Ceiling Circumvented With Special Funds

by Lowell L. Kalapa, Tax Foundation of Hawaii

Earlier this month the State Auditor again raised the red flag on the proliferation of special funds citing the fact that there are at least 729 non-general funds or special funds and accounts that hold an estimated unencumbered cash balance of $2.47 billion. That's right, billion dollars not million dollars.

The State Auditor goes on to point out that in the 30-year period between 1980 and 2010, the number of special and revolving funds tripled to 313 funds. These special funds have become very attractive targets for legislative raids to supplement the state general fund in recent years with the total amount of those raids amounting to more than $161 million in the last three years alone. The Auditor also found that there are no regular reviews of these special funds to determine if they meet the criteria set out in state law.

The proliferation of special funds became rampant in the late 1980’s when the state saw a huge growth in the state general fund surplus which rose to more than $600 million by the end of 1989. Lawmakers were so embarrassed that they started finding ways to hide that money by creating all sorts of special funds and tucking excess general fund revenues into those special funds. After all, lawmakers were not about to give back those tax dollars they had already collected nor did they want to reduce tax rates because obviously people didn’t seem to raise a ruckus about tax rates being too high. Although there were calls for a substantial rebate, lawmakers were able to satisfy taxpayers with a one-time tax rebate of $100 per person.

During the 1990’s, the special funds fulfilled a different role as department heads were charged with becoming self-sufficient insofar as programs within their departments. Two departments were especial adroit at this mandate, the department of commerce and consumer affairs and the department of health both of which came up with a whole new menu of fees and, in some cases, substantial increases in existing fees.

The former department became so good at raising fee income that by the end of the decade, it raised enough in fee income that the department was generating an annual surplus equal to its annual budget. It had enough cash on hand that it was able to purchase a new home for its operations and turned the cash over to the ailing general fund in return for debt financing.

Although legislative leaders may argue that they still maintain oversight over all these funds, one has to wonder how they can do what the Auditor admits that she could not do in her review of these funds. In fact, she was only able to sample some 47 special and revolving funds of which six failed to meet the criteria for continuance and were recommended for repeal. The Auditor believes that in repealing these six funds, the general fund could realize as much as $49.7 million.

Granted, the task of the Auditor is to review these special funds with an eye on the appropriateness of the funds, to insure there is a clear link between those who are asked to chip into these funds and the services provided. What she did not point out is even more crucial to all taxpayers and that is these special funds provide a way for lawmakers to circumvent the constitutionally mandated ceiling on general fund expenditures.

Adopted by the 1978 Constitutional Convention, the general fund spending ceiling was intended to control the growth of state spending so that it did not grow faster than the economy that produced the revenues to support that spending. It was a more reasonable alternative to the revenue slashing Proposition 13 which was being adopted in California at about the same time. Limiting the growth in revenues, as Proposition 13 did, created many more problems for state and local governments in California over the years.

Under the general fund spending ceiling, the expenditure of general funds is allowed to grow as long as there is growth in the state’s economy. If lawmakers or administration officials want to grow spending faster than the growth in the economy, they have to tell the taxpaying public how much faster they are growing spending. That is all well and good when the Constitutional Convention delegates believed that all spending would be done through the state general fund. Little did they conceive that lawmakers would create numerous special and revolving funds with their own sources of revenues or earmark former general fund tax revenues for those special funds.

The upshot is that general fund spending may stay within the constitutional spending limit, but the size of government continues to grow even faster than the state’s economy. As a result, a heavier and heavier burden is placed on businesses and families in Hawaii, making it even more difficult to survive in what is already a costly place to live and do business. There is no doubt it is time to get rid of those special funds!

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