With a looming deficit facing the state administration and lawmakers, especially since the administration has declared that it will not touch the hurricane relief fund, much of the spotlight this year is on money matters.

One of the statements bantered about during the campaign is a call for the “audit” of the state books. While that statement elicited a lot of nods from voters, a better choice of words might have been used as the word audit connotes that an official examination of financial records has been undertaken. Thus, to say that the books of the state (or county for that matter) need to be “audited” infers that they have been so examined.

Technically, the books of the state and the counties are audited each year by reputable accounting firms. In the case of the state, it is KPMG that audits — and has audited at least for the last two decades — the books of the state. KPMG issues its opinions along with the annual comprehensive financial report of the comptroller of the state. In the case of the City & County of Honolulu, it is PricewaterhouseCoopers that opines on the financial condition of the books of the largest of the four counties.

Why be so picky? Well, imagine some bond holder sitting in his office back East hearing that there is a call for an audit of the books of the state of Hawaii. Does this mean he has been buying bonds of the state of Hawaii where the financial worksheets have not been “audited?” While, in fact, the state’s books have been audited, such statements can raise perceptions that the state’s financial house is not in order.

The other spotlight that the financial crisis has focused upon is a call for the repeal of special funds. This is an issue that the Tax Foundation raised as early as 1989 when the legislature decided to earmark $90 million in general excise tax revenues for the educational facilities special fund. Argued that this was the Legislature’s commitment to education, a position that was ardently supported by the heads of some of the largest businesses in the community, that little scheme was nothing more than a way to hide the money from public view.

As a result, the 1989 Tax Review Commission picked up the issue and cautioned against the creation of special funds that earmark general fund revenues. Taking the cue from that recommendation, the legislature adopted Act 240 during the 1990 session mandating that the Auditor conduct a thorough review of all special and revolving funds and make recommendations as to whether those funds should be continued or repealed.

Although given five years to do the study, the Auditor returned within two years with a list of special funds that did not pass muster. But the Legislature, which created many of these special funds, did not have the political will to repeal some of their pet stashes. So this year after campaigning on the issue of special funds repeal, the administration has submitted a bill which begins to nibble away at the problem.

While the Auditor did establish four criteria to measure whether or not the subject special funds were appropriate and therefore gave rise to the recommendations to continue, modify or repeal, the criteria falls short of one very telling aspect. The four criteria include whether or not the fund: (1) continues to serve the purpose for which it was originally created; (2) it reflects a clear link between the benefits sought and the charges made; (3) it provides an appropriate means of financing the program; and (4) it demonstrates a capacity to be self sustaining financially. Perhaps the most important criteria overlooked by the Auditor is whether or not the program or activity was once financed through the state general fund.

Over the years as department heads were exhorted to find ways to self finance their programs, fees and charges were increased or created and tucked into special funds. Many of these services or programs were once financed out of appropriations from the general fund. The catch is that there is a constitutional limit on general fund spending. It was imposed to keep a check on the growth of the size of government, to make sure that the size of government did not grow any faster than the economy.

Well, when you start taking many of these activities out of the realm of the general fund, they are no longer subject to the spending limit. So what was once counted as part of the size of government is no longer a part of that pie, and no one knows just how large government has grown since the limit was imposed back in 1978. Lawmakers and administrators may want to add this measurement to their review of special funds. In the case of the educational facilities special fund, for example, repeal will force the department to account for money it is given to build and maintain school facilities.

”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ http://www.tfhawaii.org

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