Hawaii legislators poised to exceed state debt limit to avoid making cuts

HB2500 SD1 would allow the state to borrow billions of dollars at a time when revenues are falling and expenses are increasing

News Release from Grassroot Institute, June 22, 2020
 
HONOLULU, June 22, 2020 >> The Grassroot Institute of Hawaii today submitted testimony to the state Senate Committee of Ways and Means expressing its concerns about HB2500 SD1, which would allow the Legislature to breach the state's constitutional debt limit.

Joe Kent, institute executive vice president, said the measure is especially troubling for the following reasons:

>> It was gutted and replaced from a blank budget bill to a proposal that would allow the state to breach the constitutional debt limit.

>> The current fiscal 2021 general fund budget proposal increases spending by 3% to a record high of $8 billion.

>> The state just experienced a devastating financial collapse.

>> Economists project that Hawaii’s economy will not recover for a minimum of four to five years, necessitating a multiyear strategy for spending cuts.

>> State revenues are projected to fall dramatically, but long-term costs are rising.

>> The state’s fixed costs, including debt service, have grown to 63% of projected general fund revenues, up from 50% earlier this year, and adding more debt will only increase the state’s required debt service.

>> Borrowing to such a degree could affect the state’s credit rating.

>> Moody’s Investors Service in April downgraded Hawaii’s outlook from stable to negative, saying that increased debt ratios compared to other states and “utilization of significant nonrecurring solutions to balance the budget” could lead to a downgrade of the state’s credit rating.

>> S&P Global Ratings in April downgraded Hawaii’s outlook from stable to negative, saying that tourism-dependent states could face credit pressure, and that Hawaii and Nevada are the “most severely affected states.”

>> Hawaii already has the highest debt per capita at $5,480, which is significantly well above the median of $940.

>> Hawaii’s debt service already takes up 11% of general fund spending, which is the second highest in the nation, behind Connecticut at 14%.

>> Lawmakers are aiming to increase long-term spending, such as with increased fixed costs and public employee pay increases, and planning to pay for it with borrowed money, which is unsustainable.

>> Lawmakers could balance the state’s budget by reducing spending instead of borrowing.

>> It’s not clear where the additional revenues would come from that would be needed to pay the debt service of potentially billions of dollars in additional debt authorized by the proposal, especially considering that revenues are projected to fall.

>> Hawaii’s population is expected to fall by 30,000 residents by 2022, which means that fewer taxpayers will be left to pay any increased debt service costs, and this will also have a ripple effect on state revenues.

>> Private sector businesses have slashed their budgets and payrolls — if they’re still in business at all — while the state plans to increase spending to record highs, paid for by record high debt.

>> Hawaii’s economy is projected to fall by 12% in 2020 while state spending is on track to grow by 3% in fiscal 2021, which violates a golden rule of fiscal planning that the private sector should grow faster than the government.

"For all of these reasons," Kent said, "we caution legislators to respect the state’s constitutional limitation on debt and spending and avoid creating new avenues to take on more debt."

To see the supporting documents for Kent's statements, please see his testimony posted on the institute's website. You can also see an interactive budget-balancing tool created by the institute here.

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HB2500: Text, Status

The Grassroot Institute of Hawaii is an independent 501(c)(3) nonprofit research and educational institution that seeks, in the spirit of “E hana kakou!” (Let’s work together!), to educate people about the value of individual liberty, economic freedom and accountable government.