Hawaii the Sinkhole State

by Tom Yamachika, President, Tax Foundation Hawaii

We just got through with a legislative session where, due to anticipated federal aid to our state, we seemed to be swimming in money and were finding money for all kinds of things. At the end of session, however, our Council on Revenues dropped our revenue forecast by a Billion Dollars and our Governor used his line-item veto pen to balance the budget by making a few cuts here and there (including a $500 million cut to an appropriation to our rainy-day fund).  So, at the end of budgeting, we were not fat, dumb, and happy like we were anticipating, but were instead a little less fat.

But is that the whole picture here?  The national think tank Truth in Accounting says it isn’t. That organization analyzed the comprehensive annual financial reports from states at the end of fiscal year 2022 (the latest available) and tried to get at the true picture. They put in long-term costs for the state pension plan (about $9.0 billion) and post-employment health care (about $7.6 billion). They concluded that Hawaii had $11.2 billion available to cover $22.6 billion worth of bills. It concluded that Hawaii has an overall taxpayer burden of $23,100 per taxpayer, earning a spot in the bottom five states with Massachusetts, Illinois, Connecticut, and New Jersey.  

Hawaii ranked 46 out of 50, receiving an “F” financial grade, which the report awarded to any state with a taxpayer burden greater than $20,000. Six states including Hawaii received “F” grades.

This reminds us that we can’t simply dismiss the promises we made to our state workers back in days of old when times were better.  The OPEB issue (standing for Other Post-Employment Benefits) is a big problem nationwide, but it is critical here since we promised some state employees that we would pay their healthcare costs for life.  We can’t simply hope the issue goes away; we still need to grapple with the fact that people are living longer, health care costs are rising, and those factors mean that lifetime post-employment healthcare will cost us more than we thought when we made the promises.

The same goes for our pensions. We pay our retirees a set amount (because our retirement plan is a “defined benefit” plan) without regard to whether the amounts contributed plus the investment earnings on those amounts is sufficient to pay for it.  It’s no secret that such plans are now exceedingly rare in the private sector.  Further, over the years, lawmakers had dipped into pension fund earnings to use some of them for other things, leaving the fund little or no wiggle room to handle years in which earnings were less than expected.

On occasion, lawmakers have tried to mandate financial responsibility, as when they in 2013 enacted a law that sequesters state tax revenues when state or county governments failed to make required contributions toward their OPEB obligations.  The law needs revisiting—for example, the law enforced county contributions by sequestering state Transient Accommodations Tax (TAT) money headed for the counties.  A few years ago, the state stopped sending TAT money to the counties altogether, deciding that the counties should impose their own TAT.

Lawmakers have returned to the Capitol to prepare for the 2024 legislative session.  As they think about ways to handle the issues du jour, namely the Lahaina fires and their aftermath, they absolutely must come up with a plan around the financial tinderbox the State created for itself when it adopted its pension and post-employee health plans.