The state Senate’s sole Republican is waving red flags over the pace of government spending in Hawaii.

Sen. Sam Slom says the Legislature and new governor will face a big challenge next year because the state is on track to deplete its record $844 million carryover balance by 2016.

A five-year financial outlook, based on current spending projections, shows the state budget hundreds of millions of dollars in deficit. By 2019, the projected carryover ending balance will be just over $1 billion in the hole, according to Paul Harleman, the Senate Minority Research budget director.

Sam Slom  PF

State Sen. Sam Slom, seen here at a legislative hearing last year, is concerned about the pace of government spending.

PF Bentley/Civil Beat

The state by law must have a balanced biennium budget, so that means tough decisions have to be made in the coming year about tapping into the reserves, increasing taxes, cutting services or a combination thereof, Harleman wrote last week in a paper on the budget.

Democrats recognize the budget dilemma.

Gov. Neil Abercrombie’s finance director, Kalbert Young, said the state will be challenged for declining ending balances beginning this fiscal year, which started July 1.

Positive ending balances from previous years, going back to 2012, will help keep the state’s financial ship afloat through 2016. But if revenues come in as forecast, Young said, “there would have to be significant fiscal constraint measures in play this fiscal year to preserve those positive ending balances through FY16.”

He agrees with Slom’s assessment for the most part, but considers it a “severe-case scenario” because the executive financial plan the administration is currently developing for the next two-year budget recognizes the need to control expenses.

“The ebb and flow of the ending balance is typical of what allows the state to keep positive ending balances in the general fund from year to year even if expenditures do outpace revenues in any given fiscal year,” Young said, adding that this highlights why the $844 million carryover in 2013 was so important.

Young’s ultimate goal is to bring the state’s reserve and ending balances up to at least 10 percent of the general fund budget. It is currently at 4.4 percent of the fiscal 2015 budget.

The state has also imposed a 10 percent appropriation restriction in the general fund out of consideration to slowing revenue growth, Young said.

Slom says withholding a sliver of each department’s funds until revenues improve “will not be enough to stop the freefall.” He noted that the 10 percent reduction for the first quarter, roughly $14 million, is a “drop in the bucket” in the state’s $6 billion annual operating budget.

Harleman analyzed the implications of the Hawaii Council on Revenues’ recently downgraded general fund forecast, which the state relies on for budgeting. By his calculations, the state can anticipate $188 million less revenue in 2015 based on the council’s decision earlier this month to reduce the expected growth rate from 5.5 percent to 3.5 percent. 

It marked the fifth straight quarterly meeting at which the council lowered its forecast. The council smoothed the revenue forecast for 2016 to 2021 to 5.5 percent annually.

State revenues have come in higher than the council forecast for July and August, but Young noted that the “lion’s share of the fiscal year does remain to be seen.”

“I remain optimistic about revenue growth FY15 over FY14, but it does appear the next administration will have to continue to be proactive in fiscal management in order to ensure that the state financial plan stays balanced and positive across the future 6-year financial plan,” Young said in an email Tuesday.

Budget Carryover Projections

The projected carryover balance for the state budget from 2013 to 2019. Courtesy of Paul Harleman, Senate Minority Research.

New Faces Will Be in Key Places

New people will be in at least two of the most important seats in Hawaii government as far as shaping the budget goes. 

With Abercrombie’s loss in the Aug. 9 Democratic primary, Hawaii will have a new governor setting the course on state spending priorities. It will most likely be either Democrat David Ige, a state senator, or Republican Duke Aiona, the former lieutenant governor under Linda Lingle.

Ige led Aiona by 4 percentage points in a Civil Beat poll conducted in mid-September. Independent Party candidate Mufi Hannemann trailed Aiona by 31 points. Only 2 percent of likely voters said they’d cast a ballot for Libertarian Jeff Davis, the fourth candidate in the race.

On the legislative side, there will be a new chair next year for the Senate Ways and Means Committee, which shepherds the overall state budget. Ige held the post for the past three years. The reorganization of Senate leadership likely won’t be known until after the Nov. 4 general election.

Assuming House leadership remains unchanged, Rep. Sylvia Luke will have the lead role on the budget in that chamber as Finance Committee chairwoman.

Hawaii Council on Revenues’ General Fund Tax Revenue Forecast

Fiscal Year  Amount (in billions of dollars)  Growth from previous year
2015 $5.558  3.5%
2016 $5.863 5.5%
2017 $6.186 5.5%
2018 $6.526 5.5%
2019 $6.885 5.5%
2020 $7.264 5.5%
2021 $7.663 5.5%

In his report to Abercrombie earlier this month, Council on Revenues Chair Kurt Kawafuchi noted several pieces of legislation passed last session that affect the state’s bottom line.

Lawmakers voted to extend until 2030 the $1.05 per barrel rate for the environmental response tax, which was set to expire at the end of fiscal 2015. The law is estimated to produce annual revenue gains of $15.5 million starting in 2016.

A change in the annual allocations of the conveyance tax to the rental housing trust fund from 30 percent to 50 percent will cost $11.5 million per year.

And a two-year increase in the amount of hotel tax money the state gives the counties will mean $10 million less general fund revenue in 2015 and 2016.

Kawafuchi said the council also took into account legislation passed in 2013, including:

  • a bigger tax credit for the film industry (costing the state an extra $21 million a year);
  • a cap on the hotel tax allocation to the tourism special fund (expected to increase general fund revenues from $177 million in 2016 to $246 million in 2020);
  • a general excise tax exemption for certain expenses paid by hotel operators and removal of the cap on the aggregate amount of exemptions that can be claimed (estimated to reduce GET collection by $20 million in 2014 and $13 million annually thereafter);
  • and a loss of $111 million in general fund revenues over two years to replenish the Hurricane Relief Fund.

Slom said it’s likely the state will tap into the emergency budget reserve fund and Hurricane Relief Fund to balance the budget since it’s not allowed to borrow from outside sources for operating expenditures. But he cautioned that those funds are not big enough to be more than a Band-Aid for the problem.

“The state and the Legislature will have their work cut out for them to deal with this mess resulting from kicking the can down the road for so many years,” he said in a statement.

Young said he believes the future administration and finance directors will be up to the task of formulating a strategy to ensure financial balance.

“I know I will be doing whatever I can to guide that objective through the upcoming transition in administrations,” Young said.

Projected budget surplus/deficit

The projected annual state budget surplus/deficit. Courtesy of Paul Harleman, Senate Minority Research.

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