“How to balance Hawaii’s budget” was the topic of Keli’i Akina’s “Hawaii Together” episode, Monday, June 22, 2020, on the ThinkTech Hawaii network. The special guest was Joe Kent, executive vice president of the Grassroot Institute of Hawaii.
Akina is president and CEO of the institute, which that very day had submitted testimony to the Senate Ways and Means Committee commenting on legislative plans to borrow billions of dollars to cover the state’s budget deficit.
A few days before, on June 19, the institute had released an online tool that lets Hawaii residents try themselves to balance Hawaii’s state budget.
Kent, who both wrote the testimony and developed the online tool, talked with Akina about both of those developments, which you can see by watching the half-hour video below. If you wish to read what they said, a complete transcript is below.
Keli’i Akina: Aloha, everybody and welcome to “Hawaii Together” on the Think Tech Hawaii Broadcast Network. I’m Keli’i Akina, president of the Grassroot Institute, and I’m your host for this program.
Boy, do we have a lot to talk about today. It’s June 22nd here in Hawaii, 2020. So much has gone on this year, and so much is happening now at the state Legislature. Today, our original plan was to feature on this program a new toy, really, at the Grassroot Institute. It’s a tool for balancing the budget. I had a lot of fun the other day just sitting down with it and playing with it. I was able to balance our budget and get rid of all of our debt, and give us a prosperous future as a state.
Of course, it all depended upon what assumptions I put into the model. But we want to give you that model. It’s online now for the public and for legislators to use. We do know that legislators have gone to the site, and actually some of them are starting to use it. I have with me today Joe Kent, the executive vice president of the Grassroot Institute who did a terrific job of developing this tool for balancing the budget. You can see that tool at grassrootinstitute.org, and you can use it and play with it.
Before I introduce Joe, I need to say that the Legislature reconvened today for a special session, and for those who are trying to guess what they were going to deal with, the answer is before us now. The Legislature is poised now to exceed the state debt limit and to avoid making needed cuts to balance our budget. It’s a tough call for them to make, and they’re going to have to deal with some political fallout because of it. But it could be something that is dangerous for Hawaii, in the thinking of our staff at the Grassroot Institute. We just want to talk a little bit about that, first, and then we will introduce you to our budget tool.
Please welcome somebody who’s doing a terrific job of leading our research at the Grassroot Institute, which is a public policy think-tank, independently looking at the economy and government. Please welcome to the program our executive vice president, Joe Kent. Joe, thanks for being on the program and for all the good work that you do.
Joe Kent: Thanks for having me.
Akina: Boy, today was an exciting day with the reconvening of the Legislature. What’s top of mind?
Kent: Well, how are they going to balance the budget? That’s the biggest question, and now we have the answer. They’re going to take on loads of more debt, billions of dollars of more debt, and that’s a big problem because it’s going to cause a lot more liabilities in the future.
Akina: Now, Joe, you just delivered for Grassroot Institute some testimony on House Bill 2500 Senate Draft 1 (HB2500 SD1). That’s a bill that would allow the state to borrow billions of dollars at a time when revenues are falling and expenses are increasing. Now, we’re not telling the Legislature to vote yea or nay on this bill; we gave expert commentary as to the potential impact. Basically, what’s one of the things we see in this bill?
Kent: Well, we’re concerned there’s a lot of problems with the bill, the first and foremost being that the bill was a gut-and-replace type of a bill that used to be a blank budget bill and now basically oversteps the Constitution and violates the state debt limit.
Akina: Let me see what you’re saying. Basically, we now have a bill that the Legislature is putting forth that violates the Constitution, or at least it attempts to change a rule in the Constitution. But this bill came to the Legislature through a process called “gut and replace,” which means they took an existing bill, took out the contents and put new contents in, and all without public hearing. Is that right?
Kent: That’s right. The bill started out as a sleepy little budget bill with a bunch of blanks in it. It’s the same type of bill that you add $1 million here and $1 million there. But now they want to use it to basically open a backdoor to the state Constitution that allows for overstepping the debt limit. That’s going to allow them to borrow billions of dollars of debt.
