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Efforts Needed To Rein In Special Funds

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By Lowell L. Kalapa

(Released on 6/01/08)

Last week we discussed how the constitutional spending ceiling is declared piecemeal by parceling out each and every measure appropriating general funds that exceed the limit, creating the illusion that the amount exceeding the ceiling is minimal rather than showing the total picture of the aggregated excess.

The result is that lawmakers really don’t take the heat from taxpayers, as the cumulative picture of just how much in total has been spent over the expenditure limit is not clear. While the way the declaration is made can be argued as a matter of interpretation, another means by which lawmakers have avoided being forthright about the growth in the size of state government is by the creation of special funds and user fees to fund new programs.

The constitutional spending ceiling was adopted as a means by which taxpayers could gauge just how fast state government was growing relative to the growth in the economy that was called upon to support that public infrastructure. Except for a few funds where there was a direct relationship between the users who received a direct benefit for the taxes or fees paid for that service, every other public program should have been funded out of the state general fund where nearly 90% of the revenues come from taxes paid by all taxpayers. The programs funded from general funds are generally those that will benefit all taxpayers or are for the general health and welfare of the community.

During the late 1980’s, the balance of the state general fund ballooned as a result of a robust economy due largely to the Japanese bubble and receipts of the transient accommodations tax that accrued to the general fund instead of a convention center special fund. Not wanting to give back funds they already raised, both the administration and the legislature created special funds to hide excess general funds. Once those funds were swept off the general fund table for some designated purpose, they didn’t show up in the general fund balance or surplus.

In the meantime, the state’s economy was going into the tank as the Japanese bubble burst and the outlook for tax revenues turned bleak. In an effort to avoid spending cuts or program reductions, lawmakers turned to these special funds into which they had tucked surplus general fund dollars to keep those programs and projects funded. And as those funds were depleted, the order went out from the administration for each department to find ways to become self-sufficient. For those departments that already had programs and services that assessed users of their services, the conversion was easy as fees were instituted or raised to cover the cost of providing those services.

Since these fees and charges were designed to cover the cost of providing the respective services, special funds were established to hold these monies. Thus, what were at one time general fund-financed activities of a department now became special fund-financed activities. But the problem was that this new funding structure held unknown opportunities to make money and in some cases fees were established at rates much higher than needed to pay for the services provided.

Soon the growing surpluses in these special funds came to the attention of lawmakers who faced ongoing shortfalls in the state general fund. These attractive surpluses became targets for legislative raids on special funds to shore up the general fund spending plan. Thus, what had begun as user fees to fund specific services to be provided to the user became just another means of providing revenues for the state general fund.

This gave lawmakers the idea to spin off what had been general fund responsibilities into special fund- financed programs. For example, somehow lawmakers linked domestic violence to having a marriage license. Marriage license fees were raised and the increase was used to fund domestic violence prevention programs.

While taking the special fund approach might seem to be the most expedient path to fund these programs, they are nothing more than another government program that will ultimately be funded by all taxpayers as those who are burdened with the user fees will pass them on to the final consumers of the goods and services.

Since these are programs that should have been funded with general funds, they represent nothing more than the hidden growth in the size of state government. The constitution should place a ban on all special funds that do not meet the test established by the State Auditor as a legitimate special fund where there is a direct relationship between those who pay the fee and the benefits received.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui NewsWest Hawaii TodayGarden Isle News, and the HawaiiReporter.com.

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