As the press peels back the onion on the issue of budgeting practices and special funds, it is important to see why this is a contemporary problem and why it has not been the focus of anyone’s attention
Conventional wisdom
Our state budgeting practices have not changed since the 1970s. The state’s fiscal condition has always focused on the general fund since that is where the fiscal flexibility lies. The General Fund, made up of our major taxes, is used for a variety of purposes and is allocated under rules provided in the constitution. The governor and the legislature have a wide amount of discretion. Special funds have revenue from taxes and fees that are assigned for specific purposes. A significant amount of cigarette taxes and taxes on gasoline are set aside for special purposes, fee revenue from water quality activities are set aside for environmental regulatory purposes, etc.
This is the old model. Over a 25 year period the composition of state spending did not change very much. About 15 to 20 percent of state spending was from special funds and the remainder from the general fund.
Why transparency of special funds is important
Over the last five years a significant amount of general fund revenue has moved into special fund accounts that have changed not only the composition of the state budget but how we look at the state’s fiscal condition.
We have passed the 30 percent mark as far as how much state spending is attributable to special fund. In addition a significant amount of special fund money is earmarked by the legislature and governor to move it out of the general fund category. This blurs the old distinction between special funds and the general fund.
In the 2012-13 cycle, the state plans to spend $130.7 billion, of which $91.3 billion comes from the general fund. It is the other $39.4 billion that deserves scrutiny.
How can we get more transparency and accountability into the special fund budgets?
First, the state’s fiscal condition needs to account for the condition of special funds. Although some funds are dedicated (gas taxes are earmarked for transportation) and some are held in trust for specific purposes (court fees for Judicial budgets), many others are simply there because the legislature and the governor chose to assign what is normally general fund revenue for a specific purpose (20 years of state-local realignment). Each of these funds plays a role in the state fiscal condition. Remember that special funds are now 30 percent of state spending.
Second, improve transparency: bureaucratic answers as to why budget makers did not reconcile the state Controller’s cash numbers and the Department of Finance budget numbers is not an acceptable answer. An administrative system for tracking cash balances in special funds and relating them to managing the budget needs to be on the administrations list for fiscal improvements.
Third, improve accountability: the Assembly and Senate budget committees need to be held accountable for their primary task, which is keeping administrations honest about their budget numbers. In the mid 1940s the legislature was so frustrated with the lack of executive transparency that they created the Office of the Legislative Analyst so that they would have an independent source of information on state budgeting.
There is failure of the legislative institutions to keep administrations honest.
Fred Silva is the Senior Fiscal Policy Advisor at California Forward
