Hawaii finances ‘unsustainable’ without economic growth
by Grassroot Institute of Hawaii, June 20, 2023
“Unsustainable.”
That was the word Joe Kent, executive vice president of the Grassroot Institute of Hawaii, used to describe Hawaii’s precarious financial situation during a presentation earlier this month at Chaminade University of Honolulu’s “People, Planet, and Prosperity for a Sustainable Future Conference.”
“My rule for government financing,” Kent said, “is very simple: Government spending must grow no faster than the private sector. … So if the government spending is growing faster than the private sector, then it is unsustainable.”
Kent’s talk at the Chaminade-sponsored conference was titled “Troubled Waters: Hawaii’s Unsustainable Financial Situation.” It was an update of a report he helped write in 2019 that was issued by the Hawaii Executives Collaboration called ““Troubled Waters: Charting a New Fiscal Course for Hawaii.”
Kent said the earlier report estimated the state’s unfunded liabilities over the next 30 years to be about $88 billion; the current amount is about $132 billion. He said the increase is partly due to him adding “a few things” to the liabilities list “that were forgotten the first time.”
Meanwhile, the state budget between 2013 to 2022 increased by about 87%, while Hawaii’s private sector grew by only about 24%.
“So, our state government budget growth is growing about triple — more than triple — the rate of our economy,” he said. “And the same story is true with all the counties as well. From the county to the state level, we are growing our government spending at an unsustainable rate.”
Kent said the way to put Hawaii’s finances back in order is to “grow the economy.”
“If we grow our economy at 1% faster than we currently are growing it [now], then over time, it pays for all of the debts that we have here. People think you either have sustainability or you have economic growth, but the truth is, the way to have sustainability is through economic growth.”
TRANSCRIPT
6-12-23 Joe Kent presents at Chaminade Conference
Joe Kent: Aloha, everyone. My name is Joe Kent. I am the executive vice president of the Grassroot Institute of Hawaii. And we’re a nonprofit research organization, a think tank, and we often look at the budget and the state’s financial situation.
This is a sustainability conference, and so I wanted to take our look at sustainability, which is the state’s financial sustainability and our ability to pay for sustainable initiatives, and things like that.
And so today, we’re going to be looking at “Hawaii’s unsustainable financial situation,” I’m calling it, “Troubled waters.”
Now, first I want to talk about someone very important (laughs): Iam Tongi. And if you know anything about Hawaii, or if you were here in the past month, you know how jazzed and excited everyone on the island is about Iam Tongi.
He’s the winner of “American Idol” this year. And [an] amazing, amazing artist. The only [Hawaii] artist to ever win “American Idol.” And he just came back to the islands a month ago, on the North Shore, and played a concert, and it was just a big awesome lovefest.
And during the “American Idol” show, they asked him, you know, because it was filmed on the mainland, but they asked him, “What are you doing here?”
And he said, “Well, I was priced out of paradise.” And that became a quote that everyone latched onto in Hawaii because they can really identify with that. We’re priced out of paradise and he actually made a shirt out of it: “Priced out of Paradise.”
And just last week, by the way, I was in Minnesota, and, you know, at my brother’s house was another family from Hawaii that had fled because of the cost of living. You know, since 2016, we’ve had around 10,000 people every year, on net, residents leaving the state.
Hawaii has one of the fastest outflows of population to the mainland, and, you know, the No. 1 reason is the cost of living.
So when it comes to financial sustainability, we asked, well, if all these people are leaving, then who is going to pay for all of the government’s, you know, bills that we have imposed upon the public?
And so, that’s what we’re looking at today.
In 2019, there was a report called “Troubled Waters: Charting a New Fiscal Course for Hawaii,” and it was produced by the Hawaii Executive Collaborative.
I was one of the authors of this report, and what they did is they tallied all of the debts and all of the unfunded liabilities and deferred maintenance and we racked it all up, and they just tried to see, “OK, how much do we have to pay for over the next 30 years?” And the number was $88 billion in liabilities over the next 30 years.
In Hawaii, we could say we have around a million adults, so that’s about $88,000 per person, you might say. That’s a huge liability, especially when you compare it to other states. We have among the highest liabilities in the nation when it comes to these types of things.
