GOVERNOR LINGLE PROPOSES FISCAL STABILIZATION FUND TO PREPARE FOR FUTURE FISCAL EMERGENCIES

Governor Linda Lingle announced in her State of the State Address she will propose a constitutional amendment to rename and revise the State’s Rainy Day Fund to create a Fiscal Stabilization Fund.  This fund will shield Hawai‘i in future years from the need to raise taxes during periods when the economy is contracting and citizens can least afford to pay more.

The Fiscal Stabilization Fund will ensure that in years when tax revenues are growing, 5 percent of the general fund’s end of year balance will be placed in the Stabilization Fund prior to granting the currently mandated refund to taxpayers.

This prudent and important revision to the state’s Rainy Day Fund will augment the fund’s current single source of revenue from Tobacco Settlement moneys.

TITLE:       

A BILL FOR AN ACT PROPOSING AMENDMENTS TO THE CONSTITUTION OF THE STATE OF HAWAI‘I RELATING TO THE STATE FISCAL STABILIZATION FUND.

PURPOSE:       

To ensure funds are available for future fiscal emergencies by creating the State Fiscal Stabilization Fund and requiring 5 percent of general fund end of year balances to be deposited into it.

JUSTIFICATION:       

During periods of economic growth, tax collections may exceed spending needs resulting in a positive balance at the end of the fiscal year.  However, when the economy is sluggish, tax revenues generally decline.

To build a financial reserve to lessen the negative impact of emergencies or economic downturns on the State budget, this constitutional amendment establishes the State Fiscal Stabilization Fund and requires 5 percent of general fund end of year balances to be deposited into the Fund.  Deposits are made until such time as the fund equals 10 percent of general fund revenues for the preceding fiscal year.

The Constitution authorizes the Director of Budget and Finance to transfer the required balances into the State Fiscal Stabilization Fund at the close of each fiscal year.  This transfer shall take place prior to calculating whether the provisions of section 6 of article VII of the State Constitution are met governing tax refunds or tax credits to the taxpayers of the State.

Impact on the public:  Ensures that the State can meet its financial obligations during periods of economic difficulty and lessens the need to increase taxes when the economy and community can least afford to pay more taxes.

Impact on the department and other agencies:  Ensures that the State can meet its financial obligations during periods of economic difficulty.

GENERAL FUND:        Transfers a portion of general fund surplus balance to a State fiscal stabilization fund.

OTHER FUNDS:        None.

EFFECTIVE DATE:        Upon ratification.