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The following is testimony submitted by the Grassroot Institute of Hawaii to the Hawaii Senate Committee on Means and Ways on Monday, June 22, 2020,
______________

June 22, 2020

10:00 a.m.
State Capitol

To: Committee on Ways and Means
Sen. Donovan M. Dela Cruz, Chair
Sen. Gil S. C. Keith-Agaran, Vice chair

From: Grassroot Institute of Hawaii
Joe Kent, Executive vice president

HB2500 SD1
Comments Only

Dear Chair and Council members:

The Grassroot Institute of Hawaii would like to offer its comments on HB2500 SD1 relating to the state budget.[1]

We are concerned that this measure would allow the state to breach the constitutional debt limit, which could saddle taxpayers with billions of dollars of additional debt and endanger the state’s credit rating.

Source: HB2500 SD1 proposed. Debt limit at time of issuance versus greatest amount and year of highest principal and interest on bonds and guarantees.[2]

This measure is especially troubling for the following reasons:

>> The measure was gutted and replaced from a blank budget bill to a proposal that would allow the state to breach the constitutional debt limit.[3]

>> The current fiscal 2021 general fund budget proposal increases spending by 3% to a record high of $8 billion.[4]

>> 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.[5]

>> State revenues are projected to fall dramatically,[6] but long-term costs are rising.[7]

>> 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.[8]

>> 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.[9]

>> 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.”[10]

>> Hawaii already has the highest debt per capita at $5,480, which is significantly well above the median of $940.[11]

>> Hawaii’s debt service already takes up 11% of general fund spending, which is the second highest in the nation, behind Connecticut at 14%.[12]

>> 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.[13]

>> 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.[14]

>> Hawaii’s population is expected to fall by 30,000 residents by 2022,[15] 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%[16] in 2020 while state spending is on track to grow by 3% in fiscal 2021,[17] which violates a golden rule of fiscal planning, that the private sector should grow faster than the government.[18]

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

Thank you for the opportunity to submit our testimony.

Sincerely,

Joe Kent
Executive vice president
Grassroot Institute of Hawaii

________________

[1]  HB2500 SD1 proposed, House of Representatives, Thirtieth Legislature 2020, State of Hawaii, Jan. 22, 2020.

[2] HB2500 SD1 proposed,p. 18.

[3] HB2500,” House of Representatives, Thirtieth Legislature, 2020, State of Hawaii.

[4] Grassroot Institute FY 2021 budget analysis,” Grassroot Institute of Hawaii, June 18, 2020.

[5] Sarah-Jane Trimble, et al.,COVID-19: pandemic impacts on North American city tourism,” Tourism Economics, May 7, 2020; and “How Can the State Government Restore Fiscal Balance? Economic Research Organization at University of Hawaii, June 18, 2020, pp. 2-3.

[6] Estimates of general fund tax revenue from the meeting of May 28, 2020: FY 2020 to FY 2026,” Hawaii State Council on Revenues, May 28, 2020.

[7] Grassroot Institute FY 2021 budget analysis,” Grassroot Institute of Hawaii, June 18, 2020.

[8] Grassroot Institute FY 2021 budget analysis,” Grassroot Institute of Hawaii, June 18, 2020. Fiscal 2021 fixed costs amount to $4,254,697,897, or 63% of the state’s projected revenues of $6,700,712,000. See also, The FY 2021 Executive Supplemental Budget,” Hawaii State Department of Budget and Finance, Dec. 16, 2019, p. 18.

[9] Moody’s revises State of Hawaii’s outlook to negative, affirms outstanding ratings,” Moody’s Investor Service, April 15, 2020.

[10] Tourism-Dependent U.S. States Could Face Credit Pressure From COVID-19’s Outsized Effects On The Industry,” S&P Global Ratings, April 27, 2020.

[11] Moderating Debt Burdens Allow Some U.S. States Room To Borrow During A Recession,” S&P Global Ratings, June 16, 2020.

[12] Ibid.

[13] New tool lets citizens balance Hawaii budget,” Grassroot Institute of Hawaii, June 19, 2020. See also, Road map to prosperity: How Hawaii can recover and even excel after the coronavirus lockdown,” Grassroot Institute of Hawaii, May 23, 2020.

[14] Estimates of general fund tax revenue from the meeting of May 28, 2020: FY 2020 to FY 2026,” Hawaii Council on Revenues, May 28, 2020.

[15] Comments by Carl Bonham, executive director of the Economic Research Organization at the University of Hawaii, to the House Committee on COVID-19 Economic and Financial Preparedness, June 1, 2020; video clip starts at 34:00 minutes.

[16] Outlook for the economy, 2nd quarter 2020 report,” Hawaii Department of Business, Economic Development and Tourism, Research and Economic Analysis, May 21, 2020.

[17] Grassroot Institute FY 2021 budget analysis,” Grassroot Institute of Hawaii, June 18, 2020.

[18] Melissa Newsham, Start working now to adopt a meaningful spending cap,” Grassroot Institute of Hawaii, June 7, 2020.