Special funds run surpluses amid general fund deficit

California’s perpetual budget battles center around the $85 billion “general fund” used to pay for schools, prisons and health welfare services.
But separately there are more than 400 little-noticed accounts called “special funds” that together will spend nearly $30.5 billion in 2010-11, according to Department of Finance records.

And unlike the deficit-riddled general fund, most of these special funds have healthy reserves. Those savings accounts combined will have $7.9 billion in savings tucked away as of June 30.

As a result, these special funds have become a go-to trove for cash-starved governors and lawmakers despite the added costs of mandatory interest, due dates and resistance from beneficiaries that come every time money is shifted from these pots into the general fund.

Although some accounts are safely behind legal locks, the state nonetheless has been able to work deals to borrow billions over the years . The general fund owed nearly 100 of these special funds $2.65 billion as of Dec. 30, 2010.

Of that, nearly $500 million comes due in the coming months. It will be repaid in the fiscal year, under Gov. Jerry Brown’s proposed spending plan.

But, at the same time, Brown’s budget separately taps special fund reserves for another $2.5 billion in loans. Most of that was made necessary by his refusal to sign off on then Gov. Arnold Schwarzenegger’s $1 billion proposal to sell state office buildings and then lease those back from private owners. In taking the state property off the market, Brown argued that his plan will save taxpayers more in the long run.

Brown spokesman Evan Westrup said that the administration’s borrowing is “on a limited basis and only as a last resort to bring the state budget into balance.”
For Brown and pressured lawmakers, it often comes down to a frustrating choice . They can either tap special fund reserves or cut even more deeply into important programs that rely on the general fund for support.

“It’s a policy call for the Legislature,” said Mark Newton, who tracks environment-related special fund accounts for the nonpartisan Legislative Analyst’s Office. “The Legislature is reflecting its priorities.”

Why do the special funds run surpluses while the general fund seems to be in perpetual deficit? One reason is that they rely on dedicated revenue sources, and their managers know that they cannot spend any more money than comes into their coffers. The general fund, however, finances many programs that are entitlements – they are required to provide services to whoever is eligible and needs help, whether the money is in the treasury or not.

Special funds may become an even more attractive target in the coming weeks as Brown and lawmakers wrangle to balance the budget by June 15. The projected deficit is $15.4 billion over the next 14 months out of the $85 billion general fund.

That will take maneuvering, however.

“The tricky legal issue is whether the general fund can tap special funds and redirect them to some other use,” Newton said.

For example, with certain special funds, lawmakers are not allowed to take the money outright, because the funds come from regulatory fees and the money is held “in trust.” It can only be borrowed.

Several transportation related special funds are completely off-limits. That’s because voters weary of state raids on various local funds – as well as transportation dollars – banned future shifts when they passed Proposition 22 in November.
Other special fund accounts are not as tightly guarded. The state can divert general tax money from other types of special funds and the money doesn’t have to be repaid.

So how did the state come to create these special funds, what are the purposes and how are they funded?
The accounts mostly have been shaped by legislation, usually to raise money and administer selected programs. Goals and funding sources are routinely spelled out in the law, along with interest and repayment schedules. Primary sources of revenue are general taxes diverted to those funds, regulatory fees, licensing charges and voluntary contributions.

“They run the gamut,” Newton said.

A large number of the special funds are for environmental regulations, from safe water to safe mines. That money comes from industry fees. Transportation programs, using mostly gas taxes, are another major collection of special funds.

Californians often voluntarily chip in. Motorists who buy special license plates, such as the whale tale, and use their tax form check-off to contribute to specific causes, such as breast cancer research, are sending money to those special funds.

Consumer protections are also big. Special funds are used to regulate various professions, from acupuncturists to contractors to opticians. There is even a special fund related to dying; it pays for cemetery oversight.

There are funds involving charity bingo, ensuring safe wine, running “welcome to California” centers and protecting car wash workers. Those, too, are filled by mandatory charges on related businesses.

Off to snowshoe or cross-country ski? Sno-Park maintenance is taken care of by fees that are part of a special fund. Enjoy off-roading? Special “in trust” fund status protects off-road vehicle registration fees. But, thanks to a loophole, lawmakers were able to take $10 million in general gas tax money that usually goes to off-highway vehicle (OHV) parks. That money, because it was diverted before being deposited into the special fund account, will not have to be repaid.
The nature of special funds also explains some head-shaking in the Capitol. Special fund programs seem to roll along even as the state slashed billions of dollars used for education, parks, libraries and health and welfare services for the needy.

That said, the recession has taken a toll in some places. Most notably, the beverage container recycling program has been revamped due to financial pressures. Programs used to regulate construction are seeing smaller checks with the industry in the doldrums.

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