Appropriations and multi-year commitments

Public bodies budget annually, and contracts extending beyond the fiscal year raise questions about committing future appropriations.

Constitutional and statutory limits. Many states prohibit local governments from incurring obligations beyond current revenues without voter approval or compliance with debt procedures.

Non-appropriation clauses. The standard solution: the contract terminates without penalty if funds are not appropriated in a future year, with the supplier taking the risk. Lease-purchase and equipment financing arrangements are structured this way.

Consequences for the counterparty. A non-appropriation right makes the obligation contingent, which affects pricing, financing and, for a lessor, the ability to securitise the payment stream. Counterparties negotiate limits — a requirement that the body request the appropriation, that non-appropriation not be exercised while similar functions are funded, and a restriction on replacing the equipment or service.

Continuing service contracts for operations may be permitted for longer terms by statute, and the enabling authority should be identified.

Debt characterisation. An arrangement that in substance creates a debt obligation, notwithstanding a non-appropriation clause, may be challenged as evading debt limits. The genuineness of the termination right is what distinguishes them.

Documentation. The appropriation should be identified in the contract file.