 Yeah, special funds squirreling away taxpayer money here on Talking Tax with Tom, Tom Yamachika. Good morning, Tom. Good morning, Jimmy. Thank you for having me on the show. Isn't it an interesting way to title the show, Squirreling Away Money, because we have no squirrels here in Hawaii? We're the only state of the Union that doesn't have squirrels in Hawaii. Let's keep it that way, because they can be a real pest, you know. They're cute, but they can be a real pest. And this is a real pest. You know, we have the balanced budget provision in the Constitution, and we're supposed to be accounting for taxpayer money, and yet we really can't answer the question, how much money you got? It's like, you know, when we couldn't answer the question, probably still can't answer the question, how many state employees you got, same thing. And so here we are, you know, worried about fiscal policy, worried about how we're going to pay all these extraordinary, liquidated and unliquidated and anticipated liabilities and handle all these very difficult and costly challenges to the state. But we don't know how much money we have. And this is a real problem. How did it get to be that way, Tom? Well, I think we're looking for, you know, a long, long time ago when these budget restrictions went into effect, you know, the balanced budget amendment and so forth. This is, you know, from the 1978 Constitutional Convention, you know, every time you make a rule, somebody wants to make a loophole. And this is what the loophole is. Because the balanced budget provisions in the Constitution only apply to the general fund. So it stands to reason that if you have other little funds that are, that's not the general fund they, they don't have to be dealt with. And besides, due to the nature of how they're created, and let me, let me, you know, get to that, you know, right now, agencies love them. Now what special funds are? Are little pots of money set aside for, you know, specified purposes, usually specified in the statute that's creating them. They're not part of the general fund. And they can be used by the expending agency, even if there is no current legislative appropriation. So they do not have, you know, the agencies, you know, typically go to the legislature every year. They beg, they plead, you know, for the continuation of, you know, sustenance to carry out their mission. And our legislators have a constitutional responsibility to scrutinize the budget request to see if, you know, what they're asking for does in fact benefit the people of Hawaii and is in accord with our current priorities, right? And that's what they're supposed to do, but the special funds get around all of that. Are we allowing this or are the states have the same arrangements? I think other states may have it to a lesser degree, but in our state it's gone out of control. Okay. You know, and of course we're not talking about squirreling away the monies. We're talking about mongoosing away money. We got lots of mongooses. You said it was small pots of money, but I think it's probably large pots of money and it's at the discretion of pretty much the department head and the governor doesn't have much to say because he didn't even know what what happens and the legislature doesn't have much to say and they may or may not take it into account in creating the budget for a given year. They nobody knows. So the result is you have everybody on his own pile. And this is this is it sounds to me like it's really a bad idea for fiscal management of the state. I remember Linda Lingo when she first got in office, she was saying, this is terrible what we have here. This is 20 years ago, right? This is terrible what we have here. We have to cut out these special funds, but she was never able to do it or she didn't really try. I don't know the answer to that. But the legislature would have to act, wouldn't it? Yeah. And let me let me kind of show you how far this mushroom data control. You know, when we were in the midst of the pandemic in 2020, you know, you're a good friend of mine, the state auditor, he took it upon himself to see if there were special and revolving funds that had idle pots of money in them. And what he found after reviewing 1877 special and revolving funds, he found that 257 of them containing more than $2.28 billion with a B had balances significantly exceeding expenditures and other outflows. The expenditures of that department, which is ridiculous, that's what I call rainy day plus. Oh, yeah, and of course, that of course only counts money and funds that were properly reported to the, you know, the Department of Budget and Finance, the auditor and the other bean counters sometimes that of course doesn't happen. In the same year, the state auditor took the Department of Debate, you know, D bed, the task for not reporting $6.5 million in general fund monies. And this followed closely on the heels of a 2019 report where the auditor found $1 million in non-general fund monies administered by the Attorney General. Now, you know, what I say to you is, look, with the state's top law enforcement agency delinquent at its own reporting, it's easy to imagine the existence of other unreported funds. It's just a question of how many, you know, where have the mongooses hidden them? This makes the budget process, you know, ridiculous. Why? Why? With all this billions of dollars out there, and at the same time, they're, you know, feeding in all these calculations and the council on revenue information and all that to determine what the budget is in a given year. And for that matter, to determine what, you know, changes should be made in the tax law, that they don't have it all on the table. It's under the table. It really pulls the rug out from under the regular visible process that is known to the legislature and the taxpayer and the business planners in the community. It's a mockery, isn't it? Well, you know, it might not be so bad if the only source of revenue