 Welcome back to Think Tech, it's Talking Tax with Tom. We're gonna talk about yet another slush fund. Woo, they're everywhere, we'll be right back for that. Welcome to the show, Tom. I'm so interested to find that you've found another slush fund. And we've been talking about slush funds and special funds and the like and money tucked away in the corners of state government for a long time. And now another one, what is it? How did it come to light? And what is good or bad about it? Well, we've been talking about rainy day funds for a while. This one is literally a rainy day fund. When Hurricane Iniki hit us in 1992, a lot of the private insurers who were insuring houses and stuff said, well, we don't wanna insure Hawaii anymore, they left the market. So the state decided to come up with this agency called the Hawaii Hurricane Relief Fund, HHRF. And they put some money in it and they allowed it to issue, base policies for residential dwellings. And so they did. And then about a decade later, the private insurance market wasn't so jittery anymore. Insurers came back into the market. So there really wasn't anything for the HHRF to do. So it closed its operations in about 2002, but it still had a bunch of money. And at that point, something very interesting happened. I mean, the statute that created the HHRF said that if the Hurricane Relief Fund dissolves, then the money is supposed to go back in the general fund. Did that happen? No, it did not. At that point, HHRF had over $100 million in it and they let it sit there. And it still sits there to this day. Now, it has kind of a storied history because back in 2010 or so, you remember, we were just reeling from the great recession of 2008. People were out of work. There was like a lack of money everywhere and we started for a low Fridays. You remember that? For a low Fridays was basically a day when the state gave everybody an unpaid day off once a week because they couldn't pay everybody for seven days or five days in a week. But there was some concern about kids in our public schools because they weren't getting taught. And there was some concern that they'd be left behind and things like that. So some bright legislators had the idea to fund these instructional days out of the balance that was in the Hurricane Relief Fund. But of course, it'd be paid back now. What they did was they put a spinal tap into the GE tax saying that for a couple of years, the revenue from the GE tax would be used to pay back the Hawaii Hurricane Relief Fund to replenish it. So to this day, it's still there. It's got $186.7 million in it and it's just sitting there. And why do you ask? We already have a emergency and budget stabilization fund. It's got several million, several hundred million dollars in it. It got $500 million last year. It's getting $500 million this year. It's getting $500 million next year, according to the budget that was just passed. And so my question to the lawmakers out there is, yes, we need to squirrel some money away in case of emergencies, but isn't it helpful for you to know how much we're squirreling away? It doesn't really help anybody to have all these monies sitting around idle in all of these places where people don't necessarily know about them. So you can pull the wool over people's eyes if they ask what's the condition of the state and whether we have any money sitting around. Well, the answer is yes. And getting it out of there requires an act of the legislature to do, doesn't it? So it's not like it's available for the same purpose or even a related purpose of going forward. It'll sit there until somebody walks about it like the press. And I really wonder, I mean, you're covering this and once in a while you write in Civil Beat about these special funds, but is the government responding to that? Is the government shutting down special funds? Shouldn't this $180 million be put into the general fund instead of being squirreled away at an item? Well, yeah, I mean, that's what the legislature wrote when they enacted the Hurricane Relief Fund program. They said when it shuts down, the monies go back to the general fund. Did they follow that? No. And what about the spinal tap you talked about? Define how that worked or worked? There are every so often earmarks that are enacted by the legislature off of the tax revenues that come in. For a while, there was a spinal tap on the GE tax to fund education to the $290 million a year. That went away, you know, maybe a couple of decades ago. But there are still earmarks on various taxes to do different things. Like the transient accommodations tax has a bunch of earmarks for land conservation and tourism marketing and to pay for Turtle Bay, among other things. The conveyance tax has earmarks. The barrel tax has earmarks. And this, you know, is kind of disingenuous really because when you kind of divert taxes like that, you really lose track of how much you're making. Well, yeah, who's in charge of that? Who's in charge of looking at these lush bonds and figuring out, you know, how to take the money out, how to change the purpose, how to establish them or terminate them? Who's looking at that? Well, I mean, you would think that the legislature would have some way of looking at that because they need to pass the statute that establishes the fund or terminates it. The agency responsible at the state government under the executive branch of the Department of Budget and Finance and we do know that the state auditor goes in and takes a look at pots of money that each agency has every once in