Akina: Now, there’s so much going on in Hawaii with the coronavirus crisis, and dealing with that — the reopening of the economy and the failures of many businesses, as well as the fact that we’ve got so many people out of work — that I don’t hear much rumbling on the part of the public in terms of anybody really being up in arms that the Legislature is now putting forth a bill without public hearing.
Kent: Yes. The hearing itself was very quick. It took about three minutes.
Akina: I should correct myself with the gut-and-replace that might pass the public hearing process originally. You go ahead. I cut you off.
Kent: That’s right. The hearing itself took about three minutes. It’s just amazing to see how fast it takes to basically take on so much more debt and cause a lot of problems.
Akina:Well, let’s take a look at the condition of the state budget. The current fiscal 2021 General Fund budget proposal increases our spending in the state by 3%. That really brings us to a record high of $8 billion, but the problem is that’s a problem when everything is going fine and dandy. It’s a more severe problem in light of the devastating impact of the coronavirus. Is that right?
Kent: That’s right. If you look at everyone’s household budget, if you look at your household budget, everyone is pinching pennies, and we’re cutting back. A lot of people have lost their jobs and lost their income, and they’re trying to reduce their expenses. They’re not trying to take on more credit card debt. In fact, a lot of people are paying off credit card debt right now because it’s time to live within our means. But the Legislature is doing exactly the opposite. They’re living outside our means. They’re increasing the state budget, and they’re paying for it with more debt.
Akina:Now, the top economists in the state and also private economists tell us that Hawaii’s economy will not recover for a minimum of four to five years, and so the Legislature really should be looking at a multiyear strategy, not just getting ourselves out of hot water in the short term. State revenues’ bottom line are projected to fall dramatically. At the same time, our long-term costs are also rising. What kind of position does that put us in?
Kent: Well, if you have long-term costs, you should match those with long-term revenue. As long as we have long-term revenue, it’s OK to have long-term spending costs as long as it all matches. But now, it doesn’t match; in fact, revenues went down about $2 billion, and that punched a hole in the state budget. That’s about $2 billion big that we need to cut. Just imagine we have an $8 billion spending plan, and now we have a bite out of it that’s about $2 billion. That doesn’t leave a lot for the rest of government, especially when we have so many fixed costs.
Akina: Now, talking about fixed costs, including debt service which is a big part of the fixed costs, they’ve grown to 63% of projected general fund revenues. Now, that’s up 50% earlier than this year, and that’s adding huge amounts of debt that will only increase our debt service and the cost of that. To borrow to cover that would have all kinds of devastating consequences, not to mention affecting our state’s credit rating.
Kent: That’s right. In a way, it’s like we’re borrowing to pay off debt. When you take on more debt to pay off old debts, that’s a problem.
Akina: Now, some of the debt rating services, investing rating services such as Moody’s and S&P Global have downgraded Hawaii’s economic outlook. What exactly does that mean, and how will that affect your credit rating in the future?
Kent: Well, that just takes a look at how they view our economic future. Moody’s and S&P downgraded their view of our economic future from stable to negative. That means that they think our finances in Hawaii are in trouble. In fact, they said that Hawaii is one of the worst states in terms of its financial outlook — Hawaii and Nevada, and that’s because we’re both tourist states. We rely so heavily on tourism, and tourists right now can’t really come into the state very easily, and it’s not clear when they’ll be able to come in the state. We asked economists across the world, and a lot are telling us that it’s going to take years until we reach the same levels that we used to see.
Akina: The debt level here in Hawaii of the state when it’s compared to each individual taxpayer or per capita, is astronomically high. Across the country, that amount is about $940 per capita. Here in Hawaii, it has skyrocketed to $5,480 per person, and the Legislature is looking at actually raising that. How much debt do we have overall?
