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Testimony, HB200, relating to the state budget

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The following testimony was submitted by the Grassroot Institute of Hawaii on March 17, 2021, for consideration by the Hawaii House Committee on Finance.
______________

To: House Committee on Finance
Rep. Sylvia Luke, Chair
Rep. Ty J.K. Cullen, Vice Chair

From: Grassroot Institute of Hawaii
Joe Kent, Executive Vice President

RE: HB200 — RELATING TO THE STATE BUDGET

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HB200, which would appropriate funds for the operating and capital improvement budget of the executive branch for fiscal years 2022 and 2023.

The current budget bill HB200 submitted by the executive branch reduces general fund expenditures by $299.4 million in fiscal 2022, demonstrating that lawmakers can reduce spending.

However, there are many issues with the current budget that lawmakers should address.

Skipped EUTF payments

The bulk of the spending reductions come from skipping annually required contributions (ARC) to the Hawaii Employer-Union Health Benefits Trust Fund of $413 million for fiscal 2022, which could add $922 million of debt over the next 37 years.1

Lawmakers are also planning to skip these payments for the next five years, which could save the state $2 billion in the short run but cost $8 billion in the long run.2

Original ARC prefunding + additional ARC prefunding from 5 years of skipped payments (in thousands)

Grassroot Institute of Hawaii analysis of county Annual Required Contribution increase from deferral of 5 years of prefunding,” Grassroot Institute of Hawaii, Jan. 11, 2021.

If lawmakers wish to continue providing the same level of health benefits for public union employees without overburdening taxpayers, they should find other areas to reduce spending.

In the alternative, state leaders could consider reductions to public employee health benefits, such as by sharing more of the costs with beneficiaries. Lawmakers should not expect taxpayers to pay billions of dollars more if the state’s finances are improperly managed.

Debt obligations

Gov. David Ige borrowed $750 million from the bond market to fund payroll expenses, but the money needs to be paid back by 2025.3

Hawaii unfunded liabilities and state debt per capita

Source: “Total state debt” Grassroot Institute of Hawaii, Jan. 22, 2021. * Estimated debt so far as of Jan. 22, 2021. Note: Includes unfunded liabilities for public pension or health benefits systems.

The rising debt service and unfunded liabilities this year will eat up 56% of the general fund, up from 50% in fiscal 2021.

Additionally, the state borrowed $700 million from the federal government to pay for unemployment insurance claims in 2020, and private-sector businesses are on the hook to repay that debt.4 However, lawmakers are choosing to pay back that loan instead of handing the bill to the private sector, though it is a substantial expense for the state.5

Lawmakers should focus on paying down debt and reducing spending obligations.

Increased spending and payroll

HB200 shows $299 million of net general fund spending reductions for fiscal 2022 yet adds a net of 576 employee positions. The governor’s updated budget adjustments increase spending by a net $91 million and positions by 36 for fiscal 2022 compared to the fiscal 2022 budget allotment in HB200.6

Legislators should reject the spending increase proposed by the governor in his updated budget adjustment, so as to keep spending low during this fiscally uncertain period.

Windfall revenues

The state is projected to receive additional organically generated tax revenues of $569 million in fiscal 2021 and $324 million in fiscal 2022, as projected by the state Council on Revenues.7 Additionally, the federal government’s American Rescue Plan Act would provide $1.6 billion more to the state budget.8

These windfall revenues should not be used to increase spending beyond the baseline level in HB200. Instead, they should be used to pay off debt.

‘Golden handcuffs’

The $1.6 billion ARPA money prohibits the state from using the money to offset a tax reduction. This means that if the state accepts the ARPA money, it cannot lower state taxes until Dec. 31, 2024, unless they are offset by spending reductions.

Given this strict limitation, the state should consider either rejecting the money or, indeed, reduce spending to allow for tax reductions.

At the very least, the state should not increase spending or taxation during this period.

Observe the ‘golden rule’ of state budgeting

Lawmakers over the past decade have increased general fund spending by more than double the rate of growth of the economy. 

If state leaders ever hope to revitalize Hawaii’s economy, they need to follow the “golden rule”9 of state budgeting: Make sure government does not grow faster than our economy. 

Hawaii public sector growth outpacing private sector
Hawaii general fund vs GDP growth rate, FY 2010 to FY 2019

Source: “GRIH calculations of state vs GDP growth,” Grassroot Institute of Hawaii, “General Fund real,” Feb. 10, 2021. Adjusted for inflation.

Keeping government growth below the state’s overall economic growth would leave more money for Hawaii residents to invest in new businesses, buy new homes, afford college educations for their children and generally accumulate capital that is essential to a sustainable, healthy and prosperous economy. 

Thank you for the opportunity to submit our comments.

Sincerely,

Joe Kent
Executive Vice President
Grassroot Institute of Hawaii

  1. Draft Hawaii Employer-Union Health Benefits Trust Fund Retiree Health Care Plan, Actuarial Valuation Report as of July 1, 2020,” Gabriel, Roeder, Smith & Company, Jan. 11, 2021, p. 7.
  2. Ibid.
  3. State of Hawaii,” Hawaii Department of Budget and Finance, Oct. 21, 2020, p. 2.
  4. Civil Cafe: Legislative Update,” Honolulu Civil Beat, March 10, 2021, 13:20.
  5. Ibid.
  6. GM1 of 2021, Feb. 19, 2021.
  7. Governor Ige Updated Budget with Council on Revenues estimates on March 8, 2021,” Grassroot Institute of Hawaii, March 10, 2021.
  8. Jared Walczak, “State Aid in American Rescue Plan Act Is 116 Times States’ Revenue Losses,” Tax Foundation, March 3, 2021.
  9. Melissa Newsham, “Start working now to adopt a meaningful spending cap,” Grassroot Institute of Hawaii, June 7, 2020. See also, Daniel J. Mitchell, “The Golden Rule of Spending Restraint,” Cato Institute, April 7, 2014.

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