While California struggles to pay its bills, state's 'special' funds flush with cash

http://www.insidebayarea.com/california/ci_21183014/while-california-struggles-pay-its-bills-states-special

As California uses one arm of state government to ax services and ask for new taxes, a seldom-watched arm is raking in cash hand over fist.

A review by this newspaper found that the state's 500-plus "special funds," like the ones at the center of this month's hidden-money parks scandal, have nearly tripled their spending since 2000 as highly scrutinized general fund spending has barely budged.

California now spends nearly $40 billion on special fund programs, more than every state except New York and Texas spends on its entire general fund. The special fund money pays for an amazing array of services, from major priorities such as mental health, hospital construction and highway repairs to obscure things like bingo halls, acupuncture and midwifery.

Fees like the cost to enter a state park or the 5-cent recycling fee on a soda can -- not your taxes -- fuel the state's special funds. Yet more and more, the state is borrowing billions of dollars from these special accounts to balance the general budget used to fund such things as education and prisons.

"I think most people in their own budgeting would not do that -- if they had a car payment and a house payment they wouldn't borrow from one for the other," said state Sen. Jean Fuller, R-Bakersfield, a Senate budget committee member.

Usually out of the spotlight, special funds make up one-fourth of all state spending and are now receiving rare scrutiny and will be the focus of legislative hearings after finance officials found $54 million in funds hidden in two state parks accounts. An analysis by this newspaper showed the state's books for all the special funds were off by $2.3 billion, a discrepancy finance officials are investigating.

The discoveries could result in political headaches for Gov. Jerry Brown as he tries to convince voters in November that the state needs tax increases to avoid massive cuts to schools and social programs.

"It just completely erodes any kind of trust or faith that the public should inherently be able to have in their governments," said Republican strategist Mark Standriff. "The public looks at this and says, 'Who's minding the store?' "

The state has drained nearly $4 billion in special fund balances to pay its general fund bills, a $1 billion jump over last year, even though the special fund fees are earmarked for other things and are supposed to be paid back.

The state chose to "borrow out of the left pocket to make up the shortfall in the right pocket," said state Sen. Joe Simitian, D-Palo Alto, also a member of the budget committee.

The special funds are supposed to be raided only when they have adequate reserves, but that's not always the case. For instance, in 2010 the fund that pays Californians for recycling their bottles and cans ran dry, forcing many supermarket recycling centers to close, after the state borrowed $400 million from the account to balance the general budget.

Lawmakers concede that special funds have become more popular because voters do not trust politicians to spend their money wisely, feeling more comfortable with fees earmarked for specific uses.

"But it should not be the role of government to stockpile (special fund money) to balance the general fund budget," said Assemblyman Jerry Hill, D-San Mateo. "It seems we may have abused the system by accumulating more funds than necessary to meet the needs of those departments, and if that's the case maybe we're charging too much money."

Since 2000, special fund spending has jumped 180 percent, from $14 billion to $39.4 billion. During the same time, the general fund has increased a mere 17 percent -- more slowly than inflation -- from $78.1 billion to $91.3 billion.

Another large piece of the state spending puzzle -- money borrowed by issuing bonds -- has more than doubled during that period, but at $11.7 billion still pales in comparison to the size of the special funds.

One reason the funds have grown is the increasing reliance on local governments to pay for services that used to be the state's responsibility, like last year's transfer of inmates from state prisons to county jails. When the state shifts the burden for providing more services to local governments, it transfers general fund money into new special accounts that cities and counties tap into.

Deputy legislative analyst Jason Sisney said the general fund relies on tax revenues that can swing wildly during economic ups and downs, which helped lead to the severe budget crisis over the past several years. The special funds, however, are mostly stable.

As of the end of 2011, the state had borrowed $3.6 billion leftover in various special funds to balance the general fund -- compared with $2.6 billion at the end of 2010 -- adding to what Gov. Jerry Brown coined a "wall of debt." The number of loans has increased from less than 100 to nearly 150 in a year, and many of them don't have dates for repayment.

On the one hand, borrowing from special funds has been "very important for helping the state to continue to provide critical services," Sisney said. "But on the other hand, the loans are going to have to be paid back eventually."