“Dedicated Funding Source”?  Nah

by Tom Yamachika, President, Tax Foundation Hawaii

I’m sometimes asked how we can achieve true fiscal reform here in the Aloha State.  It’s easy to imagine an end goal, with government spending within its means and with no gargantuan liabilities (the big two are the State’s defined benefit pension plan and the EUTF health system for state retirees) hanging over our heads like swords of Damocles.  But to know which direction we need to travel, we need to know where we are now.  This, unfortunately, is a big problem. 

Many individuals and companies have a budget.  So does our state.  But the individuals and companies have a few bank accounts at most, so figuring out their financial condition is not terribly difficult. Our state, on the other hand, has literally thousands of accounts called special funds in addition to its main account called the general fund. It’s questionable whether any one person or agency knows where all of these funds are, because they can be created either by law or by the action of an agency.   And these special funds can rack up a lot of dough.  Our Office of the Auditor, in Report No. 20-06, examined 1,877 special and revolving fund accounts, and flagged 257 of them with balances significantly exceeding expenditures and other outflows.  Collectively, these accounts held more than $2.28 billion.

Agencies, both past and present, love special funds.  Because they are created and maintained mostly independent of the annual legislative budgeting process, agencies can spend the money in the funds, as long as the spending is consistent with the funds’ purpose, largely without needing to go back to the legislature to plead for money every year.   Often, they justify a fund by saying that a certain cause or project deserves a “dedicated funding source.”

A “dedicated funding source,” however, has to get money from somewhere.  Sometimes the agency charges user fees to feed the fund.  Sometimes it’s able to get some money from the Legislature.  In a few instances, the Legislature allows the fund to tap a money source directly, such as through an earmark on a tax. This creates difficulties in accounting for state revenues and expenses. 

And then, the “dedication” of the funding source is often porous.  On several occasions in the past couple of decades, when the state was weathering a financial storm, the Legislature passed “raid bills”— laws forcing money to be transferred from special funds to the general fund.  And even in good financial times, many special funds are required to fork over 5% of their balance to the general fund annually as a “central services expense assessment.”  (A former State Auditor, Marion Higa, wrote in a 1994 report that a flat 5% seemed to be an arbitrary percentage and wondered whether it was a reasonable amount, noting that other states charging a similar fee charged quite a bit less.)  There’s also a “departmental expense assessment” based on actual (so they say) costs of administering the fund. 

Are these truly dedicated funding sources if they can be bled and raided for other purposes at any time?  Nah.  What a shibai!  What these funds really accomplish, together with their charges and cross-charges, is the obfuscation of our financial position.

It would be much easier to assess our state’s fiscal health if money into and out of all the various funds could be tracked and totaled in real time.  Sadly, we don’t seem to have that capability now and there seems to be no rush to acquire it.   It’s just another way that our State keeps this critical information secret and closed off from scrutiny by us taxpayers.