But what I wanted to do today is to look at the numbers again, because, you know — these were the contributors by the way. We had Colbert Matsumoto, Sterling Higa and Jeff Laupola were among the principal authors, but we had … it’s basically a “who’s who” list of the people who are really interested in the financial matters of the state who produced this report.
And, you know, when it was released in 2019, there was a lot of hubbub. You know, going into the 2020 legislative session, there were a lot of bills, a lot of lawmakers who were talking about troubled waters, the price of paradise: How do we bring down the cost of living so more people can afford to prosper in the islands?
And then the pandemic happened, [laughs] and everyone kind of forgot about the troubled waters thing, but I wanted to, you know, look at it again.
And so the main finding of this report is the extent of future costs of the state and local governments are required to meet will strain their capacity beyond any prior experience.
So, in other words, your taxes in Hawaii right now are high, but they are about to get even higher, if we are to pay for all of the things that we’re supposed to pay for and things that we want to pay for and everything.
So, what are those things? Well, let’s look at all of the list of things today.
So, again, like I said, I’m retallying the debt, and in 2019, it was $88 billion; today, it’s about $132 billion, and that’s because of a few things that I’ve added in that were forgotten the first time.
So, what is that comprised of? Well, you’ve got $24 billion around for environmental things;, $44 billion dollars, that’s just debt; and then $63 billion dollars for infrastructure.
And so let’s dive into the numbers a little bit more.
I’m going to go into the environment section right now.
OK, so, for the environment, we’ve got the Ala Wai flooding [control] project, which is around $300 million. Actually, I should change that. It went up to $600 million last year. So, sorry.
But then we’ve got the state highways relocation. There’s a report that came out that if, you know, erosion happens throughout the state and the state highways need to be moved, then it would cost about $15 billion to move those highways mauka. And mauka means, you know, towards the mountain. And so that’s a huge cost that some people say, you know, we need to pay for if the waters take the roads.
Now, you also have a renewable energy mandate, which is, you know, the state Legislature passed a law that, by the year 2045, Hawaii needs to be 100% powered by renewable energy sources.
And Hawaiian Electric Co., just a couple of weeks ago, came out with a new report that showed that the cost to upgrade just the grid for that would be about nearly $9 billion. So, that is the cost of renewable energy, but it could be much higher than that as well.
Then finally, you have Red Hill, which I’m not even calculating into this because that’s a federal thing. I’m sure many of you may have heard of the Red Hill fuel tanks that were shown to have leaked into the groundwater, and, you know, a lot of people say it was a natural, you know, environmental disaster, basically. So there’s a movement to move those tanks somewhere else, but that would cost about $10 billion.
So, who’s going to pay for all of that, right? Supposedly the feds would be paying for the Red Hill relocation — if you convince them to do it, right? So, that’s why I have in — I’m not even counting that, by the way — so now, that’s the, you know, renewable energy portion.
This is county: It says infrastructure, deferred maintenance and housing. So, for housing, we’ve got, you know, a bunch of housing needs, and the state calculates that we need to spend a billion on, you know, these different housing initiatives.
Then you have the county water and wastewater treatment. There’s huge upgrades needed for wastewater.
Apparently, the story is that the counties have not been paying for the upgrades over time of the wastewater treatment facilities, and so those costs are sort of racking up over time, and so we’ve got billions of dollars, that’s $5.3 [billion] just for Honolulu alone; $1.7 [billion] for the sewage part; and then for Kona desalinization, that’s $100 million
And then the cesspool conversions — this is a big issue. Basically, you have all of these cesspools, you know, when Hawaii was being built in the ’60s and ’70s and ’80s, they didn’t have a centralized water-treatment facility, especially on islands like the Big Island. And so you have around 83,000 homes — these are all homes, every brown dot you see is one of those homes that has a cesspool.
And so that’s releasing, according to reports, that’s releasing around 150 million gallons of raw sewage, untreated sewage into streams and oceans and things like that. And so this could be a big problem. But the lawmakers have passed a law to require that all cesspools in the state be updated to cleaner systems by the year 2050.
And so, it’s really similar to that renewable energy mandate. You pass a mandate, but who’s going to pay for it?
I mean, imagine on the Big Island, you have a Puna family, an older-generational family that has a house, a plantation house, they’ve been living in for all their life. They’re land-rich, but cash-poor, and now they have to pay $40,000 to upgrade their cesspool, right? They don’t have $40,000. What are they going to do?