a while, every so many years and writes a report because, you know, of course, the auditor has no power to terminate funds because those are established by law. So they have to report to the legislature which sometimes follows the recommendation and dissolves like unneeded pots of money so they go into the general fund or wherever they're more needed. But sometimes the legislature doesn't do anything about it. I don't understand the spinal tap thing because it doesn't make sense. It's not necessarily related. If you laid this down in front of some objective an analyst, he would say or she would say, what's going on here? It doesn't make any sense. It's all, you know, patchwork. It's a patchwork. I mean, even without special funds, the idea of the spinal tap really troubles me. Why do we need to do that? You know, if we're taxing people, put it in the general fund. When you need the money, as you need the money with a budget, take it out of the general fund. Why assign it to a particular source of revenue? Sounds like the, you know, very clever but lazy. Somebody ought to straighten all this out. It should be simple for a citizen to understand. Here's the reality. You get these guys come in for two years, right? And they do these clever things. The end of two years, you got a whole new bunch of legislators in there. They don't know. They forget. And so it goes on, you know, in the back room. Yeah, so what the legislators say is, or what the activists supporting these funds say, or the agency supporting the funds say is, we need a dedicated source of revenue for this cause or that cause. What's a dedicated source of revenue? One where you don't have to go back to the legislature every year and beg for the money. That's what their definition of it is. Even though they may say something else, that's what they're really thinking. I suggest to you, what we need is a consistent policy where you don't have to go back to the legislature and beg for the money. If a given expenditure is worthy, then the legislature should see that as a continuation of a consistent policy. This is really, you know, a way to ensure the funding to a certain agency or a certain purpose, which may change over time, like the hurricane fund. Can I tell you a short story time? Can I take a little of your time and tell you a short story? Sure. Early part of the 20th century in Maui, the merchants were very concerned with the bubonic plague. They thought that would be very destructive to business in Maui. And so they established, on a county level, they established the Maui Quarantine Fund. Actually, I don't even think it was government. It was just a bunch of merchants created a trust called the Maui Quarantine Fund. And they contributed to it. And they contributed, you know, maybe tens of thousands of dollars. But then bubonic plague went away. There was no bubonic plague. So the funds stayed there. Nobody did anything about it. And a hundred years later, okay, it had hundreds of thousands of dollars simply by, you know, appreciation and interest. And so the question was, what do you do with this? The private fund? What do you do with this? Well, you remember the doctrine of sea prey, Tom? Sea prey? Yes. It's an equitable remedy in the state courts, allowing you to modify the original purpose of a trust. And you had to, you know, satisfy a judge. It was a judge sitting by himself, herself. You had to convince the judge that it was close enough so that the people who were established to trust in the first place would agree that this was a good change. So ultimately... And it's impossible to execute the current purpose of the trust. Exactly. Exactly right. And so, you know, back in the, I guess it was in the 70s or the 80s, a lawsuit was brought in equity for sea prey of the Maui Quarantine Fund. And the idea was, well, it shouldn't just be bubonic plague. It should be public health. That's okay. And that was granted. And the fund then, you know, became much more current and addressed all public health. So it seems to me one of the elements... We're talking about a lot of issues here, but one of the elements is the ability to change the purpose of the fund. I mean, in a transparent way. So everybody knows what you're doing. Don't you agree? Well, sure. My question is, why is there so much resistance to dismantling machinery like, you know, a fund for bubonic plague when the threat that it's supposed to address is no longer present? We have, you know, insurers back in the market that the fund shut down operations in 2002. Why didn't somebody wind it up? And the answer is, and I think the answer is because there are, you know, people around who thought, eh, we got this money. We may as well, you know, save it for... We might use it someday. Yeah. I think what you're saying is, let's leave this money where it is. It's like a quiet bank account. And when we really need it and where we figure it out, then we'll come back to the legislature and say, we want to do a tap on this money and we use it for something else. But that's not good fiscal policy, is it? No, one of the things that you got to have in fiscal policy is you got to know how much, you know, you got to know where your money is. That's one reason why we rail against special funds so much that it's, you know, very easy to hide stuff. You know, you have money and all of these little pockets all over the place. How are you going to keep track of everything? Yeah. Especially when new pockets are created and closed daily, it seems. Is Hawaii alone in this kind of perverse