Only in government is borrowing considered a legitimate way to balance a budget. In California it has become standard operating procedure.

To address this growing problem, the state’s Special Funds were the subject of a hearing last week in the Legislature, which I attended. The 500-plus special funds have been routinely raided over the last several years to “balance” the state budget. The now-preferred budget gimmick is to shift “special funds” into the general fund in order to call the budget “balanced.”

The Senate Budget Committee conducted the oversight hearing to review this practice, but only covered what amounted to less than 0.5 percent  of the $4.6 billion in special funds that have been raided over the last several years.

Recent history

From 2007 to 2012, California had a $10.4 billion decline in its general fund, but a corresponding increase of $13.15 billion in its “special funds,”’s Wayne Lusvardi reported in May 2012.

Last year, State Controller John Chiang reported California was patching its budget together by borrowing $4.3 billion from special funds accounts.

A few days later, the secret $54 million special parks fund was revealed.

Then-state Finance Director Ana Matosantos reported that the borrowing from special funds had ballooned to more than five times the borrowing amount since June 2008.

“Where are these dollars?” asked Senate Budget Committee Chairman Mark Leno, D-San Francisco. Leno said it was a “big problem” that the special funds “clearly have not been getting enough attention.”

Where are we today?

Gov. Jerry Brown’s last budget proposed to make only a partial repayment to the special funds accounts. The $566.4 million repayment would have been merely a drop in the bucket of the $4.6 billion owed to more than 80 California special funds. But even that amount was deferred when the actual budget was passed in June.

In April, Senate Budget and Fiscal Review Committee Vice Chairman Sen. Bill Emmerson, R-Redlands, sent Leno a letter requesting the full committee investigate the astonishing  growth of special funds, as well as the significant growth of borrowing these funds. Joining Emmerson in the letter were state Sens. Joel Anderson, R-San Diego; Jim Nielsen, R-Gerber; Tom Berryhill, R-Twaine Harte; and Mark Wyland, R-Escondido. They requested the investigation of special funds specifically from 2007 to 2012.

“The Governor’s Budget proposes to repay $566.4 million in 2013-14, with full repayment by the end of 2016-17,” the lawmakers said. “However, his proposed delay of over $1 billion of previously scheduled payments calls into question his commitment to that timetable, and the fact that over $4 billion of excess Special Fund revenues were available to backfill General Fund budget deficits, strongly suggests that fee payers have either been grossly overcharged, or have not been receiving the services for which they have paid, or both.”

But it was months before the hearing was scheduled, and only a minute portion of the debt was covered.

Budget background

Special Revenue Funds are an “account established by a government for a specific project,” such as gas taxes for transportation and highway maintenance, park user fees, and the like.

State agencies separately report information concerning special funds to the Department of Finance, but use differing accounting methods.

According to the Legislative Analyst’s Office, “Multiyear loans of special fund balances to the General Fund—in order 
to help balance the state’s annual General Fund budget—have grown from $749 million at the end of 2007-08 to $4.3 billion now (including additional loans in the 2012-13 state budget package). In addition, in 2012-13, up to $16 billion of special fund and other funds’ cash resources are likely to be used to ensure that the state can make General Fund payments on time.”

When the economy tanked in 2007-08, thousands of businesses closed, unemployment went sky-high — and fee payers got hosed paying for the increases in special fund accounts.

“In California’s budgetary accounting system, over 500 special funds receive specified fee and tax revenues to support particular public programs,” the state Legislative Analyst’s Office explained in a 2012 report. “The administration forecasts that special funds will generate about $38 billion of revenue in 2012-13, averaging around $70 million for each special fund.”

But the governor, the Department of Finance, and legislative leaders have helped themselves to the special fund monies for use in the general fund, in order to claim they have a balanced budget. They claim the funds are being paid back, but as the senators noted in their letter, these repayments are regularly delayed.

“Republicans formally requested an oversight hearing several months ago and we were assured by the Chair that the committee would review ‘a majority of fee-based funds,’” Emmerson said in a statement after the hearing. “Unfortunately, we only looked at $18 million in repayments, which is a fraction of the $4.6 billion owed to fee payers. There are 27 funds scheduled to receive repayments this year yet we are discussing only seven. What about the other 20?”

“My colleagues and I are also concerned that these special funds were able to grow to more than $4 billion calling into question whether fee payers have been grossly overcharged or have not been receiving the services for which they have paid, or both,” said Emmerson. “Moreover, these fees should be for services directly benefiting the payers and should not be spent on unrelated General Fund programs.”

Republicans have called for more oversight hearings to address many of the other special fund loans, including:

$611.8 million from the Unemployment Compensation Disability Fund

$480 million from the Motor Vehicle Account

$350 million from the State Court Facilities Construction Fund

$328 million from the Highway Users Tax Account

$285 million from the State Highway Account

$171.7 million from the California Beverage Container Recycling Fund

$133 million from the Off-Highway Vehicle Trust Fund

$95 million from the Hospital Building Fund

$11.5 million Dealer Record of Sale

Crossposted on CalWatchDog