And so, you know, all I’m trying to do is just calculate what are the numbers of what we’re requiring here.
OK, so that’s the cesspools. Then you have, of course, you’ve got the Honolulu rail, which is not completely paid for. That’s $9. … , what is it, $9.93 [million] and counting? It could be much higher. That does not include the maintenance costs, by the way. It does not include the ongoing operational costs every year. So, that’s a big … this is just capital costs.
Then you’ve got, you know, Department of Transportation that just needs upgrades as well. So, we’re not done. [laughs] I’m sorry.
Then we’ve got the more deferred maintenance. I mean, if you look at our public school system, we’ve got $11 billion of upgrades. I mean, I was a public school teacher myself once, and the schools are badly in need of upgrades. There’s a school on the Big Island that is so moldy that children are getting sick. They’ve had to send kids home and things like that, and they just don’t have the funds to, you know, fix the schools up.
So, UH [University of Hawaii] also is badly in need of repairs.
Then you’ve got the prison upgrades, public facilities, just at the county level.
Electric grid. This is electric grid upgrades, that’s even if you don’t do renewable energy. If you just, like, keep everything as the status quo, it’s $10 billion still.
And then there’s, you know, kind of pet projects, you might call them, Aloha Stadium is $500 million, Neal Blaisdell Center, that’s another $800 million. So, that is …
Audience member 1: Before you move on to the next slide, who plays in Aloha Stadium? [laughter]
Kent: I don’t know, actually. You know, it’s college games, basically.
Audience member 1: So, the stadium, they don’t know who’s going to play.
Kent: Right. Exactly. Yeah.
Audience member 1: Cool.
Kent: At one time, we had the Aloha Bowl here, but those days are gone, basically, and it’s empty most of the year. It’s largely unutilized except for a flea market that makes some money in parking lots, so … but that doesn’t pay for it.
OK, then you’ve got just the regular debt and unfunded liabilities.
So, the ERS pension — that’s the Employer Retirement System of the State of Hawaii, which is the retirement system to pay for all public workers at the state and county level. So, if you are a public worker, you get a pension. The problem is, half the fund is missing money. You know, it’s supposed to be a hundred percent funded, it’s only half-funded, and they need $13 billion to fund the rest of it.
And so, that’s money that taxpayers are going to have to forego over the next 30 years to pay it back. That’s if the stock market is OK, right? If the stocks tank, then that number goes up.
Same thing with the EUTF, the Employer-Union [Health Benefits] Trust Fund, which is the health benefits for all public workers in the state. Same thing. You have a fund, it’s half-funded, and you need $9 billion to cover the rest of it.
It used to be a hundred percent funded, by the way, in the year 2000, but that’s dwindled down.
Then you’ve just got the bond debts. You know, Hawaii is taking on an unprecedented level of bond debt. Interest rates are going up right now, that means more money will be used to pay for the debt-service costs rather than for roads, bridges and everything else.
And Honolulu’s bond rating just dropped. Moody’s said we have too much debt. They said, you know, they could see Honolulu had this little gimmick where they were trying to sweep the rail debt off the books so that the rating agencies wouldn’t see it in their calculation, I think, and so, but the rating agencies said, “No, we see that debt too, and that counts,” and so they downgraded our bond rating, which will hike our interest rates as well. So, that is a lot of debt.
Again, if we go back, that’s, you know, $140-some-odd billion. This is the total debt over time at the state level. These are the pension debts. Remember when I said that in the year 2000 we were 100% funded?
This green line, if you take it back to the year 2000, it would have gone to zero, right? We had no debt in the year 2000, and then what happened is lawmakers saw our fund, which was 100% funded, right? And in 1999, you remember what the stock market was doing? It was booming at that time, and they said, “Well, why do we have all this money in that fund, it’s just sitting there? Can’t we use some of it for some pet projects and things?”
So, they took the money out, they gave themselves pay raises, and then when the stock market crashed — right? — in the year 2001, that money wasn’t there, and so it punched a hole in the fund, creating a debt spiral that we haven’t gotten out of yet. So, that’s where the pension debt came from.
Health benefits is a similar story, and that’s, you know, this is a really big problem with our state financing.
My rule for government financing is very simple: Government spending must grow no faster than the private sector, right? Government derives its revenues from the private sector, and so if the government spending is growing faster than the private sector, then it is unsustainable, right?
