finances to that list.

So why the change? Proponents of government programs that have accompanying revenue streams routinely push to have those revenues dedicated to the program. Such dedication provides greater protection from the whims and unpredictability of the general fund appropriations process. Using the user fees to finance the program itself makes sense and can sustain a program -- as long as demand for the service continues unabated.

But although the appropriations process can be fickle, market forces are no less unpredictable or capricious. Countless governments have learned this lesson in the context of fundamentally rethinking and reevaluating an enterprise’s cost structure, the need for the service, and quality of the service it provides as it competes directly with the private sector. The difference is that no golf course or liquor store can use the force of law to direct customers through its doors.

This is the environment the Office itself sought to create in 2013 when this alternate financing arrangement was established – effectively placing considerable organizational chips on the continuing demand for its auditing services. That in itself is a little bit curious since so many of Minnesota’s local governments that are already able to choose their auditors use private sector alternatives, and it was abundantly clear many others would like that opportunity. Perhaps this proposal was based on confidence that the “regulatory barriers to entry”, as they like to say in the B-schools, would continue as they have in the past. But as we have now seen, these barriers can disappear, quite literally, overnight.

Call the current situation a strategic misstep, call it an unintended consequence, call it foolhardy and unconstitutional, the reality is this enterprise fund arrangement has created more fiscal exposure for the State Auditor’s Office than existed before. Exposure from the vagaries of the appropriation process may be annoying, but in this instance it pales in comparison to the exposure created by opening all county audits to a competitive process.

It seems odd that a constitutional office with its considerable responsibilities in support of the public interest should be operated largely based on its ability to “pay its own way.” It’s time to rethink the 2013 changes and make general fund appropriations the OSA’s primary revenue source.