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Friday, July 25, 2014         

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Breaking the bank

The state's serious financial crisis has prompted legislators to look at funds previously off limits

By Vicki Viotti

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INTRODUCTION

The hungry hordes at the Capitol — meaning the lawmakers trying to balance the budget — are scouring the islands for any spare cash hanging around in state government offices. If they were to descend on the state Department of Agriculture, they just might find Dean Matsukawa standing guard.

Matsukawa is the agricultural loans administrator and, although legislators haven’t pinned a target to the department’s loan fund on this go-around, that’s probably because they already hit it last year.

“At the beginning of the year, we were sweating when they came around asking questions,” he said. “But this year we showed them it was just too tight.”

The state is facing a $1.3 billion deficit in the general fund for all of its operating expenses. Bridging that gap is going to take a patchwork solution, mixing budget cuts with added taxes and money swept from some of the state’s myriad accounts into the general fund.

And in that mix is sure to be millions from these “special funds.” Exactly which ones get scooped and by how much won’t be known until the House and Senate meet in conference committee, which is set to convene this week. But just to provide some idea of the scale, the House Finance Committee is proposing to collect a little more than $20 million, by paring back the balances of 23 funds by $19.9 million and repealing more to gain another $400,000.

Exactly how many of these “special  funds” are actually available is an elusive figure. The Senate Ways and Means Committee, which will be involved in the final cut, is working from a spreadsheet that lists 362 funds and accounts, but not all of them are ripe for lawmaker raids. Some are revolving loan funds directed for a specific demand that still must be filled. Some are the entire funding mechanism for a state office.

In any case, the last time the complete array of non-general funds was audited was 1992. That was updated in 2001 with an accounting of newly established funds, but state Auditor Marion Higa said the Legislature since has directed her to review only the trust and revolving funds.

So the state seems not to have a clear picture of all its money. Individually, some are well tended. Matsukawa said his fund issues loans to farmers who have been denied elsewhere; it has a low default rate, he said, so the money circulates well where it’s needed.

“You try to do a good job in how you administer it,” Matsukawa said with a little laugh, “and then they come and raid.”

———

There's the state general fund … and then an enormous flood of separate bank accounts that deal with a lot of the specifics.

These are often called "special funds," and state officials have them in their sights this year as part of an overall effort to cobble together a patch that fits over a projected $1.3 billion budgetary hole.

Some are being considered for closure; others for transfers of some cash to the general fund.

An exact tally of the funds themselves is elusive. State Sen. David Ige, who chairs the Senate Ways and Means Committee, is working off a spreadsheet of special and revolving funds, listing 362 funds or accounts, with roughly $1.3 billion in unencumbered funds for the current fiscal year. But not all of the funds even on this winnowed list are candidates for the legislators' treasure hunt.

One problem: Some account balances are transient. Ige cited the tuition fund at the University of Hawaii as an example. It is flush with cash when payments come in, but the money goes out, and most of it is spoken for.

"Depending on when you take the snapshot of the funds balances, they can be very different," he said.

Representatives of Ige's panel, as well as the House Finance Committee, are due this week to go into conference to settle, among many other issues, just how much money they can afford to take from some of the funds.

State law defines special funds as those "dedicated or set aside by law for a specified object or purpose, but excluding revolving funds and trust funds."

Among the many caches of state money: holding accounts for interest earned from state investments before they're distributed; money set aside for vacation and sick leave benefits for staffers not paid through general funds; and revolving funds providing loans for disaster victims, farmers and other petitioners.

Many of them are very specific, constrained by law or a trust arrangement that defines the beneficiary class and strictly limits where the money can be spent. But some have accumulated surpluses that lawmakers have the prerogative to siphon off, even if under law they were created for a set purpose.

Ige's counterpart in the House, Finance Chairman Rep. Marcus Oshiro, said financing some operations through special funds makes good sense from a policy standpoint. For example, the Department of Commerce and Consumer Affairs runs much of its licensing and oversight duties through fees paid by the businesses it serves rather than the general taxpayers.

Those payments feed the Compliance Resolution Fund, with accounts totaling around $30 million, said state Auditor Marion Higa, whose office provides ongoing oversight of the revolving funds and trust funds and accounts.

Having such a large collection of special funds can make fiscal accountability tough to enforce, Higa said. Many funds live in a kind of cocoon once they're created.

"If the proposal to create a special fund is carving away money from the general fund, if the program you are trying to support has its own funding mechanism, what you're doing is assuring that new creation its source of funding that it doesn't have to compete for," she said. "These programs that are special fund-created escape some scrutiny."

The proliferation of special funds has its vocal detractors, especially among the more fiscally conservative. Lowell Kalapa, executive director of the Tax Foundation of Hawaii, is a frequent critic of the system, which he said sometimes becomes an unaccountable end-run on spending control. Instead of sticking with any spending limits, he said, governments can get around them by spinning off a special account with its own funding mechanism.

Higa is the person in the best position to ride herd on the funds, but a 1992 study was the last overall review of all the funds. The 166 special and revolving funds in existence then were audited, and they had an aggregated cash balance topping $1.5 billion.

In 2001, 132 newly created special and revolving funds were checked, revealing $1.19 billion more. That audit recommended that 70 funds be ended; lawmakers ultimately repealed 37. In 2001, Higa's office advised that 69 of the more recently created funds be repealed. The auditor hasn't checked up on it — since then, the Legislature has ordered regular reviews only of trust and revolving funds and accounts — but she said she believes most of those funds have survived.