way of treating these pockets of money or is this all over the country? I don't think it's all over the country, but I don't think we're unique either. I haven't really studied that extensively, but I am surprised by the extent to which we have, you know, special funds of this that, you know, this that or the other thing. We have thousands of them. And we have criteria in our state law that says, you know, here's when you establish a special fund and here's when it's not appropriate. And the auditor goes around and tries to enforce this, but every session there are, you know, bills and bills and bills, you know, adding or deleting more spinal taps on these taxes, establishing or deleting special funds. And on top of that, agencies can establish special funds administratively and sometimes do whether, you know, whether or not the legislature wants it. So there are all these moving pieces that not only the legislature, but the auditor has to kind of screwy around and try to grab. So we even know how much money we have in the state. I mean, one of the, I remember when Sylvia Luke, you know, our current Lieutenant Governor, when she came in to be House Finance Chair, one of her, you know, initial projects that she imposed upon herself was trying to find out how much money the state had. And she found it was impossible. Well, okay, that's a subjective conclusion. I mean, it is possible. I remember when Neil Abercrombie announced and announced that he was going to bring in technology to identify, you know, all the things we want to know about state government and make that information accessible to the public. You know, for example, I don't know if you remember during the time that Earl Anzai was involved, I think he was Attorney General at the time, the question arose as to how many employees the state had and nobody could answer it, not even close. Nobody knew how many employees the state had. Yeah. And that's, I think, another symptom of the same problem. Yeah. Because employees can be special funded. You have these pots of money and you can pay employees out of them. Okay. So if you have all of these, you know, moving targets as to where the money's at, you also have moving targets as to where the employees are because, you know, most employees that are on state payroll, you know about them because they're general funded. Some of them are not. So if I make you governor just for the duration of this show, for example, I think you'd be a good governor, by the way, Tom, what would you do to fix this? What kind of legislation would you introduce? What would it say? Well, I think for openers, I would want to go back to, you know, the special fund criteria and try to give them some real teeth. That, you know, that there are, you know, bad things that can happen to an agency if they have a special fund that's unreported or it's being used inappropriately. I think there should be some consequences for that. And then we got to start getting rid of the special funds we don't need. Well, how about the state auditor? I mean, it seems to me that, you know, if we gave the state auditor more resources, more people and we gave him or her this assignment of finding out where they are and making recommendations about either modifying them, like C-Pray, kind of legislative C-Pray, or terminating them and putting the money in the general fund where it belongs. And let's say that costs a couple of hundred thousand dollars. If we achieved hundreds of millions for the general fund, if we took it out of those dark spaces in dark places in the back end of the state government and put it in the general fund, we'd save the taxpayers a ton of money. We would, you know, realize enormous amounts of money, hundreds of millions at least. So to spend a couple of hundred thousand and empower the state auditor to investigate all of this would be a very worthy expense, don't you think? Oh, he's already done that. You know, during the pandemic, there was concern about, you know, catastrophic failure of the state budget because of, you know, tourism drawing up and stuff like that. So the auditor took it upon himself to look at all of the special funds that are recorded in the state-famous system, which is where all of the monies are supposed to be recorded. Note, by the way, that this doesn't mean that all of the special funds are there. It's just the ones that are recorded. So somebody can do something about it. There are, I'm sure, funds that are out there that are not recorded because the agency just doesn't reward them. But he took a look at those special funds that were there at the time and he did in fact conclude that there were millions of dollars available to stabilize the budget if the legislature so chose. And of course the legislature did not so choose. No, they didn't really have to because the federal aid came in and so quickly the legislature was consumed with other matters. Like, you know, trying to spend the money that was there and that they did know about. Really, we got to clean this up. You know, it's a kind of collective corruption to let it go, not do anything about it year after year. These special funds probably draw interest of less than a percent. It's a tremendous waste. And then they come up with new taxes, taxes all over the lot that are just piecemeal and these piecemeal spinal taps. And you know, it's really hard for any human being to understand what happens. The first thing we got to do is terminate the special funds and put all of that now and in the future in the general fund. And that means