The Senate Minority weighs in on the sustainability of the General Fund.
News Release from Office of Senator Sam Slom January 8, 2015
HONOLULU—Senator Sam Slom says “If we make bad assumptions now, they will have long term negative effects on our state.”
Today, the Senate Minority Office published a report[1] questioning the sustainability of the state’s General Fund, and considered the following four key factors affecting the state’s financial plan:
1. Continuation of executive spending restrictions (imposed by the previous Executive Administration);
2. Revised projections of General Fund revenues by the Council on Revenues from 3.5% to 4.5%;
3. Expiration of collective bargaining agreements in June 2015, and related costs of renewing these contracts; and,
4. Overall long term General Fund expenditure growth estimated at 2.3% despite actual growth of 4% over the last decade
In its report, the Senate Minority urges that adjustments be made to the Executive Biennium Budget for fiscal years 2016 and 2017, in order to avoid dangerously low cash reserves that could negatively affect the state’s bond rating and lead to new or increased taxes to bail the state out in the future.
Sen. Slom said, “Hawaii is at an economic and fiscal tipping point. For years, the Legislature has ignored certain figures or made assumptions based on false or misleading indicators in creating a financial plan for the state. This has led to a reactive rather than proactive approach to the budget, as each poor decision catches up with us at some point. If we keep ignoring financial realities eventually the state is going to find itself in a desperate situation financially. We have to start planning responsibly, and our Executive and Legislature should be open, honest and forthright with the public, government departments and unions.”
The Senate Minority report was partly prompted by the Council on Revenues meeting Tuesday, where the Council revised its General Fund revenues forecast to 4.5% growth, up 1% from its September 2014 forecast. This translates to a $55.5 million positive impact on the General Fund for fiscal year 2015. However, even with that small revenue increase and the $163.3 million the state will be saving if it extends the executive spending restrictions put in place by former Governor Abercrombie, the General Fund is still facing serious depletion, for two reasons.
First, a significant number of collective bargaining agreements will expire at the end of the current fiscal year, in June 2015. Extending those agreements means the General Fund will absorb $97 million that is currently not accounted for in the Biennium Budget. Secondly, the Budget predicts a conservative 2.3% overall growth in expenditures out of the General Fund, but over the last decade, actual growth in expenditures has been about 4% or $498.6 million over fiscal years 2018-2021. Senator Slom said, “The people cannot afford any more inaccurate fiscal assumptions. As legislators, and as servants of the public, we have to use the best evidence there is, so that we end up with a financial plan built on a reasoned approach and sound assumptions.”
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How Sustainable is the State General Fund 2014-21?
by Paul Harleman MBA, Budget Director, Senate Minority Research Office
On September 17, 2014, the Senate Minority Research Office published an article that raised serious questions regarding the financial sustainability of the state's general fund. The article projected that the state would have depleted its general fund cash reserves by FY 2016, if no major changes were made in FY 2014-15. Since the release of the article, however, several important factors have delayed this projection from FY 2016 to FY 2018.
Table 1. Factors that Impact the State Financial Plan – General Fund
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A
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Executive Spending Restrictions Implemented by Previous Administration
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$ 163.3M
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B
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Additional Revenue - Council on Revenues (1/6/2015 projection)
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$ 87.9M
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C
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Collective Bargaining Cost - Not Included in Financial Plan
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($ 97M)
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D
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Adjustment - Long Term Expenditure Growth
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($ 498.6M)
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I. DISCUSSION OF FACTORS THAT IMPACT THE STATE FINANCIAL PLAN
A. Executive Spending Restrictions:
The first important factor that has positively contributed to this delay are the executive spending restrictions imposed by the Abercrombie Administration in FY 2014. As a result of lower than anticipated general fund revenues, the Abercrombie Administration imposed a 5 percent spending restriction on both discretionary and non-discretionary general fund appropriations. If these cuts are continued in FY 2015, the state's treasury is expected to have saved an estimated $163 million.
B. Council on Revenues Revised Projections (1/6/2015):
In addition to the positive impact of the executive spending restrictions, the Council on Revenues met on January 6, 2015, and increased the state's projection of anticipated general fund revenues for FY 2015 by $55.5 million. This means that both the executive spending restrictions and revised general fund forecast are projected to positively impact the state's financial plan by $218.5 million.
C. Collective Bargaining (Expiring HGEA contracts):
Despite the significance of these two factors, however, a careful analysis of the recently introduced Executive Biennium Budget, reveals two shortcomings that significantly impact the bottom-line of the state's financial plan. The first shortcoming relates to the Hawaii Government Employees Association (HGEA) collective bargaining agreements that expire on June 30, 2015. Currently, the financial plan does not account for the potential costs associated with the renewal of these agreements. If the current HGEA agreements are extended to FY 2016-17, the state's financial plan would have to absorb an additional $97 million in general funds.