could be tracked, you know, and it all came from the general fund and it was distributed somewhere else. At least then, you know, we would know what the inflow was and we could take plans accordingly. But the problem then is that there are earmarks on the tax laws, which means that some of the collections don't even go to the general fund. They are diverted to feed these special funds first and the, you know, the general fund gets the sloppy seconds. Now, how does that happen? Is this in the budget or in the law? It's in the tax law. The transient accommodations tax, for example, currently feeds five special funds for more than 20 million. It used to be, yeah, for more than 20 million. The conveyance for tax feeds two for 43 million. The environmental response to energy and food security tax on imported fossil fuels, which we call the barrel tax, is parceled out to four special funds. And of course, there are others, lots of others. The problem is that the barrel tax is probably a good example and you and I have talked about that before. You created for a given purpose and you think you did a great job, you know, you're going to help green energy and what have you. And then the legislature sees the raw meat out there and sees the, you know, the cash and it starts diverting it to other funds, so other purposes. And so what happens is the, you know, this special silo of money, which was intended for A, gets to pay B. And it's sort of a grab fest. And C and D and E. Thank you. Yeah. So, I mean, this is not the way the budget is supposed to work. The budget is supposed to be a rational, analytical, carefully researched process of knowing how much you're getting in, how much they need, how much you're going to give them. And we don't have that. This is Swiss cheese around that. So, you know, it strikes me that it hasn't been fixed, it hasn't been changed, even though it has been known to the legislature and to the governor for 20 years. Why not? What is the, you know, the interest group, if you will, or the interest of the legislature in general, not to fix this? Well, the departments are always telling the legislators, no, nothing's wrong. You don't have to fix this. This is all perfect and good and clean. And the interest groups are coming in and they're looking at the special funds that are, you know, for their own interests, right, for example. And they say, we need a dedicated funding source. We absolutely need to have it, otherwise it's not going to happen. And, you know, in large part, they're right. Well, yeah, I mean, this is a commentary on the lack of flexibility of the fiscal arrangement in the state. If the ordinary general fund systems were working well, you agree with me? If the ordinary general fund systems are working well, we wouldn't be having this conversation. You wouldn't need to have any special funds. Am I right? That's right. I mean, if the budget was carried out in a good orderly fashion, the agencies were doing what they're supposed to, and they're telling the legislature about, you know, the benefits they're applying to the community and so forth, then, you know, in the absence of a, you know, a big emergency, that should be perfectly fine and that's how our government is supposed to work. But that's never enough for some people. Yeah, well, and then it goes like topsy. You know, if you turn the other way, if you ignore it, then it grows and it goes again out of control. I would imagine that even if you fixed part of this, if you looked again in five years, it would be out of control again. So what did the state auditor suggest in his audit report, what, 2019, you said, what was the solution? Well, in 2020, again, the auditor's basic mission was to try to find, you know, where all these pots of money were in this, you know, special fund matrix, so that some could be, you know, brought back to the table to pay the real needs and emergencies that were occurring at the time, you know, at the time we were in the middle of the pandemic, okay. The government had dried up, TAT was through the floor, almost close to zero. And there were a lot of people hurting, but then, you know, the federal government came and bailed us out and basically lessened the appetite, you know, to go to do these, you know, sharpen the pencils and go attack those special funds. So, you know, I guess it, I have the feeling that there's a lot, from what you say, there's a lot of money that's squirreled away here. And if we were able to recover that money, and I say recover because I think it's been hidden from public view, if we were able to recover that money and put that money where arguably it belongs, the general fund subject to the budget and, you know, and the governor and, you know, the people who distribute the general fund, then we have extra money, lots of extra money, billions of extra money. And we could either, A, pay our bills more promptly and do the projects we should be doing and, B, we could probably reduce taxes. Isn't that all the case? Sure. I mean, in order to do proper budgeting, you got to know what resources you have. If you don't, that makes it all the more difficult to get your arms around everything and make sure the resources are being parceled out properly. So what would you do, Tom, would you just terminate them? You know, whatever the legislation was that created them, you repeal it or you terminate the fund and would you leave it there and in the fix, I mean. And then on the other side of that, OK, so there's millions, billions in these funds. What do you do? You have legislation that pours it all into the general fund. And do you need certain special funds? Do you need to keep them to certain special contingencies or can you terminate them all? There are some that you will need. Like, for example, you'll need the highway fund because one condition of getting federal highway money is that you have a dedicated fund to to receive the federal highway aid, among other things. So