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Use Of Special Funds Undermines General Fund Limit

posted in: Weekly Commentary 0
By Lowell L. Kalapa
(Released on 09/23/07)

At the time of the last constitutional convention in 1978, California’s Proposition 13 was just being put on the ballot for voters in that state to approve.

Because the Proposition 13 approach to controlling the growth in the size of government was to cut off the growth in revenues, it came with all sorts of problems such as the inability for local governments to guarantee the repayment of debt service as their ability to raise the necessary revenue was limited. This inability, in turn, affected how local governments borrow money for major infrastructure improvements. The limitation on property taxes also meant that local governments had to find other ways to fund the escalating costs of education and just keeping public services provided.

As a result, con-con delegates here in Hawaii – still wanting to control the growth in the size of government – turned to the other side of the ledger and looked to control that growth by controlling the spending that state government could undertake from year to year. Believing that the strength of the economy determines how much it can support in the way of public services, the 1978 con-con delegates tied the growth in state spending to the rate of growth in the state’s economy.

Since nearly all state spending was supported by the state’s general fund, the target of the con-con delegates was to limit the growth in state spending to that spent from the state general fund reasoning that special funds, like the highway and airport special funds, had dedicated revenue sources that are underwritten by the users of those facilities. Little did con-con delegates think that lawmakers would find ways to circumvent this control of state spending.

Not wanting to tie the hands of lawmakers and other elected officials, con-con delegates provided an escape valve by allowing elected officials to exceed the general fund spending limit as long as the amount and percentage by which the ceiling is exceeded is declared and approved by a super majority of lawmakers. Thus, unlike Proposition 13, the state general fund expenditure ceiling provides a lot more latitude to lawmakers, but it makes sure that the public knows that the ceiling is being exceeded.

However, over the nearly 30 years of experience with the general spending limit, taxpayers have come to learn that lawmakers can devise ways to get around those constitutional provisions. In the late 1980’s when the state general fund was flush with cash, surpluses built up in the general fund due in large part to the Japanese bubble and the fact that lawmakers had funneled the receipts of the transient accommodations tax into the general fund instead of earmarking it for the convention center as had been the deal with the hotel industry.

Initially, when lawmakers couldn’t resist spending all that surplus cash they devised a way so that it wasn’t so apparent that the ceiling was being exceeded. Instead of declaring the total amount by which the ceiling was being exceeded by all appropriations of general funds, lawmakers took each bill and declared how much the appropriation in that particular bill exceeded the ceiling. Of course, by making the declarations on a piecemeal basis like this, the percentages were dwarfed by the overall general fund budget. So taxpayers never did see how much the overall appropriations of general funds exceeded the ceiling for that particular year.

After a couple of years of exceeding the ceiling and a growing general fund surplus that taxpayers called to be refunded, lawmakers found another way to circumvent the ceiling. They created special funds, first by earmarking collections of general fund taxes so that the money never went into the general fund like the conveyance tax reported in last week’s commentary. Later they transferred general funds into newly created special funds. This allowed lawmakers to not only hide the money from public view, but to spend it without having to exceed the general fund ceiling.

When the economy went south, lawmakers raided these special funds to keep public programs running instead of paring back those services. Eventually the State Auditor was called upon to monitor and opine on these special funds, finding those that had no nexus to the source of the funds to be inappropriate.

Although voters have shied away from calling for another constitutional convention for whatever reason, correcting some of these abuses of the general fund expenditure ceiling is long overdue. Unless voters put teeth back into this constitutional provision, future generations of taxpayers are almost guaranteed a government that will be too large to support with tax dollars.

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