a structural overhaul of the whole notion of special funds, doesn't it? Yeah, I mean, we have to kind of get rid of the concept of so-called dedicated funding. The way our government system is supposed to work is our executive branch spends our tax money and accounts for it to the legislature so the legislature can decide what to fund. I mean, that's how our system of government works. And all of this special funding is by and large is some version of the process. Now, there are sometimes when you legitimately need a special fund, you know, when the feds want to see it. Okay, like the Federal Highway Fund does have requirements that we have a state highway fund, for example. So, yeah, I mean, there are legitimate uses for it, but if not, it really is office getting the budget and kind of blurring the power lines between accountability to the legislature and therefore to the people. Yeah, accountability is a big word here in this analysis. But you know, if you were governor, it sounds to me like what you would do is you would take the list from the auditor. You would add additional special funds that weren't on that special, you know, printout. You would find, you would ask the auditor to find all the special funds one way or the other. And then you would take that and for the most part, except when required like the highway fund, you would terminate them and spill that money, all that money into the general fund. And then you would have another part of that bill would say, let's not do this again. Right? Isn't that what you would do as governor? No, that sounds like a great idea. With the legislation you go along with that, I don't know. Well, it really depends on two levels. I mean, one is the governor himself has to pay some attention to this. And two is, you know, the leadership in both houses, they have to see it the way we see it. They have to see the special fund thing as a perversion. And unfortunately, this is not a campaign issue that they run on or that the rank and file legislators run on. So that leaves it, am I right? That leaves it in the hands of the media. The media and the special interest groups and the special interest groups are going to say, we need the special fund. We need the dedicated funding. You know, we don't want, you know, the agencies to go through the trouble of going back to the legislature time and time again for what, right? So they're going to argue, argue, argue that we need this, we need this, we need this. You know, it's so funny if you, if you walk the halls, starting in the middle of February, actually in the middle of December of any given year and through the legislative session, it would be crowded. The halls are crowded. And the people who are there are seeking special consideration from the legislature. I mean, do you know a business or a nonprofit accepting think deck, by the way, that actually does not walk the halls. That does not come with their hat in their hand asking for money every single year. I mean, half the business community is there in the halls asking for money. Well, the foundation doesn't. I mean, my foundation doesn't. We don't accept government money. Well, we don't ask for government money. Yeah. What I find interesting is, you know, you say, well, all those special interest groups that want to preserve their stream of income from the state. And yet, still, we have all these people walking the halls, a lot of them are special interest groups, some bigger, some smaller. And they, they absolutely require state funding to continue in existence, which is really too bad. That's a whole scenario, which doesn't seem appropriate. And so when you say that they're they're asking or they're there lobbying for continuation of special funds, well, my goodness gracious, there are so many of them. There's so much money involved, not only in special funds, but in, you know, an annual funds that really it's got to be cleaned up. And some of them, you know, I don't want to tell you anything you don't know. Some of them get the money from the legislature because of twist. And I am not going to define twist is an arm twisting. I'm not going to define it. Okay. Well, I think, I think we all know what you mean. Yeah. So, um, okay, let's continue to follow this time because I think this is an ongoing problem. I don't think the media covers it enough. I don't think the state auditor, you know, had had the respect you should have had in making that that list that report. I don't think the legislature was listening then or now. And it really depends on the leadership that is the governor and the two leaders in both houses to actually do something about this. And you can say this is low on the list of priorities. We have so many other distraction points that we have to handle. But after a while, you really have to get to it, don't you? Well, I mean, a lot of our distraction points as you call them, need money. And to figure out whether to appropriately fund them or how much to appropriately fund them, you got to know how much money you have. And we don't. And we don't. Truly and simply. Well, Tom, talking to you always makes me happy. I don't know how. I'm going to take a break now and soak my head for a little while thinking about this problem, which doesn't go away. You're crying towel is right there. Thank you, Tom. Tom Yamajika, president of the Tax Foundation of Hawaii, helping us understand what is going around the square building and what is going all around us as taxpayers. Thank you so much. Thanks for having me on the show, Jay. Mahalo.