there are a few that you're going to need. But, you know, but 2000, give me a break. I mean, there's no way you need 2000 of these things. Well, you know, like we're on the cusp of some climate change threats. Right now, it's a beautiful day here in Hawaii, but, you know, every every beautiful day is one day closer to extreme weather, thanks to climate change. And who knows what else? I mean, there's, you know, this sea level rise. There could be some serious fires. I mean, just look at the main look at the rest of the world is threatened by by climate change. And of course, that affects, you know, not only our daily convenience, but it affects tourism. So it's it's a critical threat. And so this could happen very suddenly. We can have a hurricane any day or any September coming soon. You know, don't we need a fund for that? Don't we need a really big fund for that? We have one. It's called the General Fund. No, I'm very serious. Hey, all the other bills, so Tom. Yeah. And that's why it's big. It's it's there, you know, to to pay all of our bills and and, you know, deal with all of our contingencies. I mean, yeah, you can do some accounting things within it. But, you know, that's different from, you know, taking it out of the legislative purview, taking, you know, taking it out of the debt limit, taking it out of the balanced budget requirements and so forth. OK, I mean, there are there are all kinds of things that the, you know, the people of Hawaii wrote into the Constitution that that we wanted and expected the legislature to follow. And did they do it? No, they got workarounds. They they got loopholes. They got they got a whole bunch of mongooses roaming around. That's that's the most troubling thing. You know, the legislature says, OK, we we had hearings and we thought about it and we need to do this project. And so, you know, we're going to create a fund or some kind of system to fund it. And then in the middle of the project, the legislature chains, everybody forgets what they were doing. And the project, you know, is delayed or doesn't get completed for some reason. And that's embarrassing. And how do you plan for a project that is multi session and multi, you know, political cycle, multi governor and all that? How do you ensure that they won't abandon, you know, the cost end of a large project that takes, you know, a decade or more to finish? Well, I mean, you know, we do that all the time. We have, you know, large contracts. Once once the contracts are signed, the state is legally obligated to provide the funds. And, you know, certainly, legislatures can be told this much is obligated. I mean, that's what we do for debt service all the time, right? And we borrowed money from the bond market or, you know, other other people who had money. We got to pay it back. No ifs, ands or buts. We got to pay it back. And that comes out of the general fund. Generally speaking, yeah. I mean, that's that's the the biggest expense that the budget and finance department has to deal with is his debt service. Well, you know, that that seems like a natural thing to do. You borrow the money. So now you know, you have the money you pay the cost, whatever it is. And then you pay the loan back. And because you're obligated on multiple levels, you're obligated. And you take that out of the general fund and there's no ifs ands or buts about it. You have to do it. You have to reallocate a debt payment. You have to re re re re appropriated every year or whatever in order whatever the cycle is to authorize the payment. Or is it something that everybody recognizes has to be done and no further legislative action is necessary? I think it has to be in the budget, but everybody does recognize that it's necessary. OK, so so so what's wrong with having large contracts go under that under that rubric? I mean, they should be. Well, we have to. The problem is, you know, what happens when there's a big you know, real emergency like the pandemic? OK. You know, things have to be curtailed. And and the legislature is there to make those tough calls. As well as the governor. Well, you know, the thing about the balance of budget troubles me. I mean, for example, and people say that the session this past year, that's the session in the spring of twenty twenty two. They spent a lot of money. They spent more money than you would think. They gave it away a hundred million at a time. It was it was lush. And so, you know, the balance, the budget, the constitution suggests that they need to do that. They got a balance. And I wonder if we have an appropriate system for a reserve. Who knows what it might be. It might be covid again. It might be monkeypox. Who knows. Yeah, we do have what's called a rainy day fund. Yeah. That's that's already provided for in the Constitution. Yeah. Is it enough? Well, that's that's that's that's the thing, you know. We've got hundreds of millions in there. Should be enough. For what? Yeah, that's that's a good question. I mean, a good storm would cost billions, wouldn't it? So let me get a handle on that. So you say hundreds of millions by virtue of a rainy day fund in the Constitution. OK, well, that's a good good idea. What what is the state budget in total? I mean, ordinary operating and debt payment expenses. What are we talking about? Oh, 15 billion. 