California Goes Deep Into Special Funds

Utility customer funds are not a piggy bank!

California drivers pay fees for smog checks, vehicle registrations and new tires, all supposedly for programs that benefit roadway use.

Consumers pay fees to recycle beverage containers, televisions and computers. Doctors and accountants pay license fees to regulate their industries.

But for more than a decade, the special funds collecting these dollars have served a second purpose: helping California pay for schools, social services and prisons that are supposed to be funded by general taxes.

California has 560 funds deemed “special” because in theory they’re walled off from general state expenditures. In the face of two recessions, however, California reached deeper into those funds for purposes that fee payers never intended. The state now owes $4.3 billion to special funds, more than five times the amount owed in 2008.

State leaders argue that special funds have enough extra money to pay for more critical state needs. Some special fund reserves grew after the state imposed furloughs on all state workers starting in 2009.

But program advocates say the borrowed money should have gone toward intended uses like reducing pollution or better enforcement of health care fields. Or, they suggest, it should have gone back to consumers and professionals through lower fees.

“Any of these funds set up by ratepayer money needs to be spent on its intended purpose,” said Mark Toney, executive director of The Utility Reform Network, a consumer advocacy group that has watched the state borrow $296 million in telephone-related surcharges. “The purpose is not to serve as a (state) piggy bank.”

Gov. Jerry Brown says the state will eventually repay $4.3 billion in outstanding special fund loans with interest, a promise that assumes voters will pass tax hikes in November. But state officials never retired $448 million in special fund loans from 2002 and 2003 even during good times. And $1.3 billion in loans have no repayment date in state law.

Watchdogs say lawmakers consider repayment a low priority, especially compared to demands by education and social service allies seeking to reverse past cuts. The Department of Finance says it must repay money whenever a program says it needs the funds to operate.

Edward Howard, senior counsel with the Center for Public Interest Law, said that promise is hollow. He said the Department of Finance crafts general fund budgets, yet also has say over special-fund expenditures.

“If you know you’re going to be using the special funds as a piggy bank every year, then you don’t allow the special funds to spend their money on things special funds are supposed to pay for, like staff and enforcement, like consumer protection,” Howard said. “You have an incentive not to approve expenditures.”

Senate President Pro Tem Darrell Steinberg, D-Sacramento, emphasized that special fund loans are a small part of solutions that leaders relied upon – $1.1 billion in the current $91.3 billion general fund budget. He said Democrats resorted to them in part because they cannot persuade Republicans to pass taxes.

“One person’s gimmick or unpopular budgeting strategy is another person’s genuine effort to avoid deeper and deeper cuts to education, higher education, health care and public safety,” he said.

Brown and lawmakers are examining all special fund accounts after the Department of Parks and Recreation acknowledged it shielded nearly $54 million in two special funds. Finance will release an audit today showing whether similar surpluses exist elsewhere, possibly furnishing a future budget solution.

“Every year at Finance, we had gone through a drill scouring all of the special funds to see if there was money we could get,” recalled Mike Genest, who served as finance director under former Gov. Arnold Schwarzenegger when the last recession struck.

In the last two budgets, Brown and lawmakers relied on $3.9 billion in new special fund borrowing and extending loan repayment dates.

“If we don’t borrow from the special funds, we cut four or five billion out of basic stuff,” Brown said Thursday in Oakland. “It’s a good source.”

Special funds survived the recession better than the general fund, another reason state leaders have little concern about tapping them. The Department of Finance estimates that special fund spending will reach $39.4 billion this fiscal year – 48 percent higher than in 2007-08. Special funds now make up nearly 28 percent of $142.4 billion in state spending.

Some funds have managed fine. Though the state borrowed $107 million in electronic waste fees, the Department of Resources Recycling and Recovery has enough left to lower fees in January on computers and televisions.

But general fund borrowing has exacerbated problems with the California Beverage Container Recycling Fund, said Mark Murray, executive director of Californians Against Waste.

When the recycling fund was flush, state officials borrowed three times since 2002, with $173 million still owed. But recycling rates skyrocketed from 58 percent of containers a decade ago to 85 percent in 2010-11, draining funds. The Legislative Analyst’s Office said in April the fund was headed for insolvency by 2014-15 before changes came in June.

“It’s a little bit of the Wild West out there in terms of borrowing from these special funds,” Murray said. “The Legislature and governor can set their own rules, and sometimes those end up being shortsighted.”

In the past five years, the state hiked fees and traffic penalties on motorists to raise money for court construction, clean energy technology and departments like the Department of Motor Vehicles and California Highway Patrol.

The state then borrowed against the same special fund accounts to balance its general fund budget. In one case, the state borrowed $24.6 million in 2009 from the Alternative and Renewable Fuel and Vehicle Technology Fund, which lawmakers created in 2007 with new fees on car and boat owners.

“Borrowing is a euphemism for the government taking money,” said Senate Republican leader Bob Huff, R-Diamond Bar, whose caucus has long criticized the practice as a backdoor tax hike. “They’re not surplus funds. In some cases, they have raised fees, then turned around and depleted the funds. Consumers aren’t getting what they’re paying for.”