STATE SET TO GO BUST UNLESS MAJOR CHANGES ARE MADE IN 2015

News Release from Office of Sen Sam Slom

Honolulu – September 17, 2014 — Senator Sam Slom has serious concerns about the state of Hawaii's finances.

Slom said today "The recent Council on Revenues downgrading forecast indicates Hawaii is in a much worse position than what was anticipated.  Hawaii is set to go bust in 2016 unless the new Governor and the Legislature make some serious cuts."

"Senate Minority Research (attached) shows that, based on revenue forecasts, if the State continues to spend at the current rate Hawaii will use up its general fund carryover balances as early as 2016.  The small 10% of department funds withheld this year by the Governor's office will not be enough to stop the freefall as it is just a drop in the bucket ($14m) in a 6+ billion dollar state budget." says Slom.

Senator Slom adds "Because the State is not constitutionally permitted to borrow from outside sources for operating expenditures, it is likely the State will tap into the Emergency Budget Reserve Fund and Hurricane Relief Fund.[1]  Those funds are not large so that will be a small band aid for the problem and will not address the problem of overspending for long.  The State and the Legislature will have their work cut out for them to deal with this mess resulting from kicking the can down the road for so many years.  The final option to deal with the problem by raising taxes is the least desirable and burdensome for the people because we are already one of the highest taxing states in the nation." 

Attached to this release is the Senate Minority Research Office Article "The Implications of the Council on Revenues General Fund Forecast:  What happened to the $844 m surplus?" by Paul Harleman, Budget Director, Senate Minority Research Office, September 15, 2014.

CB: Hawaii Could Be $1 Billion in Hole by 2019, GOP Senator Warns

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THE IMPLICATIONS OF THE COUNCIL ON REVENUES GENERAL FUND FORECAST: WHAT HAPPENED TO THE $844 m SURPLUS?

By Paul Harleman

Last Thursday, September 4th, the state Council on Revenues lowered its projections for state general fund revenues for the fifth consecutive time. The council members specifically lowered the revenue projections for fiscal year 2014, which recently ended on June 30th, from -0.4% to -1.8%. This amounts to a loss of $76M in anticipated general fund revenues. To make matters worse, the council also lowered its projections for fiscal year 2015, from 5.5% to 3.5%. These figures amount to an additional $188M in anticipated loss of general fund revenues.

According to the council's projections, over the course of the state's two-year budget cycle (fiscal years 2014-2015), the state will somehow have to absorb a total loss of $264M of anticipated general fund revenues. The council's latest forecast raises two important questions: How will this revenue forecast affect the upcoming legislative session? And, what lessons can be learned moving forward?

How will the revenue forecast affect the upcoming legislative session?

The upcoming 2015 legislative session is very important, not only because a new Governor and Senate Ways and Means Committee Chair will soon take office, but because the state legislature needs to approve a new biennial budget. This budget will lay out the state's spending and revenue plan for the upcoming fiscal years of 2016 and 2017.

During the last legislative session, the legislature enacted a budget that was unbalanced in the long-run. This means the previous budget includes more spending as opposed to incoming revenue. This budget effectively depletes the state's $844M general fund surplus of 2013. As table I and 2 highlights, without any additional budget cuts, the 2013 surplus will be depleted as early as 2016. On July 1, 2014, the state's budget director Kalbert Young realized the gravity of the state's deteriorating fiscal outlook withholding 10 percent of discretionary general fund spending for the first quarter of 2015. Although his action could certainly be applauded, in absolute terms, the 10 percent cut only amounts to $14M. Even if the budget director's policy of 10% discretionary budget cuts is extended through all 4 quarters of 2015, this will amount to only $56M in proposed cuts. This is not enough in budget cuts to pull the state out of its current fiscal deficit position.

This all means that the upcoming legislature will have to consider the following three difficult and unpopular political decisions during the 2015 budget negotiations:

1. Tap into the state reserves (Hurricane Relief Fund and/or Emergency Budget Reserve Fund, if permitted by law) to fund government operations beyond FY 2016;

2. Increase general fund revenues through tax and/or fee increases; and or

3. Cut spending.

Although the third option seems most favorable, unfortunately it will more likely be a combination of all three options that will be implemented.

What lessons can be learned moving forward?

History indicates that cutting spending is a very unpopular and politically cumbersome process for any legislature. To move forward, it is important the new administration presents a realistic budget to the legislature that is based on conservative revenue estimates as opposed to overly optimistic revenue estimates. Although the legislature is constitutionally required to balance the budget on a two year basis, prudent fiscal management dictates that consideration be given to the long-term implications of spending decisions.

NOTES: Executive branch program expenditures for the FY 2016 and beyond are multiplied by the 10 year compounder average growth rate of the HNL-CPI (2.54%)

SOURCES:

· Revenue Estimates: Council on Revenues (Sept 10, 2014), Retrieved from http://files.hawaii.gov/tax/useful/cor/2014gf09-04_attach_3.pdf

· Executive Branch Program Expenditures: HB 1200,HD1,SD1,CD1, Budget Worksheets, Retrieved from: http://www.capitol.hawaii.gov/budget/2014budget.aspx 

· Judiciary Budget: HB 1638,HD1,SD1,CD1, Budget Worksheets, Retrieved from http://www.capitol.hawaii.gov/budget/2014budget.aspx

· Estimates for "Specific Appropriations" and "Payment of Unfunded Liabilities" have been copied from the Department if Budget and Finance multi-year financial plan that was presented as an non-public document to the Senate Minority Research Office in April, 2014. The multi-year financial plan was based on the 1/10/2014 Council on Revenues projections.

· Estimates for the "Reserve Balances" have been copied from the Reports on Non-General Funds, which has been submitted to the 2014 legislature. Retrieved from: http://budget.hawaii.gov/budget/reports-to-the-legislature/1983-2/reports-on-non-general-fund-information-fiscal-years-2011-2017/

[1] To tap into the Emergency Budget Reserve Fund the state would need a time of emergency, economic downturn, or an unforeseen reduction in revenue, as provided by law.  Hawaii Constitution, Article VII, Sec. 6.