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STATE OF HAWAI‘I

 

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Loss of Budgetary Control: A Summary Report of the Review of Special and Revolving Funds

Report No.  92-14

Summary

Act 240, Session Laws of Hawaii 1990, required our office to review all special and revolving funds in existence on July 1, 1990, except those in four executive agencies.  We completed the review in 1992, well before the scheduled completion date of 1995. 

We have reviewed 166 funds in all.  We found cash balances aggregating about $1.5 billion.  We recommended that 70 of these funds be repealed, discontinued, or sunsetted in the future.  At June 30, 1991, the cash balances of these 70 funds amounted to $146 million. 

We found many funds with growing cash balances--some with balances many times the level of their annual expenditures.  We also found an increasing effort by agencies to establish and use special and revolving funds.  We believe that the proliferation of special and revolving funds as financing mechanisms to support state programs has had a deleterious effect on the Legislature's ability to control the state budget. 

The use of special and revolving funds has distorted the State's financial picture by making both revenues and expenditures appear to be less than they are.  The power of the Legislature is partly a function of the amount of money under its control.  Special and revolving funds divert moneys from the general fund, thereby reducing the Legislature's control of state finances.  Funds diverted are not available for other current or more pressing programs.  Special and revolving funds also escape legislative scrutiny because the Legislature focuses primarily on the general fund and limits its oversight of the myriad programs financed outside the general fund appropriations process.  We believe the Legislature can gain greater oversight and control of the budget by taking certain actions. 

Recommendations and Response

We recommend that the Legislature consider repealing the special and revolving funds recommended for repeal in our prior reports and repealing Section 304-8, Hawaii Revised Statutes, that gives the University of Hawaii the authority to establish special and revolving funds administratively.  We also recommend that the Legislature consider establishing sunset dates for all existing and newly established special and revolving funds.

We recommend that the Legislature consider amending Section 37-62, HRS, to define special and revolving funds as funds used only when these means of financing are essential to the successful operation of a program and when there is a clear link between the program and the sources of revenue dedicated to its support.  Finally, we recommend that the Legislature consider amending Section 23-11, HRS, to include a requirement that proposals to establish new special or revolving funds be supported by evidence of need that: (1) states the purpose of the program; (2) describes the scope of the program; (3) presents financial information on fees to be charged, sources of projected revenue, and costs; and (4) explains why the program cannot be implemented successfully under the general fund appropriation process. 

We transmitted a draft of this report to the Department of Budget and Finance for comment.  The department concurs with our recommendations to (1) repeal the authority of the University of Hawaii to administratively establish special and revolving funds; and (2) require that proposals to establish new special or revolving funds be supported by evidence of need. 

The department does not concur with our recommendation to repeal all 70 funds.  The department also does not agree that sunset dates should be established for all existing and proposed special and revolving funds.  It supports the need for a systematic review of such funds and stresses that it is now conducting such a review.  However, we maintain that establishing sunset dates for special and revolving funds allows the Legislature to conduct its own analysis and evaluation on whether the funds should be continued. 

The department agreed that the definitions for special and revolving funds should be amended but says that our proposed definitions do not clarify the difference between special and revolving funds.  However, our focus was not on the difference between special and revolving funds, but on their use in financing state programs.


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