15 billion. And and, you know, you said that there were billions in the special funds. Yeah, a couple billion. So what what do we need to do to be more fiscally responsible with our 15, 15 billion dollar budget and the amount of the special funds and the amount that we would call on taxpayers to contribute every year? How do we rationalize this? Well, I mean, again, rationalizing it. Are we rationalizing it and what do we need to do to improve it? Well, again, you know, that's what are what are let us say we're supposed to be for, you know, we're supposed to be. Figuring out, you know, what we need to spend as opposed to what what might be good or, you know, what would be nice to have. And that would then determine how much, you know, each of us as taxpayers need to pony up to make it happen. But but I think there are too many, you know, fiscal artifices, budget stratagems, all the all of these devices that that make it, you know, impossible for one human mind to figure out. Hey, how much money do we have? Well, yeah, and of course, you know, politics is politics is people. Politics is often emotional and not particularly rational. So you give away six hundred million dollars to the native one caused this past legislature, but we don't pay the obligations to the employees' retirement system. But why is why is that rational? How do we how do we make sure that we are balancing the budget, but also, you know, covering our expenses and not letting anything, you know, fester? This is problematic. And, you know, have the have the candidates running for statewide office as any candidate been focused on this, because it seems to me this is a high priority thing, not necessarily in the sense that we're suffering any more than we want to suffer right now today here in July, but that anything could happen to throw us off and then it would be crisis of the candidates saying anything about this. Is anybody talking about this? Well, not that I'm aware of. I mean, you probably follow it, follow it more closely than I've been. I mean, my involvement so far has been kind of cringing at the prospect of a visitor green fee, because it's unconstitutional. And I'm not sure that the the the candidate who proposed it recognizes that. What is it? The visitor green fee. There was a there was a proposal by one of the candidates to charge every visitor to the state 50 bucks. And what a visitor is defined in some way. Non resident. Yeah, you're right. There are legal issues, constitutional issues about that. But a pie in the sky kind of thing. The chances of that getting through and not very great. And it's offensive to the tourist industry. Here we are struggling to bring bring back, you know, the tourism numbers and we would hit them with another tax. Really? Yeah, I mean, they were saying, oh, you know, you know, Tahiti or whatever it is has has one. Palau has one. Well, yes, they're not subject to the U.S. Constitution. Well, if we want to have the tourism numbers that Tahiti and Palau have, just keep on going and we can do that. Most of the numbers we don't really necessarily want to have. Yeah, I mean, that's that's one problem. There's a love, hate relationship with the tourism, you know, the tourism industry. But the other the other thing, and I always I always bring this up is all of this is related to the state economy in general. And that means to the sectors of the economy that that make money and that pay taxes. And I'm not aware of any of any major bill or initiative that is dedicated to expanding, diversifying the economy. Are you? Uh, I'm not sure. Yeah, OK. That's kind of doesn't it doesn't solve the whole problem. You know, like if I if I sloshed money over this whole conversation, if I had an economy which is making money, hand over fist, when you know, an economy that went into biotech, for example, the way San Diego determined that it would do as a matter of policy and legislative action back in the what, seventies, I guess, or the eighties. And then all of a sudden you have a community that's making and over fist money and that alleviates a lot of these fiscal problems. Wouldn't that be something that would be helpful? Yeah, if we if we could muster the the political will and the consistency to do it. And that gets sidetracked by other, you know, other interests that that I have come up in the meantime. Yeah, why are you giving that that entrepreneur money? Why why don't you give me the money? I want the money. Why are you favoring these young kids who start businesses? I want the money. Yeah, or, you know, we got to save the trees or we got to save the baby seals or, you know, we need to repair the aging infrastructure at the airport or at U.H. Or in our public schools, we need to give teachers more money. We need to give other public workers more money. And, you know, the list goes on and on. So how do you determine the best priorities? This is a hell of a question to ask you when we're almost out of time. Well, I don't know. I don't think it's possible for one person to do. But you need to determine the priorities. Yeah, yeah, well, well, both. I mean, I think I think you need to have, you know, some vision and leadership that's exhibited by the people at the top. And then, you know, they need to kind of coalesce around certain goals and and and execute on them. We need another government structure to determine the priorities. No, we already have it. We just need to use it right. Yeah. OK. Well, I personally, I wish that the candidates they want to really make their mark, you know, for a better future should talk about these kinds of things. I suppose they treat it as, you know, it's not appealing, maybe boring to worry about fiscal policy and priorities. But really, and they've got to do that. Do you agree with me on this? Oh, yeah, I mean, it's it's probably more more appealing to, you know, hold up your opponent's dirty laundry. But it's kind of more exciting to do that. But but you really got to think of how you're going to put your house in order. Yeah, I'm OK. Well, let us together urge them to cover the ground on this because going forward, we are likely to have ups and downs in state obligations and crises. And we better be ready for it. And we better be ready in a more rational way than through special funds. And thank you. Thank you very much, Tom. Enjoy this discussion, enjoy all these discussions. Look forward to our next one. Aloha. Aloha. Thank you so much for watching Think Tech Hawaii. If you like what we do, please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram, Twitter and LinkedIn and donate to us at thinktechhawaii.com Mahalo.