D. Long-Term General Fund Expenditure Growth:
In addition to collective bargaining, the state's financial plan also understates the real long-term growth of general fund expenditures. The current financial plan assumes that general fund expenditures beyond the FY 2016-17 budget would grow at an annual rate of 2.3 percent. Over the last decade, however, both budgeted and actual general fund expenditures have grown at an annual rate of 4 percent. This is primarily the result of increases in non-discretionary expenditures, such as collective bargaining and retirement and health care benefits for state employees. To accurately account for these future costs, the long-term general fund expenditure growth assumption should be adjusted by $498.6 million.
Table 2: Budgeted vs. Actual General Fund Expenditure Growth (FY2005-13)
Source: “General Fund: schedule of revenues and expenditures - budget and actual (budgetary basis)”. State of Hawaii - Comprehensive Financial Annual Report (CAFR). Periods: FY 2004-2013.
II. DISCUSSION OF FISCAL IMPLICATIONS
Although the state's general fund is no longer projected to be depleted as early as FY 2016, the current financial plan still shows significant financial challenges are ahead in FY 2017-18. Currently, the state is projected to run annual general fund budget deficits until FY 2018. Because the state is spending more than it receives, the current accumulated general fund cash reserve of $664 million is projected to decline to $16 million in FY 2018. To put this into perspective, $16 million would not be enough to fund current government operations for even one day.
Table 3. Projected General Fund Deficits and Carry-Over Ending Balances FY 2014-21
Source: Executive Biennium Budget FB 2015-17. Totals have been adjusted to account for the 4 factors that are discussed in this paper.
The projected $16 million carry-over ending balance in the general fund for FY 2018 raises serious questions about the financial sustainability of the current Executive Biennium Budget. The deteriorating cash reserves not only threaten the state's current bond rating, but make the state vulnerable to economic recessions in the future. Over the last decade, the state has maintained at least 10 percent of general fund revenues in cash reserves on average, which includes the state's Hurricane Relief Fund and Emergency Budget Reserve Fund. Currently, however, the state's cash reserves are projected to decline from 13 percent in FY 2015 to only 5 percent in FY 2018. According to the Government Financial Officers Association (GFOA), states should keep at least 15 percent of general fund revenues in cash reserves. The projected 5 percent in cash reserves falls well below the GFOA standard and should be of great concern to the legislature.
Table 4: Projected Total Cash Reserves (General Fund)
Source: Supplemental Executive Budget Requests FY2004-2014. Executive Biennium Budget FY 2015-17.
The current imbalance between general fund spending and revenues is not caused by less-than-anticipated revenues, but rather by poor long-term financial planning. For decades, the legislature has failed to account for the full cost of retirement and health care benefits for state workers, as well as overall growth in program expenditures. As a result, short-term budget decisions have often been prioritized at the expense of the state's overall long-term financial position. The state's financial plan clearly indicates that the current budget deficits are not sustainable beyond the FY 2016-17 budget. The legislature should therefore carefully examine the assumptions in the state's financial plan and scale down general fund spending immediately. Instead of taking a reactive approach by relying on overly optimistic assumptions and retroactive actions through executive spending restrictions, the legislature should be proactive and balance the FY 2016-17 biennium budget by taking a stand to cut at least $425 million in spending. This would prevent the legislature from having to raise taxes and it would be put the state on a healthier fiscal trajectory.
III. MULTI-YEAR FINANCIAL PLAN – GENERAL FUND
Table 5: Adjusted Multi-Year Financial Plan – General Fund (in millions of dollars)
Source: Biennium Budget FB 2015-17. Totals have been adjusted to account for the 4 factors that are discussed in this paper.
“How Sustainable is the State General Fund – FY 2014-2021?” Prepared by Paul Harleman.
“The Implications of the Council on Revenues General Fund Forecast: What Happened to the $844 M Surplus.”http://hawaiidocuments.com/SMO/2014-915-Report.pdf
The following calculation is used: FY 2014 lapses -/- 2015 lapses + FY 15 operating expenditures -/- FY 15 appropriation. ($124.5M -/- $80M + $6189.2M -/- $6070.4M). Executive Biennium Budget FB 2015-17, page 3.
Contracts for bargaining units 2-4,6,8-9 all expire on June 30th, 2015. $97 million amounts to the cumulative total appropriations for FY 2014 and 2015. The following general appropriation bills that were passed during the 2013 legislative session: HB 895, SB911,SB2073.
$498.6 million amounts to the cumulative of the following adjustments: $74.7M (FY18) + $63.7M (FY19) + $182.2M (FY20) + $178M (FY21)