Frustrating the Taxpayer’s View of Public Finances

by Lowell L. Kalapa, Tax Foundation of Hawaii

One of the frustrating things about watching state government finances these days is that the picture is less than pristine, that is, for the average taxpayer it is not always quite clear just how much money is being spent on state programs and services.

This is because so much of state government is hidden from view by the multitude of special funds that have been created over the past 25 years. Advocates of these special funds argue that these special funds insure that the fees and user charges paid by the beneficiaries of the funds’ programs get their money’s worth. The problem with that is that most of those beneficiaries don’t have oversight or the authority to determine whether or not the fund is collecting too much or not enough and, therefore, whether or not the fees being charged are appropriate.

And despite the argument that the special funds provide protection against the money in these funds being used for anything other than their intended purposes, the track record is telling as taxpayers have watched these special funds being raided over the years every time the state hits a bump in the road and needs money to bail out the general fund. For example, a couple of years ago car rental businesses decided that it would help their business if they could have a consolidated operations and maintenance facility that would help to reduce, if not eliminate, duplicative functions. They acquiesced to taxing themselves at the rate of $4.50 per day per vehicle to raise the money needed to pay for this facility. When warned that this fee would create a huge target for lawmakers to raid should they need the money, rental car companies disagreed saying the fee was a part of the airport operations and lawmakers could never really raid those revenues.

A year later, as the fortunes of the state general fund took a nosedive, lawmakers turned to this special fund and the $4.50 fee it received eyeing it with envy. While they could not take the money that had already been generated from the fee, they just assumed that since rental companies could already charge such a fee, they would just suspend the fee under that special fund and impose the fee under another chapter of the law and earmark the revenues from the $4.50 for the state general fund. So, in a way, lawmakers were able to “cockroach” the money from the rental car facility special fund and put the fee under another chapter of the law and direct the money into the state general fund.

While these shenanigans seem to be the standard for lawmakers, having the special fund mechanism facilitates these hijinks which contribute to the cloudy picture of state finances. So when the taxpayer asks just how much lawmakers are spending, the answer is less than clear. Budget makers will respond by saying its four or five billion dollars a year, and then pause and tell you that’s only the general fund and doesn’t count special funds. And, oh yes, that is only for operating expenses and not for capital improvements like building a road.

But a good part of the problem is the plethora of special funds that have been created over the past 25 years. The problem was recognized years ago when the legislature asked the State Auditor to periodically review these special funds and establish criteria as to what is an acceptable special fund. And over the years the State Auditor has continued to point out the deficiencies of many of these special funds, yet lawmakers refuse to do anything about cleaning up the special fund situation.

Now the Honolulu city council wants to have that same ability to create additional funds with or without the mayor=s recommendation. The charter currently provides that additional funds may be created upon the recommendation of the mayor and with the approval of the council. A charter amendment that will be on the ballot next month would open the flood gates that could spawn numerous special funds at the whim of the council that would make it difficult for taxpayers to watch where the money is being raised and spent.

The amendment argues that these special funds “may enhance the transparency of the City’s finances and the City’s accountability to the public by ensuring that, when appropriate, money collected by the City from licenses, fees, and taxes, and other revenue are set aside and expended for their intended public purpose.”

Given the track record of the state legislature, this amendment should send up “red flags” that instead of providing transparency for City finances, these special funds hold the potential for making sure taxpayers don’t know what’s going on with their tax dollars. Taxpayers should reject this proposition as these special funds can and will be used to obscure how elected officials are handling your money.

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