What is Fiscal Law?
Fiscal law is a legal principle governing the use and control of public funds. Its primary purpose is to ensure that public funds are spent in a way that is consistent with legal requirements, from both a federal and state perspective. Because it governs how money is used within the government, fiscal law is a necessary and important aspect of public administration that must be understood by public administrators of all levels. Fiscal law is comprised of two primary components: the Antideficiency Act (officially Title 31 of the U.S. Code , Section 1341) and the Miscellaneous Receipts Statute (Title 31, Section 3302). These statutes govern the expenses incurred by government entities, defining what actions may be taken using government funds and what financing mechanisms are legal and safe options. As such, fiscal law helps to make sense of the often bewildering range of fiscal options for government entities.
Key Concepts of Fiscal Law
Given the wide-ranging importance of fiscal law, there are fundamental principles which guide compliance with the statute, many of which have been expressed in the Federal Principles of Fiscal Law promulgated by the Department of Defense over the past year and a half. Here are just a few of the principles that are essential to effective governance:
- The Doctrine of Budgetary Integrity. This means that an agency may not use funds for other than their intended purposes. If an agency has $10 million in an appropriation for construction, that $10 million must be used for that construction – and cannot be reprogramed for other purposes, such as rental space or overtime. One example of this principle would be the requirement that the funds be used only for a purpose that meets the terms of its appropriation, which means that if the appropriation is for new equipment, the funds can’t be used to pay a contract for maintenance costs (as opposed to the purchase of new equipment).
- The Rule of Accountability. This means that the funds must be used for the purposes required or authorized by law in the appropriation act, and that the obligation of the funds be at the time required by law to be recorded. An example of this principle would be the requirement that funds be obligated in the fiscal year for which the appropriation is made, or such extension of that time as the statute authorizes.
- The Rule of Transparency. Obligation of funds means that the agency must record the obligation of funds so that the amount and future availability of the funds can be tracked. A puny example of this principle would be the requirement that an agency act in a manner to ensure that its fiscal accountability is visible and understandable.
- The Obligation of the Agency Head. The Chief Financial Officer Act of 1990 directed that agency heads be responsible for ensuring compliance with the requirements of the Fiscal Year 1991 Federal Manager’s Financial Integrity Act (FMFIA) Report, and that they take the necessary action to correct any problem identified in the report. Inherent in this responsibility is the obligation of the agency head to determine whether there are sufficient internal controls and systems in place to ensure that the agency is in compliance with the requirements of the fiscal and accounting statutes.
Fiscal Law and other Financial Laws
Given how prevalent laws and regulations governing financial matters are, it is essential to understand how fiscal law compares with these regulations.
Tax Law
Taxation is one of the most prominent areas of law in the United States, governed by various federal laws, state laws, and local government regulations. In its essence, tax law governs the assessment of funds that a taxpayer must contribute to the government as revenues to be distributed in ways deemed most appropriate for the needs of citizens and the operations of the government. Although tax law is clearly related to fiscal law in that it deals with matters related to government funding, the two laws have different spheres. Perhaps the most notable difference is that tax law is used in the private sector for taxation of individuals and corporate entities for their own revenue initiatives, while fiscal law tends to be applied only to government entities. This makes tax law the law of the people, while fiscal law is the law of the state. The types of liabilities for which a government is held responsible are generally not publicized in the same way as personal income tax liabilities. As such, the vast majority of people are less familiar with them. The two laws intersect largely when taxation is involved in an auction or a purchase by the government. For instance, state sales tax may be calculated by the private seller of the product or service, but this amount is not collected if the buyer is the federal government. Instead, fiscal law comes into play, and the buyer will produce documentation proving their exempt status from sales tax. Therefore, while tax law clearly creates an obligation for individuals to pay sales tax, fiscal law applies to the seller for validating exemption.
Corporate Financing Regulations
Corporate financing regulations deal with capital markets and financing for corporations. These regulations tend to be comprehensive, with various types of rules put in place to govern how securities are issued and traded in various markets, such as stocks, bonds, derivatives, currencies and public debt. Some examples of regulatory bodies include the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). Again, there’s much more familiarity with corporate financing regulations at the corporate level than with fiscal law. These regulations, like tax law and fiscal law, are extremely specific in terms of obligations and boundaries. They also cover similar subject matter in some respects. The various obligations a corporation must meet in order to maintain tax-exempt status could apply to the federal government as well. And while the SEC and PCAOB govern private-sector corporations, the Government Accounting Office is the equivalent fiscal law governing body at the federal level. The primary distinction between fiscal law and corporate financing regulations is the parties to which they are applied. Corporate financing regulations govern private-sector corporations, while fiscal law relates to the public sector and the financing of government activities.
Fiscal Law in Budget Formulation
Fiscal law directly impacts the budgeting process at all levels of government. At the federal level, the Anti-deficiency Act (31 U.S.C. §§ 1341-1351) and other associated laws and statutes provide the framework for developing and then adhering to a federal budget. The Fiscal Year (FY) 2022 budget process is underway; in March, the President submitted his FY 2022 budget request to Congress. The law and regulations governing advance appropriations are intended to help respond to the fiscal challenges created by advancing COVID-19 relief funding. Under the act, the legislature is empowered to allocate federal funds to the country’s various departments and agencies in the form of appropriations.
At the state level, the fiscal law may also impact budgeting processes as mandated by a state’s constitution; there are both restrictions on enacting legislation that creates a deficit budget and mandates to enact balanced budgets. An example is North Carolina’s Fiscal Research Division, which operates under the authority of state law as an impartial nonpartisan legislative branch staff agency with statutory responsibility to provide governors, legislators, and the legislative staff requirements for the preparation of the operating budget. Fiscal law similarly governs many municipalities and other local government entities in the United States.
