In a Boom or Headed to a Bust?

A Report from the Grassroot Institute Panel

It was only last February that Governor Neil Abercrombie declared that for the first time, the state was looking at an $844 million dollar surplus. According to Paul Harleman, Budget Director of the Senate Minority Research, that surplus may go bust in 2016. The issue of the state budget and Hawaii’s long-term fiscal health was the subject of discussion and debate at Grassroot Institute’s October Calabash. The event, which featured Bank of Hawaii Chief Economist Paul Brewbaker, State Budget Director Kalbert Young, Senator Sam Slom, and Mr. Harleman as part of an expert panel on budget and finance, was moderated by Grassroot President Keli’i Akina.

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“We are currently experiencing long term deficits,” stated Harleman. “We have to make those mandatory payments into the EUTF. And it’s my understanding that that amounts to about 400 million dollars, every year, starting in 2016, all the way up to 2019.”

Harleman said that the next administration has an important choice to make, “Whether to increase taxes, or whether to cut spending.”

According to Harleman, increasing taxes would probably mean increasing the GET: “If we have to fund a deficit of about 400 to 500 million dollars, I think the only tax increase that could do that is probably increasing the GET.”

Cutting spending, on the other hand, is also a viable choice–if the policy makers in question have the stomach to do so. In the opinion of the Paul Harleman, “It comes down to cutting the budget about 5% or 6%, which in our opinion is doable . . . We think it’s possible. It all depends upon what the next administration is going to do.”

Kalbert Young, State Budget Director, agreed, saying, “a number of serious hard decisions need to be made financially for our state budget.”

However, Mr. Young;s view of the economic future of the state was brighter that that expressed by the Senate Minority Research Director. In his words: “I’m actually very bullish on the future prospects for Hawaii.” Claiming that Hawaii has recovered after the recession and that the state is well positioned to make gains in the future, Mr. Young noted that, “It’s been done before. I’m very optimistic that future administrations and legislatures will be up to the task.”

Still, any conversation about the state budget must consider the issue of public employee benefits, specifically the retirement system. Currently, there are over 117,000 government retirees are on the EUTF, collecting payments. This means about 10% of Hawaii’s population is on the EUTF. Young was alive to the complications this adds to any discussion of long term fiscal health: “90% of the population is paying for remaining 10%. That cost is always going up . . . that’s why we need to deal with the unfunded liability issue.”

During the discussion, the panelists also considered the possibility of privatizing the Hawaii Health Systems Corporation. Senator Sam Slom said, “Don’t wait by your telephone. After sitting through two years of public hearings, it became abundantly clear that neither the unions want this, nor the legislators that are most dependent on the unions.”

Economist Paul Brewbaker pointed out that since 2012, construction went down, employment went down, and tourism stopped growing. “That’s what sets up this fork in the road where you thought the revenues were going to go this way . . . and now the money that you thought was going to be there, isn’t there.”

One attendee asked the panel whether it could be said that the economy had already gone bust if one factored in public retirement costs. Paul Harleman’s response was not encouraging: “We’ve got this huge unfunded liability that is almost 25% of our entire economy. Is the state broke? To answer your question, from that point of view, we are.”

Harleman continued, “We’ve got to cut the General Fund budget by at least 500 million dollars so we can make those payments. As long as we keep making those payments, that liability can be paid for.”

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