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3. Budget History

3.7 Has Special Fund Growth Offset the Decline in General Fund Spending?

HAS SPECIAL FUND GROWTH OFFSET THE DECLINE
IN GENERAL FUND SPENDING?

Operating spending from own sources (the general fund plus the special funds) has grown faster than the general fund alone. To what extent has the special fund growth been the result of moving spending out of the general fund to give the appearance that the general fund has not been growing?

There clearly has been an incentive to do just that, particularly in the Fiscal Years from 1997 through 2001 when the legislature was trying to reach a goal of cutting the budget by $250 million. Since attention focused on cutting the general fund, if some expenditure could be moved to a special fund, it would give the impression that the budget had been cut when, in fact, it had not.

As we have seen, most of the growth in special fund spending has come in those categories that are logically treated outside the general fund. A good example is the budget of the International Airports that is totally supported by landing fees and other user fees. As activity at the airport has grown over the years, landing fees have naturally increased to cover the additional costs. Since general revenues do not support the airport operations, there is no reason for the International Airport budget to be included in the general fund. The Alaska Constitution prohibits special funds, but this has not prevented their proliferating (see below).

Having said that, there have been more activities funded out of special funds in recent years, either because it was argued that they were supported by fees or because new sources of revenue were put into special funds rather than the general fund. By one estimate, the amount of this shifting can be approximated by looking at the amount of general fund "program receipts" over time. In 1997 they amounted to $97 million, but by 2003 they had fallen to $8 million. These expenditures did not disappear. They moved, by a change in definition, from the general fund to one of the special funds.

The process did not start in 1997, however. In 1992 the receipts of the ferry system were moved out of the general fund into a special fund. One can argue that this makes sense and is similar to the way the International Airport budget is handled, but it does represent a shifting of revenues and expenditures out of the general fund. And this makes it difficult to track growth of the budget over time.

TRICKS TO HIDE GROWTH IN THE BUDGET

There are a number of tricks that are used to make the growth in the budget from year to year look smaller than it actually is. Here we simply list some of the more common strategies. Of course, there are instances where these strategies are justified, but all have been abused to some extent in recent years.

1. Moving revenues and expenditures out of the general fund into a special fund reduces growth in the general fund but not in the overall budget. This is often justified on the grounds that the expenditure is supported by revenues that are earmarked for that program. (This is a shift from general fund program receipts to revenues from receipt-supported services in special funds.)
   
   
2. Using endowments and other funds to pay for programs that were previously paid for from the general fund. Using money from various pots of money set aside for special purposes to pay for general fund programs reduces growth in the general fund.

These two strategies are self-limiting because almost all fee-supported programs are now handled through special funds and because theIr available pots of money to pay for general fund programs are fast disappearing. The next two strategies—employing supplemental appropriations that are made at the end rather than at the start of the fiscal year—provide more opportunity for mischief.

3. Short funding programs at the beginning of the year so that the budget at the start of the year, compared to the prior year, has not increased. Then toward the end of the year a supplemental appropriation provides the rest of the necessary funds, but that supplement does not get much attention. The justification for this is that it is impossible to predict exactly what some programs will cost, and supplements are the natural way to deal with situations where the prediction was an honest underestimate.
   
   
4. "Forward funding" next year’s budget with a supplemental appropriation in the current year budget. Although this makes the current year budget bigger, it reduces next year’s budget and makes the year-to-year increase look smaller.

Why have these strategies been employed? Ultimately, it is because the public wants to see budget cuts, but they don’t want to see public services reduced. This is a way to accomplish those two objectives, but it does undermine trust and confidence in the budget-making process.

Fiscal Policy Papers