Kent: That’s right. Well, we have — well, if you want to talk about unfunded liabilities, we have about $88 billion of unfunded liabilities, and that includes public pension debt, and health benefits debt; this is debt service and infrastructure problems, deferred maintenance. If you total all of that up, last year we totaled it up and it turns out it’s $88 billion. Now that number is going to go up. That’s because the market’s not doing well, the pension fund may be hit by investments tanking, and because we’re taking on so much more debt and that’s going to create liabilities for debt service. The $88 billion may look like a small number by the time we’re through with this.
Akina: We want to give thanks to the (Hawai‘i) Executive Conference, which brought together a group of business thinkers and economists and others to research to that in a nonpartisan setting and to come up with the fact that over the next 30 years, we just don’t have the money to pay off $88 billion of potential debt, and that figure is growing. That kind of debt is unfunded liability. Now, Hawaii’s debt service is pretty high as it is. It currently takes up 11% of our general fund spending, and that’s just on debt service. That’s huge. It’s the second-highest in the nation isn’t it, Joe, next to Connecticut?
Kent: That’s right. We pay about $1 billion for debt service. That’s like paying off your credit card bill, you’re in the debt service. We pay $1 billion for public pension costs every year. We pay a billion dollars for health benefits costs every year, and we pay a billion dollars for Medicaid, more or less. That’s about $4 billion out of the state budget. If we’d just lost $2 billion, that leaves only $2 billion to run the rest of government. That’s really sticky. That’s why they’re trying to basically borrow to balance the budget. But what that does though, if they keep borrowing, it’s going to increase the debt service and increase those long term costs.
Akina:When we take a look at that long-term spending for whatever it may be, as you mentioned, fixed costs and public employee pay increases and so forth, planning to pay for it with borrowed money is simply unsustainable. Let me just ask you this: In the big square building today at the Capitol when the Legislature reconvened, were lawmakers talking about balancing the state’s budget by reducing spending instead of borrowing?
Kent: No, the biggest thing that lawmakers are fretting about is public-employee pay raises. They have a lot of pressure to increase salaries right now. Part of it is equity. Half of the states’ unions did get salary increases already passed, and the other half didn’t. They were expecting to pass the other half now, but they’re in an awkward position because the state’s revenues has fallen so dramatically.
One way to create fairness or equity, is to increase everyone’s salary. Of course, the other way to create fairness or add equity, is to decrease everyone’s salary the same. That’s exactly actually what Gov. Ige suggested a few months ago when he said that there’s going to have to be massive salary cuts and everything. That’s one way to balance the budget. There’s many other ways to balance the budget, but the bottom line is the numbers don’t add up.
Akina: Well, it’s clear now that the Legislature does not have any qualitative idea as to where the additional revenues would come from if we actually went about the business of paying our debt service as it should be paid and bringing down the cost of running the state. Now, we’re also in a dangerous situation, aren’t we? Our population is shrinking, and that means reduced tax revenues. We’re also seeing people leave, increasing the exodus because of the coronavirus and the failure of opportunities in Hawaii. Where is this money going to come from?
Kent: That’s right. State economists are basically predicting that Hawaii’s population will fall dramatically in the next few years. It could be 30,000 people leaving in a few years. If you just think about how many people are unemployed, it’s between 20% and 30% or 40% of people are unemployed now. What are they going to do when the unemployment check runs out, which it’s scheduled to run out in about August. If their unemployment checks run out and they don’t have a job, then what are they going to do?
That’s why a lot of people are predicting they’ll probably leave the state. If we have a mass exodus from the state, that’s going to hit our revenues, our tax revenues. Unless they reduce spending, the rest of us left behind are going to be on the hook to pay for it.
Akina: As it is, as of today, our Legislature is on track to increase spending, even in light of the fact that revenues are dropping. So we’re in a quandary. Well, when we come back from our quick break, I want you to introduce a tool that we have given to the Legislature that anybody can use, so that was a few minutes and a laptop computer, you can balance the budget yourself. I’m Keli’i Akina with Joe Kent of the Grassroot Institute. We’ll be right back on ThinkTech Hawaii’s “Hawaii Together” right after this short break. Don’t go away. You want to see that budget tool.
