Hawaii Auditor Blasts State Special Funds Proliferation; Vindicates Opponents

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Sen. Sam Slom - Photo courtesy of Mel Ah Ching Productions

BY SEN. SAM SLOM, R, HAWAII KAI-DIAMOND HEAD – For the 16 years that I have been privileged to serve in the Hawaii State Senate, I have consistently spoken and voted against every tax increase, and the creation of every new State Special Fund.

The ONLY exceptions have been for those mandated Federal Special Funds where no monies would accrue to the State unless the separate fund was established, matching federal-state funds and those federal funds where the State Legislature is absolutely blocked from raiding or misusing the funds. (An example would be the Unemployment Compensation Reserve Trust Fund.)


My rationale has always been that the over use and misuse of “Special” Funds is a convenient way of hiding funds from regular budgeting techniques, fooling taxpayers into thinking their extra tax is “special” and will only be used for the purpose they are told. In fact, history has shown that there is no way of protecting or guaranteeing the use of any special fund for the purpose advanced. Further, one Legislature can not bind a future Legislature. The sorry fact is that when a Special Fund increases in size, spending hungry lawmakers see that as a new revenue source for the General Fund and a way of balancing an unbalanced budget.

The transfer or “raid” of these Special Funds has been outrageous. The Highway Fund, Employee Retirement System, Hurricane Relief Fund and Rainy Day Funds are just the most recent high profile funds to be raided and monies used for entirely different purposes than described in the original Special Fund authorization.

Lowell Kalapa, the respected President of the Tax Foundation of Hawaii, has also been a long time and consistent critic of Special Funds.

In past years most of my colleagues—including minority party members—dismissed, ignored or chuckled at my opposition and warnings about the proliferation of Special Funds. Dozens have been added annually.

Then, something happened. Last year, a growing number of Senators and Representatives became concerned about the unwieldly number of Special Funds, the amounts  hidden within the funds, and the inaboility of many state agency heads to identify the number and balances in their departmental Special Funds.

The 2011 legislative session passed House Concurrent Resolution No. 166 requesting the State Auditor to conduct a study regarding the transfer of non-general funds to the general fund. The result is this week’s Auditor’s Report No. 12-04, “Study of the Transfer of Non-general Funds to the General Fund.”

The 153-page report examines and analyzes Special Funds in detail. It makes recommendations for corrections and improvements. The Auditor’s Summary:

“Fund growth raises concerns about budget flexibility

Non-general funds, such as special, revolving, federal, and trust funds, exist outside the State’s main financial account, or general fund. Over the past 30 years, the number of non-general funds and the amount of money contained in them have substantially increased. In FY2011, non-general funds accounted for about half of the State’s $10.4 billion operating budget, up from one-third in 1992.

This proliferation of non-general funds has hampered the Legislature’s ability to direct general fund spending. For example, the Legislature typically seeks money in special and revolving funds when general fund budget shortfalls occur. We found that the transfer, or “raid,” process is cumbersome, involving a review of hundreds of funds in addition to a legal review and committee hearings.

We also found:

• At least 729 non-general funds and accounts hold an estimated unencumbered cash balance of $2.47 billion.

• Between 1980 and 2010, the number of special and revolving funds almost tripled to 313 funds.

• Fund raids authorized by the Legislature in FY2009, FY2010, and FY2011 totaled $161 million.

• Not all annual, non-general fund reports are filed as required by law.

• No regular reviews of special funds are conducted to determine if they meet criteria set in Hawai‘i law.

• Of the 47 special and revolving funds we tested, six failed to meet criteria for continuance. We recommend these be repealed and the $49.7 million they hold be deposited into the general fund.”

The Auditor also called for a “more structured legal review process.” The report criticizes the Attorney General for its non-documented legal review process involved with proposed fund transfers and cites a 2008 Hawai‘i Supreme Court decision that eliminates certain types of money that can be transferred.

In 2009, the Hawaii Legislature “mistakenly” authorized transfers of $16.5 million from two funds, in possible violation of federal law.

Finally, the Auditor notes that while the State Department of Budget & Finance generally agrees with the Auditor’s recommendations, the Attorney General’s office balked at some conclusions and suggested changes.

What does this mean? It means that vocal critics of the Special Fund process over many years have been correct. Cautions and warnings have generally been ignored.

Hopefully, it also means that the Legislature —and taxpayers—will now look more closely at the use of existing Special Funds and creation of new funds.

The Auditor has done all taxpayers a great service if we demand implementation. Just because these off budget funds are called “special” doesn’t mean they are special, or should be exempt from sound accounting and review procedures.