As the Legislature and Gov. Linda Lingle head into what both say will be their most challenging budgeting year together, a recent Supreme Court ruling may force lawmakers to tweak the law to allow one source of funding to continue.

Last week, the high court upheld part of an Intermediate Court of Appeals ruling in April that said the Legislature unlawfully diverted $3.5 million from a fund set up by regulatory fees paid by insurance companies.

The ruling stems from a 2002 case brought by the Hawaii Insurers Council, which argued that the transfer of the regulatory fees to the state's general fund was an unconstitutional tax because the fund generated by the fees was, by law, supposed to help cover operational costs of the state's Insurance Division.

In its ruling Thursday, the Supreme Court said the fees did not amount to an unconstitutional tax, but also said the Legislature was wrong to use the regulatory fees, which were established for a specific purpose, for general purposes.

Lawmakers have been watching the case because of its potential to change a common practice of using what are deemed to be “;excesses”; in special funds to fund other programs or help plug holes in the state budget.

Even Lingle, who in the past has resisted so-called “;raids”; of special funds, said the state's dire financial picture prompted her to seek some special fund transfers in her proposed biennium budget.

Facing a weakened economy and the prospect of a $1 billion deficit, Lingle plans to ask the Legislature next year to immediately transfer $40 million from the state's Emergency Budget and Reserve Fund just to make it through the current 2009 fiscal year, which ends June 30.

For the 2010 fiscal year, her budget proposal seeks an additional $35 million from the “;rainy day fund”; as well as two one-time transfers from special funds that would add $45 million to the general fund.

The one-time transfers are:

» $36 million from the Deposit Beverage Container Special Fund, which was set up to help pay for the state's 5-cent bottle deposit recycling program and is funded by revenues generated by the program.

» $9 million from the Wireless Enhanced 911 Special Fund, which is funded through a monthly surcharge to cell phone users to pay for wireless emergency phone services.

Lingle said the budget, released Monday, was finalized before the Supreme Court's ruling, and she now awaits an opinion from Attorney General Mark Bennett on whether her proposed special fund transfers are legal.

“;If the opinion is, 'No, you can't,' then the Legislature would need to pass a law that enabled them to address whatever the issue was that the court determined was stopping us from doing it,”; Lingle said earlier this week. “;I suspect they would be open to doing that.”;

House Speaker Calvin Say said he is open to the idea, “;because we've been doing it in the past all these years.”;

Lingle said her office received a copy of the Supreme Court's decision Friday and Bennett's office still is working on an opinion.