While it is true that with the downturn in the economy tax revenues are not flowing into the state of Hawaii’s treasury as they have in the past few years, but that does not necessarily mean there is no money to pay the state’s bills.

Unfortunately, much of this money is tied up or designated for specific programs or activities. This situation is largely the work of past lawmakers who thought it was prudent to provide certain favorite programs their own resources by earmarking sources of revenue for that particular program and setting the receipt of that resource off into a special fund.

It is not that special funds are all that bad, but over the years the number of funds has proliferated as lawmakers took pet programs under wing and provided those programs with earmarked revenues.

Just how bad is the proliferation of special funds? When Hawaii became a state more than

50 years ago, there were only three special funds – all in the area of transportation – the highway fund, the airport fund, and the harbor fund. These were established largely because the users of the facilities financed by the moneys in these funds paid the fees and taxes that went into these special funds.

In many cases, these transportation funds are kept separate from the state’s general funds because the fees and taxes deposited into these funds are used to match federal subsidies for these transportation activities.

Special funds should not be confused with trust funds or revolving funds that are established to hold moneys that are loaned out, as in the case of a revolving fund, and then paid back to the fund at a later date, or the moneys are held for disbursement in the future, as is the case in a trust fund. On the other hand, legitimate special funds have been determined to be funds that are repositories for fees or charges levied for a specific service provided to the persons paying the fees or charges.

For example, the insurance industry disputed whether or not it was proper for the legislature to take money from what is known as the compliance resolution fund into which fees charged insurance companies were deposited which were supposed to regulate the industry. The legislature had taken some of the moneys in the fund to shore up the general fund in the past. The courts ruled that the fees paid by the insurance industry could not be used for any other purpose than to regulate and monitor the industry.

However, many of the special funds created in recent years are financed with resources that were formerly receipts of the general fund. For example, the fees from the issuance of marriage licenses used to be entirely deposited in the state general fund. Nearly 20 years ago, some lawmaker got the idea that somehow there was a connection between getting married and the domestic violence problem in our community. So one half of the proceeds from the marriage license fees was earmarked for domestic violence programs.
When it was discovered that the proceeds were insufficient to fund all domestic violence programs, the license fee was raised by the next session of the legislature. Because the applicants for the license receive no direct benefit from those domestic violence programs, one has to question the legitimacy of that arrangement.

The other drawback of creating these special funds with totally irrelevant earmarked revenues is that the favored program usually does not undergo the kind of close scrutiny that general-fund financed programs do. Why pay any attention to those special-fund financed programs as the money in those special funds can only be used for the designated purpose?

Thus, lawmakers don’t know how effective the programs are and whether or not there is sufficient funding or perhaps more than sufficient funding.

Over the years, the slice of the state’s operating budget pie financed through special funds other than the transportation special funds has grown steadily, rising from 11.7% of the operating budget in the 1995-1997 fiscal biennium to more than 17% for the fiscal biennium that ended just this past June. That 17% translates into just over $3.6 billion, more than twice the estimated shortfall for the current biennial budget.

Lawmakers should consider putting all of that money on the table for discussion. For those special fund financed programs that are financed with resources that do not provide the people paying the fees or taxes with a clear service in return, these programs should be folded back into the general fund and the proceeds from the fees or taxes put back into the general fund.

Then lawmakers should set priorities for spending among all programs. Lawmakers may just find that some of those programs are really not high priority, especially when there is not enough money to fund all programs.

‘Lowell Kalapa is president of the Tax Foundation of Hawaii’

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