After all the hoopla, the fanfare, the public protests outside and political speeches inside the Capitol as the 2015 legislative session opened Wednesday morning, people retreated to their offices and homes and went on with their day.

Except for a dozen lawmakers and a few of the state’s top economists and financial planners. They went to the Capitol’s basement auditorium to talk about the realities that the legislators face. Namely, how affairs within and outside Hawaii are affecting what money the state can expect to generate in coming years to pay for thousands of public jobs, social programs, infrastructure and all the other commitments government has made.

The economists included Paul Brewbaker of TZ Economics, Carl Bonham of the University of Hawaii Economic Research Organization and Eugene Tian of the state Department of Business, Economic Development and Tourism. They had slightly different takes but agreed Hawaii’s three main economic engines — tourism, federal spending and construction — were slowing, reflecting a decades-long need for the state to diversify.

Senate wide view during opening ceremonies of the legislature. 21 jan 2015. photograph Cory Lum/Civil Beat

State senators and guests are seated during Opening Day at the Capitol on Wednesday. The Legislature is expected to have a tough year prioritizing what gets funded and what doesn’t.

Cory Lum/Civil Beat

For now at least, tourism is not an engine for further growth, Bonham said. “It’s not something that’s going to move the economy forward in a big way in 2016, 2017, 2018.”

Brewbaker said federal spending is going to continue to fall, partly because Hawaii no longer has the late Sen. Dan Inouye chairing the Appropriations Committee in Congress.

If tourism, construction and federal spending are down, “then it sucks to be in Hawaii. The rest is just haircuts and nail salons.” — Economist Paul Brewbaker

“We forgot to clone Sen. Inouye,” Brewbaker said. 

If tourism, construction and federal spending are down, he added, “then it sucks to be in Hawaii. The rest is just haircuts and nail salons.”

The Hawaii Council on Revenues decided earlier this month to increase its revenue forecast for the current fiscal year, which started last July.

A projection of 3.5 percent revenue growth rose to 4.5 percent, which translates to roughly $53.7 million in additional money for the general fund. The council kept its forecast for the next six years intact at 5.5 percent growth, which would give the state $116.5 million more over the next biennium budget.

The Legislature can use all the fiscal advice it can get as it begins its work on Gov. David Ige’s proposed biennium budget. His initial submittal in December was $25.7 billion, essentially a status quo budget based on the one left by his predecessor, Gov. Neil Abercrombie.

In the month since then, Ige, his new budget director, Wes Machida, and others in his administration have been working around the clock to put their own imprint on the state spending plan.

Most of the details are expected to come Monday when Ige delivers his State of the State address, but Machida revealed some key numbers at Wednesday’s informational briefing.

Agencies Ask for Extra $893 Million in Budget

When looking at just what all the state departments asked for over and above the status quo, their combined requests totaled 1,081 permanent new positions and $419.4 million more for fiscal year 2016, which starts July 1, and 1,042 more permanent positions and $473.7 million more in 2017.

As it stood Wednesday, the governor plans to ask the Legislature to increase the budget $117 million in 2016 and $120.2 million in 2017 through individual requests to be submitted in the coming weeks.

“We have to be very serious about the current obligations that we have and the fact that they are not small by any means.” — Senate Ways and Means Chair Jill Tokuda

That doesn’t include $26.6 million for emergency expenditures over the next two years he wants lawmakers to sign off on for agencies facing shortfalls that are far beyond that amount.

Those requests would have been even higher if it weren’t for the administration’s decision to release $184.8 million over the next two years that the previous administration had restricted due to the slowing economy.

The increased level of spending — which the administration maintains is predominantly due to things beyond its control, like union agreements and soaring health care costs — is only possible because of an $844 million record surplus that Abercrombie left in 2014.

Governor David Ige enjoys opening ceremonies at the senate at the State Capitol.  21 Jan 2015 . photograph Cory Lum/Civil Beat

Gov. David Ige, left enjoys Opening Day ceremonies in the Senate chamber Wednesday, seated next to Supreme Court Chief Justice Mark Recktenwald.

Cory Lum/Civil Beat

It’s not just the next two years that are going to be tough. The long-term financial plan shows the carryover balance plummeting to $35 million in 2018 before it’s expected to start increasing again. 

Senate Ways and Means Chair Jill Tokuda, who ran the three-hour briefing Wednesday afternoon, said after the meeting that she’s concerned about all the money the departments need and the lack of funding to meet those requests.

“We have to really think about how much is it going to cost us not just in this biennium but to sustain us going forward — understanding that these costs continue to inflate over time — and we have to be very serious about the current obligations that we have and the fact that they are not small by any means,” she said.

Tokuda underscored that this is just the administration’s boiled-down request for more money. It doesn’t include any legislative proposals, the Judiciary or Office of Hawaiian Affairs, which will add millions of dollars to the overall budget request.

House Speaker, Senate President Unveil Priorities

In their Opening Day remarks in their respective chambers, House Speaker Joe Souki and Senate President Donna Mercado Kim spoke about what they hope to see state government accomplish this session, which ends May 7. But they didn’t offer a clear picture of where the money would come from.

