Can the Maine Legislature appropriate against the state's reserve account for uncollectible tax receivables?

Plain-English summary

Maine, like other governments using accrual accounting, has to recognize that a chunk of its accounts receivable will never actually be collected. Some debtors are insolvent, some claims are stale, some assessments are uncollectible for other reasons. Under generally accepted accounting principles (GAAP), the state offsets receivables with a "reserve account" on the liability side of the balance sheet that reflects the expected uncollectible portion. The Bureau of Accounts and Control, in the Department of Administrative and Financial Services, maintains both books.

The appropriations committee chairs (Sen. Hanley and Rep. Kerr) asked Attorney General Andrew Ketterer two related questions. First, did the Bureau have legal authority to maintain the reserve account? And second, if the reserve account reflected receivables that were ultimately uncollectible, could the Legislature appropriate against those receivables?

The AG answered yes to the first question and effectively no to the second. The Bureau's general accounting authority under 5 M.R.S.A. § 1541(1) ("maintain an official system of general accounts ... embracing all the financial transactions of the State Government") covered the reserve account, especially because the practice conformed to GAAP. The second question was more delicate. The Maine Constitution caps state debt at $2,000,000 absent both a two-thirds vote of the Legislature and ratification by the voters. Me. Const. art. IX, § 14. If the Legislature appropriated and the executive obligated spending against receivables that were, by definition, "doubtful" and might never become cash, a debt or liability would be created without the procedural safeguards § 14 requires. The AG advised against this approach as a matter of constitutional risk.

A footnote in the original opinion adds a parallel point: because the reserve account consists only of doubtful receivables (not appropriated cash), its existence does not violate the constitutional rule that money may not be drawn from the Treasury except through appropriations authorized by law (Me. Const. art. V, pt. 3, § 4).

Currency note

This opinion was issued in 1996. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is the difference between accounts receivable and cash?

Cash is money the state has in the bank. Accounts receivable is money other people owe the state, recorded as an asset until collected (or written off). A "doubtful" receivable is one the state thinks it probably will not collect.

Why does Maine carry a reserve account against tax receivables?

To keep the books honest. Without the reserve, the state's published financial reports would overstate the value of its receivables, by including amounts unlikely to be collected. GAAP requires governments to offset receivables with a reserve for the doubtful portion so the net number better reflects reality.

What is Me. Const. art. IX, § 14?

The state debt limit. It caps debts and liabilities at $2,000,000 unless the Legislature acts by two-thirds and the voters ratify. It is one of Maine's main fiscal-discipline rules, dating to the nineteenth century.

Why would appropriating against doubtful receivables create constitutional risk?

Because the appropriation would commit the state to spend money it does not have in hand and may not ever receive. If the receivables ultimately go uncollected, the state has effectively borrowed without going through § 14's procedural safeguards (two-thirds plus voter ratification).

Could the Legislature write off uncollectible debts another way?

Yes. 5 M.R.S.A. § 1504 gives the State Controller a procedure to certify accounts as uncollectible and charge them off the books. That removes them from the receivables side entirely. The opinion contemplates that a write-off, rather than an appropriation against doubtful receivables, is the constitutionally sounder route.

Background and statutory framework

The Bureau of Accounts and Control sits in the Department of Administrative and Financial Services and is the state's centralized bookkeeping unit. 5 M.R.S.A. § 1541(1) gives it the broad mandate to "maintain an official system of general accounts ... embracing all the financial transactions of the State Government." § 1541(5) requires monthly reports to the Governor and the State Auditor. § 1504 governs write-off of uncollectible receivables.

The constitutional backstop is the debt-limit clause, Me. Const. art. IX, § 14, originally adopted in the nineteenth century to constrain state borrowing. Maine's debt-limit framework has been repeatedly refined by amendment but the basic two-thirds-plus-ratification structure has held.

Citations

• 5 M.R.S.A. § 1504 (State Controller write-off authority)
• 5 M.R.S.A. § 1541(1) (Bureau's general accounting authority)
• 5 M.R.S.A. § 1541(5) (monthly reporting to Governor and State Auditor)
• Me. Const. art. V, pt. 3, § 4 (no money drawn from Treasury except by appropriation)
• Me. Const. art. IX, § 14 (state debt limit)

Source

• Landing page: https://www.maine.gov/legis/lawlib/lldl/agops/agops.htm
• Original PDF: https://lldc.mainelegislature.org/Open/AG/Opinions/1996/ag_19960813b.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

96-9

ANDREW KETTERER
ATTORNEY GENERAL

STATE OF MAINE
DEPARTMENT OF THE ATTORNEY GENERAL
6 STATE HOUSE STATION
AUGUSTA, MAINE 04333-0006

August 13, 1996

Senator Dana C. Hanley
Representative George J. Kerr
Chairs, Joint Standing Committee on Appropriations and Financial Affairs
5 State House Station
Augusta, Maine 04333-0005

Dear Senator Hanley and Representative Kerr:

I am writing in response to your inquiry of July 25, 1996 concerning the legal status of the reserve account for tax receivables maintained by the Bureau of Accounts and Control of the Department of Administrative and Financial Services. For the reasons which follow, it is the opinion of this Department that this account has been legally established and maintained by the Bureau.