Akina: Thanks for coming back and watching the rest of our program today. I’m Keli’i Akina, president of the Grassroot Institute, with executive vice president Joe Kent. We’re talking about the budget, important things legislators and citizens need to know. We’ve got a brand new tool to give to the public and to our legislators that can be used to help us balance the budget. Now, anybody can try their hand at balancing the budget with this new tool. Joe, why don’t you introduce that?
Kent: Sure, it’s at grassrootinstitute.org/budget. If you go there, you’ll be met with a little pop-up that says, “The budget has a $1.4 billion deficit. Can you balance the budget?”
Akina:Let me stop you there for a moment so that we get our starting position understood. What does that mean, that Hawaii’s projected $1.4 billion general fund deficit in 2021 can possibly be balanced? What is the deficit, and what does it mean to balance it?
Kent: Well, the deficit just means that you have less money coming in than going out. Here, we have about $1.4 billion less coming in than is needed to pay all the expenses, so that means it’s unbalanced. Hawaii’s Constitution says we need to have a balanced budget. Now, a lot of lawmakers are basically borrowing to balance the budget, but there’s other ways to balance the budget, too. You can increase revenues, or you can reduce expenses.
Akina:You’ve got a tool now that can let you plug in how much we increase revenues by, or how much we decrease spending by. Give us a scenario or two that we could work with.
Kent: That’s right, so right there on the screen, that is the budget tool. If you look at the top, that it’s all red there, it’s $1.4 billion, says, “You are in deficit.” But if you go to the right and you click on one of those categories there, you’re able to actually reduce the spending, maybe by 5% or 10%, and in so doing, you may decrease the deficit.
Now, another way to balance the budget is to use the rainy day fund. Hawaii has about a $1 billion rainy day fund. That’s the emergency fund that we use just in case we’re in a financial crisis, just like now. Actually, right now is a great time to use the rainy day fund, because the money is there and we have a shortfall.
Akina: About how much of the rainy day fund, which you said is $1.4 billion, would be needed to balance the budget?
Kent: Actually, the rainy day fund is $1 billion, and even if you use all of the rainy day fund, the budget still isn’t balanced. You’re still off by about $300 million. You actually need to do some cutting in order to balance the budget, in my view. But what legislators are doing is instead of cutting, they’re borrowing money to balance the budget. They’re planning to do that. Yes, that is one way to balance it, but it kicks the can down the road, and it makes higher costs in the future.
Akina: It’s taking a look at the short term trying to solve our problem immediately, not realizing we’re going to have to pay for that money that we borrow. What is the prospect at this time that the federal government is just going to give us that money and forgive any debt?
Kent: Well, there’s a lot of different actions happening in Congress. We’ve heard of the CARES Act, there’s the Heroes Act, and a lot of legislators are licking their lips over the money and hoping that the money can be used for the budget. The CARES Act money, which is hundreds of millions of dollars, about $600 million or $700 million given to Hawaii, that money cannot be used to balance the budget. That’s what Congress — that’s the stipulation they put in. It can’t be used unless they pass some kind of law in Congress. The money can only be used for emergency services or to help with the coronavirus situation.
The money was actually put into a separate kind of rainy day fund. It’s basically pocketed so that they can use it later. Lawmakers are basically planning to use it for unemployment insurance when that runs out, and for other coronavirus economic-related causes. I think they were hoping to use it to balance the budget. I think some still are hoping that Congress does something to where they can use that money. The feds also made available a loan program that allows Hawaii to borrow about $2 billion. That’s the reason that they passed that debt ceiling breach today.
Akina:Now, do you have a recommendation, having tried different scenarios, as to what really works as an ideal way of balancing the budget? We’re starting with the $1.4 billion budget, general fund budget deficit?
