Spending Limit Neutered by Crafty Lawmakers

In a recent meeting of the state’s Council on Revenues where members were tasked with estimating total state personal income, members asked how significant their estimate would be and the impact it would have in calculating the state’s general fund expenditure ceiling.

Noting that the federal government would be issuing more definitive estimates of Hawaii’s total personal income later in the year, members pondered whether or not they should just stay with their earlier estimates until such time the federal government issued its latest assessment of the state’s personal income.

Upon learning that state general fund spending had not even approached the spending limit in recent years, providing an ample margin, the Council members chose to keep their earlier estimate of the total personal income. However, their curiosity was piqued as to why spending remained well within the limit. One member thought that it was because a lack of revenues prevented lawmakers from going over the limit, but another pointed out that until this year, there was strong revenue growth so that couldn’t be the reason why the spending limit was not being challenged.

It was pointed out that over the years, especially during the last downturn of the mid-1990’s, state department heads were directed to find ways of making their operations self-sustaining as general fund tax collections along with the state’s economy were faltering. As a result, departments who could, resorted to charging fees for services they provided specific constituencies. By far, the departments of health and commerce and consumer affairs outstripped other departments when it came to user fees and charges. On the other hand, the department of land and natural resources (DLNR) was the beneficiary of a tax that originally was a general fund receipt. The tax was increased and earmarked for the natural area reserve program of DLNR.

As a result, more and more programs fell off the general fund table and were run with special funds. Thus, what may have been a general fund financed program in the past suddenly was being paid with special funds. This means the general funds that used to pay for those programs were now freed up for the expansion of existing programs or for the creation of new programs or services. Thus, state government was allowed to grow despite not exceeding the constitutional general fund ceiling.

The rule of the general fund ceiling is that state government cannot grow any faster than the growth in the state’s economy and is based on the logic that government should be allowed to grow, but no faster than the growth in the economy which must fund that growth in government. It was reasoned that if government grew faster than the growth in the state’s economy, then more and more of the economic wealth would have to be directed toward state government.

But the framers the 1978 State Constitution never imagined that lawmakers and administrators would be so crafty that they could find a way around the limitation on general fund expenditures by using new user fees and charges and depositing them into special funds to pay for programs that were once general-fund financed. For example, the program known as environmental protection in the state budget which includes the department of land and natural resources used general funds to fund 20% of its program costs and 11% in special funds for the fiscal year 1999. For the fiscal year 2010, only 5% of its program costs will be paid with general funds while 22% will come from special funds.

In the area of Individual Rights, which includes the operations of the department of commerce and consumer affairs, 21% of program costs were paid in general funds and 54% was funded through special funds for the fiscal year 1999. The percentage changed for the fiscal year 2010 when only 15% of the program costs will be funded with general funds while 81% will be funded with special funds.

If one were to go back and unravel all the shifts of funding sources from general funds to special funds, one is sure to find that had those programs that are now funded with special funds continued to be funded with general funds, one would, no doubt, find that state government has indeed grown faster than the growth in the state’s economy. Using special funds to underwrite programs that were formerly financed with general funds created the illusion that state government had not grown faster than the state’s economy. Unfortunately, that is not true and has contributed to Hawaii’s current fiscal dilemma.

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