As this Department understands them, the facts relating to the reserve account are as follows: Pursuant to 5 M.R.S.A. § 1541(1), the Department of Administration and Financial Services through the Bureau of Accounts and Control is directed by the Legislature "[t]o maintain an official system of general accounts, unless otherwise provided by law, embracing all the financial transactions of the State Government." The Bureau is further directed by 5 M.R.S.A. § 1541(5) "[t]o make monthly reports on all receipts and expenditures of the State Government to the Governor and the State Auditor; ...."

Pursuant to this authority, the Bureau has established a system of accounting, which this Department is advised is consistent with generally accepted accounting practices (GAAP), of all funds received and expended by the State government. Because the State employs a modified accrual basis of accounting, the Bureau's system must account for all accounts receivable, as well as funds actually received. It is invariably the case, however, that some of the State's accounts receivable are not collectible, due to the insolvency of the debtor or other reasons. Ultimately, 5 M.R.S.A. § 1504 provides a procedure whereby the State Controller may charge such accounts off the books of the State, upon the certification that they are not collectible by the appropriate State officials. Until that time, however, the State's accounts receivable account continues to contain these uncollectible claims.

The purpose of maintaining an accounts receivable account, which is in accordance with GAAP, is to ensure that the State's actual income position is accurately stated in such things as the monthly report for receipts and expenditures which the Bureau makes to the Governor and the State Auditor, and in the State's Comprehensive Annual Financial Report. In furtherance of this objective, the Bureau has established a corresponding account on the liability side of the State's balance sheet, entitled the "reserve account." This account, the maintenance of which is also consistent with GAAP, should in theory reflect the amount of doubtful receivables in the accounts receivable account described above. In practice, however, the amount reported by the Bureau in the "reserve account" has not, in recent years, been up to the amount needed to cover doubtful receivables in the accounts receivable account. In recent years, therefore, the Department and Bureau has sought to remedy the situation by periodically increasing the amounts reported in the "reserve account."

Your question, generally, is whether these actions of the Department and Bureau are authorized by statute, and if so, whether the uncollectible accounts receivable corresponding to the amounts reported in the "reserve account" are available for appropriation by the Legislature. As should be clear from the foregoing, the establishment of the account is authorized by law, because the account is maintained by the Bureau of Accounts and Control, pursuant to its general authority to maintain an official system of accounting contained in 5 M.R.S.A. § 1541(1). Since, as indicated above, the establishment and maintenance of such an account is consistent with GAAP, it must be considered as authorized by the statute.

This leaves your question of whether the uncollectible accounts receivable corresponding to the amounts reported in the "reserve account" are available for appropriation. The existence of 5 M.R.S.A. § 1541(1) does not, of course, restrain the Legislature from passing another statute, in the form of an appropriations bill or otherwise, making appropriations against accounts receivable, particularly since that statute itself says that the State's system of accounts and control shall be maintained by the Department and the Bureau "unless otherwise provided by law." There is, however, a problem presented by the provision of the Maine Constitution which prevents the Legislature from creating "any debt or debts, liability or liabilities, on behalf of the State, ..." in excess of $2,000,000, unless it does so by a two-thirds vote and the measure is ratified by the electors. Me. Const. art. IX, § 14. If the Legislature were to appropriate and the Executive were to incur obligations to spend money which is not in the Treasury, a debt or liability would have been created. Since, by definition, that part of the accounts receivable account corresponding to the "reserve account" contains not only accounts receivable, rather than cash, but doubtful receivables, it is highly likely that an appropriation against it would result in the creation of an unconstitutional debt or liability. For this reason, regardless of the soundness of such a course of action as a matter of public policy, this Department would discourage the Legislature from making appropriations against these receivables.

I hope the foregoing answers your questions.

Sincerely,

ANDREW KETTERER
Attorney General

AK/tt

cc: Governor Angus S. King, Jr.

[Footnote: Since the reserve account consists only of doubtful receivables, it does not consist of funds appropriated from the Treasury by the Executive Branch. Thus the existence of the account does not constitute a violation of Article V, Part Third, Section 4 of the Maine Constitution, which prohibits the drawing of money from the Treasury, except in consequence of appropriations or allocations authorized by law.]