Higa said the state should do a better job of weeding through the funds and eliminating those that don't have a clear "nexus" between the people paying into them and the ones they serve.

"Every one of those funds have a constituency, and they came out in force," she said. "A dispassionate observer would say, ‘There's no nexus there.'"

Basic fiscal operations don't vary that much from state to state, and the economic downturn has upheaved every state's budgeting in more or less the same way, according to a National Association of State Budget Officers report published last fall. Broad-based tax revenues feed the general fund, which underwrites the bulk of government operation; when the revenues fell, spending from these funds tailed off. Nationally they represented about 45.9 percent of the total in 2008 but only about 38.1 percent in fiscal 2010, according to the report.

Federal stimulus funds have filled much of the gap, but even that was running out in the current budget year. Funds that were created for special purposes become targets to finance general needs when the going gets rough, and state budget officers rarely have faced rougher times than the present.

It's going on all over the country, said Arturo Perez, a state revenue policy analyst at the National Conference of State Legislatures.

"They become tempting targets when states start look for pennies under the sofa cushion," he said.

But it's difficult to make government work smoothly if they're all eliminated or drained dry. Conventional budgeting processes can be frustrated by shifting political winds.

Operations backed by a special fund at least have a level of predictability that's otherwise hard to come by, said Susan Chandler, director of the College of Social Sciences Public Policy Center at the University of Hawaii.

Chandler acknowledged that the funds are set up to give the state agencies in the executive branch a bit of "administrative efficiency," and that they sometimes bank unused money for unspecified emergencies that never materialize.

 

"How do you plan, how do you keep the trains running on time, if you aren't able to have a little cash flow?" Chandler asked. "To say ‘no' to special funds is like throwing the baby out with the bath water."

 

FUNDS EYED FOR CLOSURE

These funds have been proposed for closure by the state House or Senate, or both. Amounts are unencumbered balances listed for the current fiscal year.

Animal Research Farm, Waialee, Oahu, Revolving Fund $54,049
Community College and UH-Hilo Bookstore Revolving Fund 0
Discoveries and Inventions Revolving Fund $112,348
Education Laboratory School Summer Programs Revolving Fund $157
Fee Simple Residential Revolving Fund $66,691
Interagency Federal Revenue Maximization Revolving Fund 0
International Exchange Healthcare Tourism Revolving Fund 0
Irrigation Repair and Maintenance Special Fund 0
Irrigation Water Development Special Fund 0
Long Term Care Benefits Fund 0
Loss Mitigation Grant Fund $3.4 million
Patients' Compensation Fund $4.3 million
Rx Plus Special Fund 0
Sen. Hiram L. Fong Scholarship Program and Endowment Trust 0
Sen. Oren E. Long Scholarship Program and Endowment Trust 0
State Pharmacy Assistance Program Special Fund 0
Travel Agency Education Fund $21,449
Travel Agency Recovery Fund $22
University of Hawaii Alumni Revolving Fund $7,218
UH Child Care Programs Revolving Fund $48,843
UH Housing Assistance Revolving Fund $10.5 million
UH Student Activities Revolving Fund $758,418
UH-Hilo Intercollegiate Athletics Revolving Fund $196,375
UH-Hilo Theatre Revolving Fund $125,717
UH-Manoa Conference Center Revolving Fund $199,185
UH-Manoa Intercollegiate Athletics Revolving Fund $7.1 million
Western Governors University Special Fund 0

Source: Senate Ways and Means Committee

 

SPECIAL FUNDS LIKELY TO BE RAIDED

Here are the special-fund amounts proposed for transfer into the general fund by the Senate, House, or both chambers:

FUND SENATE HOUSE  
Aloha Tower Special Fund $2 million $1 million
Convention Center Enterprise Special Fund $500,000 0
Community Use of School Facilities Special Fund 0 $1 million
Compliance Resolution Fund, $1.5 million $1.5 million
Deposit Beverage Container Deposit Special Fund $1 million $300,000
Drug Demand Reduction Assessments Special Fund $717,263 $700,000
Employment and Training Fund $700,000 $700,000
Environmental Management Special Fund $1 million $750,000
Federal Grants Search, Development and Application Revolving Fund 0 $500,000
Health Care Revolving Fund 0 $916,284
Hawaii Teacher Standards Board Special Fund 0 $1.2 million
Kikala-Keokea Housing Revolving Fund 0 $474,014
Medicaid Investigations Recovery Fund $688,000 $500,000
Mental Health and Substance Abuse Special Fund 0 $2 million
Neurotrauma Special Fund $400,000 $250,000
Newborn Metabolic Screening Special Fund 0 $150,000
School Food Service Special Fund 0 $3 million
Special Unemployment Insurance Administrative Fund $1 million $1.5 million
Special Premium Supplemental Fund $1 million $500,000
Stadium Special Fund 0 $500,000
State Risk Management Revolving Fund $600,000 $1 million
Trauma System Special Fund 0 $1 million
UH Faculty Housing Project Series 1995 Bond Proceed Special Fund 0 $520,780
Waialua Loan Subsidy Program Fund 0 $1,103

Source: Senate Bill 120





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