Debate hinges on transparency, statutory limits to moving funds

By Darwyyn Deyo | Pennsylvania Independent 

HARRISBURG — Facing a $4 billion deficit and a moratorium on new taxes, state legislators are considering taking money from special funds to balance the general fund.

In addition to the proposed general fund for 2011-2012, the state budget is supplemented by about $4.34 billion in special funds; more than $22 billion in federal funds; and more than $9.8 billion in “other funds” for a total operating budget of $63.58 billion. As a percent, the special, federal and other funds make up more than 57 percent of the total operating budget.

Gov. Tom Corbett’s proposed general fund budget for 2011-2012 is $27.3 billion.

Having fewer special funds separated from the rest of the budget would allow for more flexibility in the budget, said Sharon Ward, executive director of the Pennsylvania Budget and Policy Center, a nonprofit policy center in Harrisburg.

“We prefer that approach,” Ward said. “That being said, it’s not all that hard to use the money to relocate the money in special funds to the general fund. The tobacco settlement fund, how it’s distributed is written in law but for the last three years the General Assembly has changed the allocation formula and moved some of those funds into the general fund for other purposes.”

State Sen. David Argall, R-Berks, a member of the Appropriations Committee, said moving the special funds to the general fund has been considered in years past and may be again, given the $4 billion deficit faced by the General Assembly.

“This is an issue that the House and Senate have struggled with for a long time,” said Argall. “Gov. Rendell, he was constantly spending more than members of the House and Senate would have preferred and creating every possible special fund he could get his hands on. Philosophically, I understand the need to having different accounts but, at the end of the day, it’s all taxpayers’ money.”

Given Corbett’s campaign pledge not to pass any new taxes, Argall said the challenge is going to be finding money to fund the programs that need to continue.

“I would think most members would much prefer that than a tax increase,” said Argall of moving special fund revenues to the general fund.

But Nathan Benefield, director of research for the Commonwealth Foundation, a fiscally conservative nonprofit group in Harrisburg, said since these funds are not approved by the Legislature every year, it would take special legislation to move the money appropriated for special funds to other agencies, such as the Department of Education.

“In the funds where the spending is just set automatically, they aren’t really looking at that spending every year,” said Benefield. “It’s an off-budget thing; it’s not appropriated every year. Lawmakers don’t vote on how much to spend out of that (special fund). They set up a formula many years ago, and that’s simply held in place.”

There are more than 150 special funds included in the budget, divided between special funds and other special funds. Some of the funds were created decades and are funded through special taxes and licenses. One fund was created more than a century ago, and another, created in 1862, is the agricultural college land scrip fund, which supports agriculture and mechanical arts at Penn State with $686,000.

Moving those and other special funds – called fund sweeps – into the general fund as a one-time measure is a common move during a recession, said Arturo Perez, director of fiscal affairs program for the National Council of State Legislators.

“It is a fairly common practice when states face a fiscal challenge or crisis as we’ve had the last few years,” said Perez. “We saw that play out in 2001, 2002, 2003. We’ve seen that play out through the Great Recession period. Nebraska said they’d tapped over a hundred diff funds in their state or done fund sweeps (and) we’ve seen it play out in states like Arizona, Colorado.”

But dissolving those special funds permanently is still uncharted territory.

“There’s a reason those funds were created in the first place,” said Perez. “It may involve small agencies or bureaus or programs that may only employ a dozen or even a handful of employees. They’re very specific and targeted in what they do; it doesn’t make sense for the general fund to support them.”

Perez used the example of a special fund for licensing barbers supported by fees paid by barbers. While Pennsylvania does not have a special fund for barbers, it does have the racing fund which is supported through taxes and license fees collected by the state harness racing commission and the state horse racing commission for the regulation of horse and harness racing.

“The barbers should support their own regulatory agency for inspections and licensing and registration and certification,” said Perez. “The general fund does not have a role in doing that.”

State Sen. Dominic Pileggi, R-Chester, Senate Republicans floor leader, said while moving the special funds into the general fund would put all the revenues and expenses on the same page, it would not change the total revenue and expenses the General Assembly has to account for.

“If you folded that fund into the general fund and made that one reporting unit you wouldn’t have any greater net cash flow in a given year,” said Pileggi. “There might be some on the margins but for the major funds that operate outside the general fund, the revenues are matched with expenses.”

Moving the special funds into the general fund for the purpose of more effective fund distribution could also be achieved by taking excess revenues from special funds or forcing agencies to cut their expenditures internally, he said.

Pileggi said Corbett’s proposal to move the tobacco settlement fund into the general fund as an example of how the process could work, but brought up the constitutionally mandated motor license fund as an example of how a fund sweep process could be limited by law.

“Certainly there’s more budget flexibility if you start out with one blank piece of paper and have a prioritization of expenses by need,” said Pileggi. “What you do by having these funds is you restrict that somewhat. … (Looking at the other funds is) a lot more complicated, a lot more moving parts and most people struggle with just the absorbing the general fund information.”

House Democrat spokesperson Bill Patton said House Democrats “will closely examine any proposals to divert money from special funds, notably the governor’s request to move $220 million of the tobacco settlement fund to the liberty loan fund in the Department of Community and Economic Development for non-health care purposes.”

“Such a transfer raises many questions,” said Patton. “Each special fund is established by law for a specific purpose, and most of the funds carry low balances from one year to the next. Many of the funds serve as conduits for federal money that is reserved for certain uses.” 

He also pointed to transfers from the budget stabilization reserve fund, also known as the rainy day fund, which was “virtually depleted” to balance the budget in 2009 and therefore “is not of help this year or next year.”

There is $60,000 remaining in the rainy day fund.

House Republicans did not return calls for comment.

“The special funds are created by law, by statute and they’re designated really to restrict the uses of certain funding streams,” said Ward, but added “it hasn’t proven to be all that hard to reallocate special funds for general funds.”