So, are we growing faster than our economy can support?
Well, if you look at the growth rates, these are the budgets for the counties and the state.
So, at the state level in 2013 to 2022, we’ve grown about 87%. Our budget has grown about that much.
If you look at the CPI [consumer price index] though, you know, for our economy, it’s grown about 24%. So, our state government budget growth is growing about triple — more than triple the rate of our economy.
And the same story is true with all the counties as well. From the county to the state level, we are growing our government spending at an unsustainable rate.
Now, you remember the question that I asked Gov. [Josh] Green today, which was about the spending cap. Hawaii has a spending cap, and it says you’re not allowed to spend over … the framers of the [state] Constitution said, “We don’t want the government to spend at a rate that’s too fast,” because, you know, it violates that rule that I mentioned.
And, but this year, they blew the spending cap by a billion dollars, and I asked the governor, “What are you going to do about that?”
And so, that’s the reason he said he’s cutting spending, which is miraculous. It was a miraculous answer, and I hope he sticks to that. It’s a good idea.
So, that is, you know, the problem. And, you know, I’m a bit out of time here, but you can see basically that if our level of spending continues, then in the future we run out of surplus monies, we run a deficit at the state level. That means that we may have to raise taxes in the future and so on to pay for all the spending.
And so, all I want to … I’m going to basically end here, but all I want to impress upon you is that there are competing demands upon the state budget. For every initiative that we believe is, you know, extremely important, there are many other initiatives that other people think are just as important.
And so, we need to have …we cannot pay for all of it.
There’s two roads. If we pay for all of it, the cost of living in Hawaii goes up too much and Iam Tongi and many other residents move to the mainland.
But the other way to do it, to think about it, is all we have to do, according to the state economists, is grow our economy — we can grow our economy — out of this problem.
If we grow our economy at 1% faster than we currently are growing it, then over time, it pays for all of the debts that we have here. And so that makes economic growth such an important part of sustainability.
People think if you either have sustainability or you have economic growth But the truth is, the way to have sustainability is through economic growth. So, that’s all. Thank you.
[applause]
Moderator: You have a couple of minutes. Did you want to take any questions?
Kent: Oh, yeah. Oh, I didn’t know I have a couple of minutes. Yeah, sure.
Audience member 2: So, what are the tax revenues?
Kent: Oh.
Audience member 2: Because you must have … you talked about the budget, and so, obviously, major expenses, you got a lot of debt. So, what’s the … when you have to balance the budget, what do you need to …
Kent: OK. Well, half the taxes come from general exercise tax, which is like our sales tax in Hawaii, basically, and the other half comes from business taxes and income taxes and tourism taxes, basically.
So, you know, Hawaii is a tax-heavy state. The state collects no property taxes, that all goes to the county level. And so we’ve already raised our taxes far beyond … you know, we have the second-highest income tax rate in the nation. We have … if you calculate all of the so-called sales tax or general exercise tax numbers, it’s very high compared to the rest of the states.
I don’t think there’s a way to raise taxes in such a way that people don’t end up leaving. And if you do raise taxes, it causes a spiral, right? The taxes go up. And we’re already there, in a sense. More people leave. Now you have fewer people to pay those taxes so you need to raise them again. And hence starts the spiral
And we’re already there in a sense. I mean, you’ve got the unemployment insurance fund. I mean, you know, during the pandemic, unemployment, you know, fund, fell off the cliff. They paid billions of dollars to keep people, you know, stabilized throughout the pandemic, but that we were in the hole a billion dollars, and so now, they have to raise taxes on businesses to climb out of that hole.
And just this year, they’re raising taxes by $300 million on businesses. That’s $300 for every employee. So, let’s say you have a business with 200 employees, multiply that by $300 extra that you have to pay this year, and that’s going to hit our business community.
So, taxes are already going up. Thankfully, [Gov.] Josh Green gave a little bit of a cut this year … well, excuse me, the Legislature passed a [tax] cut. We don’t know if he’s going to sign it, although it seems like he is. And thankfully, Josh Green seems to be singing the right tune when it comes to one to reduce taxation.
I think the best thing we could do is send a green light to the business community. Reduce taxation that will, hopefully, jump start our economy in such a way where we can become more sustainable.
Is that it? Any other questions? OK. Well, thank you so much. Yeah.
[applause]