Kent: Sure, well, if I were the governor, then I would use the rainy day funds first. We’re in an emergency, and it’s appropriate to use those funds. But how much should we use? If we use all the funds, then we won’t have any money left for next year or the following years, and there’s projected to be financial difficulties next year, too. So we may need the cushion next year. What I would do is use some of the money, maybe $700 million or so of the rainy day fund, use that to balance the budget, and then just try to reduce spending for the rest of it.
If you reduce spending from 10% to 15%, which would be about 2019 levels, then the budget would be balanced. That means, if we just went back to — if you think back to the year 2019 or 2018, the government basically functioned about the same as it does today, at least from my perspective. If we just used that government to run today’s operations, then the whole budget would be balanced. It actually might make sense since we’re having less people in Hawaii. A lot of people are leaving the state. We’re paying more money right now to service fewer people. That doesn’t make sense; we should pay less money to service fewer people.
Akina: Back in 2018, if I understand correctly, it cost our government about $7.8 billion to pay everything they did on the budget. If we balance it, as you’re suggesting it, in terms of taking $700 million from the rainy day fund, we could be back at a level of $7.7 billion as to the cost of our basic budget, which would be about the same thing, something we could do. And yet we’d still have money leftover, because if we take only $700 million for the rainy day fund, what does that leave, about $430 million or so left in the rainy day fund?
Kent: That’s right.
Akina:This crisis is not over. There may be other types of crises. It’s a good idea not to deplete the rainy day fund.
Kent: That’s right. If you think about all the people in Hawaii who are cutting back on their expenses, a lot of people — we’re talking about a 10% cut to government — but a lot of people have had 100% cut to their finances. They’re unemployed right now, and the pain is real for them. So it really makes sense for the government to scale back a little bit, live within our means, and try to live within the amount of money that taxpayers can afford.
Akina: The real rub for politicians is whether they’re willing to have a 10% to 15% cut in the cost of government. Let’s talk about that. One way to scare people away from that is to say that there will have to be massive cuts and layoffs of public-sector workers. But that’s not necessarily the only way to go about making 10% to 15% of cuts. What else could the government do in order to reduce its costs?
Kent: That’s right. Well, one of the best ways to reduce cuts is to simply ask department heads to target the waste in their own department. From a governor’s perch, he can’t see all the different nooks and crannies that the state wastes money, but department heads could. If they simply had a smaller budget to run their department, then it’s their job and their position to try to make those cuts. Cutting back by percent, saying this department gets less and maybe across the board, all departments get, let’s say, 5% to 10% less, that’s one, I think, effective way to dole out the cuts without having to make mistakes.
Other ways to do it are to basically target cuts that could be done better in the private sector. Hawaii has a lot of state hospital systems. The private sector has been, for years, jumping at the chance to run the state hospitals. A lot of times, they do it better, faster and cheaper. In fact, on Maui, they basically took over the management. The private sector took over the management of the Maui hospital system, and that is saving government in the long run. If we did that across the state for all state hospitals and tried to look at ways of saving … Another way is with the airports.
There’s a lot of different ways that the government could save money, either by trying to find private sector entities that could do it better, or just by reducing spending and letting the departments handle it.
Akina: That’s good news to hear. Joe, in fact, you have worked with the team to develop another tool, a research report called “Roadmap to Prosperity,” which has 23 solutions that can bring about reduction in the cost of government, and that can be used, many of them, immediately. There are solutions available to our legislators, and citizens are encouraged to take a look at what we offer at the Grassroot Institute website, grassrootinstitute.org. Look for our budget-balancing tool, and also look for “Roadmap to Prosperity.” I want to say thanks to Joe Kent for being with us today. I appreciate the time in your ongoing research, Joe.
Kent: Thank you.
Akina:To everybody, aloha to you. This is Keli’i Akina with the Grassroot Institute on ThinkTech Hawaii broadcast network. We’re coming from the show “Hawaii Together,” and we’ll see you next time. Aloha.