Financial Planning for a $200M Per Year Deficit?

by Tom Yamachika, President Tax Foundation Hawaii

A recent news release from the Hawaii State Senate Majority Caucus says:

The State Senate has drafted, discussed, and voted on SB508, SB2415, SB2484, SB2489, SB2699, and SB2821 that are projected to generate approximately $72 million in revenues based on the Department of Taxation estimates. The current State Financial Plan shows the State is over spending by $208 million this fiscal year, $263.2 million in FY2020, $209.7 million in FY2021, and $105.4 million in FY2022.

The additional revenues derived from the Senate bills will be added to the general fund which will allow the State to pay for government services, debts and liabilities, and to reduce financial shortfalls for the next five years. With the Senate voting on the final measures today, combined with the updated January 8th Council of Revenues forecast, the State revenues to the general fund will increase by $114.7M.

Here, the Senate Democrats are talking about shoring up the State’s financial plan with $72 million in additional revenues, mostly new or increased taxes. Before we start thinking about how great or wise the Hawaii State Senate is, or isn’t, we need to be asking a few questions.

First, why do we have a current state financial plan that spends more than $200 million every year over available revenues? If I were teaching a class in financial planning and someone handed me a financial plan that didn’t balance, I’d hand it back saying, “How can this be called a financial plan?”

Is the idea that someone just dropped this financial “plan” on the Legislature’s lap and said to them, “Fix this”? The Hawaii Constitution requires a balanced budget, so doesn’t the submission of a deficit financial plan burden the Legislature with making politically tough decisions—cut programs or services, or raise taxes once again—while the creators of the plan dodge any repercussions from constituents?

In the past, the Governor’s Office has responded to financially critical situations with across-the-board spending restrictions. This means any department that receives general funds is required not to spend a certain percentage, perhaps 5% or 10%. Gov. David Ige's administration routinely imposed budget restrictions, even in years when the State had money, such as fiscal 2016 when the State finished up the year with a $1 billion “budget surplus.” Routine use of this kind of device is dangerous. Not only will it motivate government departments to over-budget in response to the anticipated restrictions and rely more on special funds that are not subject to those restrictions (although the State does skim 5% off special funds for a “central services assessment”), but it breeds distrust among other affected parties such as the unions. They, by the way, were visited the month after the “$1 billion surplus” announcement with news that all of the money was gone already, as we have mentioned before.

Everyone, cut it out already! Honesty and transparency in government, which we all need, doesn’t call for “financial planning” for a $200 million deficit when a balanced budget is required. It doesn’t call for routine use of across-the-board budget restrictions that take no account of the fiscal priorities we have. And it doesn’t call for fiscal sleight of hand where we say the money is here today and gone tomorrow. The budget is hard enough to understand without any of these gimmicks, so let’s have a real financial plan and honest debate over the fiscal priorities we have as a State.