‘New normal’ requires long-term budget thinking

by Joe Kent, Grassroot Institute, June 10, 2020

Hawaii lawmakers are facing a “new normal” of significantly reduced tax revenues. In response, they should reduce long-term expenses, such as payroll expenses and department budgets, instead of only short-term expenses, such as one-time projects or more borrowing, if they wish to keep their spending in line with their new levels of income.

That they are facing a “new normal” is undeniable, since in May the economic experts affiliated with the state Council on Revenues lowered their tax-revenue projections for the state budget by a total of $10.7 billion over the next six years, dooming Gov. David Ige’s record-high spending plans.[1]

Source: “Difference between Council on Revenue projections on January 9, 2020 vs May 28, 2020,” Grassroot Institute calculations, June 6, 2020

That threw Gov. Ige’s multiyear budget off target by a total of $26 billion between fiscal years 2020 and 2025.[2]

Source: January projection taken from testimony by Craig K. Hirai, Director, Department of Budget and Finance, Jan. 7, 2020, attachment 1. May projection taken from Grassroot Institute calculations, June 8, 2020. Grassroot Institute calculations based on Council on Revenues estimate on May 28, 2020.

This dramatic fall in revenues means lawmakers will need to put all possible spending cuts on the table, including and especially any long-term spending items, such as payroll expenses, debt and liabilities.

One area of spending that has been viewed as untouchable has been what lawmakers call the “fixed costs” of Medicaid, debt service and contributions to Hawaii’s public pension and health-benefits funds.[3] In December 2019, those fixed costs for fiscal 2020 were projected at $4 billion, or 50% of the expected $8 billion general fund revenues.[4]

But now that revenues have vaporized, those fixed costs could crowd out the rest of the budget, taking up over 55% of the state general fund in fiscal 2020 and 64% in fiscal 2021.[5]

Source: “Fixed costs as a percent of the updated FY 2021 general fund budget,” Grassroot Institute calculations, June 8, 2020

That means more than 64 cents out of every dollar of general fund spending would go towards benefits and debt. Unfortunately, those “fixed costs” could rise if the investment returns of Hawaii’s public pension and health-benefits funds fall, or if the state takes on more debt.

To make matters worse, Hawaii’s population is expected to fall by 30,000 by 2022,[6] which could further reduce Hawaii’s tax revenues in the long-term, and leave Hawaii’s remaining residents holding the bag.

Source: “State Population Totals and Components of Change 2010 – 2019,” United States Census Bureau, December 30, 2019.

Grassroot Institute population growth assumption of -10,000 in fiscal 2020, -20,000 in fiscal 2021, and -30,000 in 2022 based on Carl Bonham comments to House Committee on COVID-19 Economic and Financial Preparedness, June 1, 2020; video clip starts at 34:00 minutes in.

Hawaii’s declining population could also reduce demand for public services, calling into question the need for whether such services are still in demand.

According to the national Government Finance Officer Association, governments should be wary of overexpansion practices such as paying for ongoing programs during relatively good economic times. Having ignored that advice, lawmakers now should focus on cutting long-term spending, such as by reducing payrolls, shrinking department functions and using private contractors instead of government employees.

If lawmakers focus too much on short-term measures to reduce the deficit — such as cutting one-time spending projects or taking on more debt to balance this year’s budget — they will have to make greater cuts every year.

Cutting long-term spending and liabilities could resolve the multiyear deficit problem now and in the future, and could possibly even result in better public service supplied by a competitive market of private contractors. It could also create wiggle room to lift the tax burden for Hawaii’s struggling residents.

If common-sense financial policies are combined with smart regulatory reforms, such as those listed in the Grassroot Institute of Hawaii’s “Road map to prosperity”[7] policy brief, this could grow Hawaii’s economy, reduce the cost of living, reverse the exodus of residents and help islanders flourish.

Link: Footnotes