Souki proposed one of the bigger-ticket items, expanding kindergarten to all 5-year-olds instead of just those born by July 31.

Tokuda said that would cost at least $21 million a year, based on how much the former junior-kindergarten program cost before the state cut it in 2013.

Dr. Carl Bonham, Executive Director, UHERO addresses the Senate Ways and Means and House finance committees at he Capitol auditorium. 21 jan 2015. photograph Cory Lum/Civil Beat

Dr. Carl Bonham told lawmakers Wednesday that tourism won’t drive further growth in the near future.

Cory Lum/Civil Beat

Souki also suggested finding ways to save the state money. He wants lawmakers to look at a public-private partnership between Maui Memorial and Hawaii Pacific Health that could make it less costly to run at least one of the state’s 13 public hospitals.

The Hawaii Health Systems Corporation, a safety net that serves thousands of the state’s poorest residents, has been bleeding money for years. HHSC is asking the Legislature for $267 million over the next two years, plus an emergency appropriation of $48 million for the current fiscal year.

The bulk of the money is to fund collective bargaining costs, which is how a public-private partnership could theoretically save money. Nearly all of HHSC’s roughly 4,000 employees are union members.

Last year, state support amounted to 20 percent of the system’s $550 million operating budget. Kim said HHSC needs roughly $1 billion or more in capital improvements over the next decade. She urged Sens. Roz Baker and Josh Green to take on the problem this session.

Lawmakers to Explore Giving Counties New Taxing Power

The Legislature will be looking at Honolulu Mayor Kirk Caldwell’s request to make the 0.5 percent surcharge on the General Excise Tax permanent to help pay for the city’s $5.2 billion rail project, which is hundreds of millions of dollars over budget.

The counties have also expressed interest in gaining the authority to levy a GET surcharge of up to 1 percent to pay for infrastructure improvements on the neighbor islands, but they need legislative approval to do so. Kauai, Maui and Hawaii counties were given the chance to raise the GET a half-percent when Honolulu did in 2005 but chose not to. 

Souki said the rail project will benefit commercial development on Oahu in the form of transit-oriented development near the stations and help build affordable neighborhoods on nearby state lands.

“We will be holding the city’s feet to the fire and closely scrutinizing its request to extend the GET tax for rail.” — House Speaker Joe Souki

“Ensuring that rail is built on time and on budget will be key,” he said. “We will be holding the city’s feet to the fire and closely scrutinizing its request to extend the GET tax for rail.”

The state keeps 10 percent of the GET surcharge that Honolulu charges. Critics have said the state is getting far more than it deserves for administering the tax.

As Tax Foundation of Hawaii President Tom Yamachika pointed out in his column last week in Civil Beat, the state kept $24 million of the $242 million collected in fiscal 2014.

Economist Brewbaker said he tried telling Caldwell to make “development-oriented transit” his mantra as mayor instead of the reverse.

“The condos should be built before the train arrives,” Brewbaker said.

Kim has tasked Tokuda with facilitating a discussion over whether the counties should be granted the option of enacting a half-percent GET surcharge provided that it is earmarked specifically for housing, transportation, road improvements and vacation rental enforcement.

And Kim has asked Sen. Clarence Nishihara to scrutinize the financial plan for the city’s rail project and obtain a full accounting of the half-percent tax surcharge the city has received thus far.

‘Tough Year’ Lies Ahead

There was a tone of optimism in the Senate and House about working with the new administration on the various priorities for next session.

“There is no one who better understands the state’s challenges of balancing the needs of our citizens with our limited state resources than the former chair of the Senate’s Ways and Means committee, Gov. Ige,” Kim said.

House Speaker Joe Souki proposed one of the bigger-ticket items, expanding kindergarten to all 5-year-olds instead of just those born by July 31.

“I’m confident that together … we will listen and work in the best interests of the people we represent.”

Ige told reporters after the morning session that the administration would be looking at all proposals.

“It’s always good to take a fresh look and make the assessment about whether our communities would benefit from it,” he said.

Ige said the administration is “99 percent done” with finishing all of the budget proposals it plans to ask the Legislature to consider and is on track to have them finalized by month’s end.

Machida said the plan is to submit the administration’s specific budget requests Jan. 30, followed by the formal governor’s messages asking for the funds within two weeks thereafter.

Ige has said his administration won’t be pursuing any broad-based tax increase to balance the budget. Instead, he has put a lot of faith in the benefits of modernizing the state tax system, believing Hawaii could capture hundreds of millions of lost dollars.

The Tax Department’s Compliance Division is going after more money. The agency completed 9,202 cases in 2014, up from 7,701 in 2013. The amounts assessed grew similarly, from $87 million to $99 million.

The division is also trying to collect more money it believes is due to the state from online travel companies. The division issued assessments totaling $217 million in 2014, but those were appealed to the courts and are being handled by outside counsel, according to the department’s annual report.

“It’s a tough year,” Tokuda said. “But I think this Legislature is very aware of the fiscal constraints that we’re in and I think this current administration is very much aware of the fiscal constraints that we’re under.”

Read Machida’s financial briefing to the Legislature below.

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