The Government Accountability Office (GAO) is responsible for interpreting and ensuring compliance with fiscal law. As such, the GAO audits agency expenditures to ensure compliance with applicable fiscal law requirements. The GAO does not audit the use of funds by state and local governments, although it is required to monitor the use of grants of federal funds to those governments.
In the Army, for instance, the Fiscal Law training program teaches more than just how to utilize the corresponding statutes and regulations, like the DoD Fiscal Law Overview Course. It also instructs attorneys on how to interpret and apply these legal authorities, including the Anti-deficiency Act, the "necessary expense" exception to the general prohibition against the cost-effective use of appropriated funds, and the bona fide needs rule used to assess the timing of agency requests for congressionally appropriated funds.
Challenges to the Implementation of Fiscal Law
Beyond the need to identify the requirements of fiscal law, the real work is in the implementation, and this is where the challenges lie. Take the example of the prohibition on exceeding the period of availability, sometimes referred to as the 5-year rule. This is the very basis for fiscal law. The most straightforward solution to be in compliance with this rule is that the money must be used by the end of the 5-year period, otherwise it should be returned to the U.S. Department of the Treasury. But, in practice, this may not be workable, whether because there are political reasons to hang on to the money or because the money is desperately needed in the program office. In other words, people do not have the incentive to give the money back to the Department of the Treasury.
An example of a compliance challenge is that, in many cases, the officers and executives who have fiduciary responsibilities are not the same people who spend the money. One person is responsible for a federal grant or cooperative agreement, while someone else is responsible for taking the money out of the federal grant. The first person is not going to be penalized for spending more than the availability due to the other fiduciary not returning the money to the Department of the Treasury. Therefore , every entity that uses federal money should ensure that the staff responsible for compliance with fiscal law understand the rules and have the authority to ensure that they are being followed.
Another example of a compliance challenge is that, in many cases, the same officers and executives who have fiduciary responsibilities are not the same people who make the request to Congress for funding. Congress tends to get along with those who they know and trust, and the people at the program office often form a bond with the process. The people at the program office also push back against a Congressional request for money to be returned to the Department of the Treasury, so the conflicts between fiduciary responsibility and the practical realities will continue to surface. So, one thing that should be done is that the fiduciary should speak with the "face" of the fiscal law. Post documents that show that the decision was made to circumvent risks of exceeding an availability and be able to present that information as needed to rebut Congressional staff members.
If your agency is going to be serious about managing funds appropriately, then a risk assessment should be performed right now with those who are the on the front lines of requesting the fund and drawing down the fund.
Examples of Recent Case Studies of Fiscal Law
Numerous cases have illustrated the application of fiscal law in both government and private practice.
• In one case, the US Congress passed legislation that authorized the Department of Defense (DoD) to assist Hellenic Republic in acquiring military equipment, hereafter referred to as "excess defense articles". DoD was required to obtain documentation from Hellenic Republic validating that it was financially capable of paying fees associated with excess defense articles prior to the equipment being provided. Although this documentation was absent, the equipment was provided.
• DoD prepared a bill for the shipment of excess defense articles and sent it to Hellenic Republic. However, Hellenic Republic failed to pay the bill for the shipment of excess defense articles.
• The Government issued a demand for payment to Hellenic Republic but this demand was rebuffed.
• The Government placed the claim before the United States Foreign Claims Settlement Commission (hereafter referred to as "the Commission"). Within 60 days, the Commission rendered judgment in favor of the Government for the amount of $8,985.
• "The Commission properly determined that Hellenic Republic was liable for the payment of the excess defense articles that were shipped before a demonstration that Hellenic Republic was prepared from a financial standpoint to pay for the excess defense articles."
• In another case, DoD had a plan to provide Navy/Marine Corps Reserve Center facilities in Hawaii at no cost. DoD made this plan without prior congressional approval. This was a violation of the Federal principle of "Appropriation laws".
• The Government was denied recovery because "the Government applied this [violation] principle on an extraordinary basis, provided that there is no Congressional intent for this to occur." The Government did not demonstrate that Congress provided any intent for the allocation of the Navy/Marine Corps Reserve Center Facilities in Hawaii at no cost.
Emerging Trends in Fiscal Law
As nations grapple with the complexities of an increasingly interconnected world, fiscal law will continue to adapt and evolve. One emerging trend is the push towards greater transparency and accountability in government financial practices. This movement is driven not only by domestic factors, but also by international standards and agreements. For example, the OECD’s Base Erosion and Profit-Shifting (BEPS) Action Plan and the G20’s Global Infrastructure Initiative have underscored the need for countries to adhere to shared principles of transparency and fair competition.
Technological advancements will also play a key role in the future of fiscal law. Innovative tools and data analytics will enable governments to track spending and revenues in real-time, reducing the incidence of waste, fraud and abuse. Blockchain technology may also create new avenues for secure, transparent and efficient transactions , streamlining compliance requirements and reducing administrative burdens.
Omnibus appropriations bills are one potential reform that could have significant implications for fiscal law. By providing broad grant authority to a limited number of programs, legislators would increase the flexibility of agencies while expanding the potential for coordination across federal programs. Such measures would promote a more strategic approach to financial management, ensuring that resources are used efficiently while still meeting the needs of taxpayers and beneficiaries.
In addition to these long-term trends, shorter-term issues such as the handling of sequestration and government shutdowns will continue to test the flexibility of fiscal law. As critics of logrolling demand more transparency and accountability in the legislative process, lawmakers will need to find new ways to balance the competing demands of budget discipline and program service delivery.