For months Gov. David Ige talked about Hawaii’s $1.4 billion-per-year state budget shortfall, a catastrophic number that acquired a kind of doomsday feel to it. Yet when Ige presented his new financial plan to reporters earlier this month, he never once mentioned that number.
When a reporter asked earlier this month about the size of the shortfall, Ige replied he didn’t have that amount handy, a tacit acknowledgement the infamous estimate of $1.4 billion is outdated.
And that is another sign that, from the perspective of state government, things are looking up.
But this year’s budget drama won’t end there. State lawmakers are now rewriting Ige’s budget, and they appear to be headed in directions that will further complicate the fiscal landscape.
House Finance Committee Chairwoman Sylvia Luke said Monday she is determined to restore funding to a number of state programs the administration has targeted for cuts.
Luke also said she is ready to consider increasing the state capital gains tax and boosting state income taxes on higher-income residents to raise money for the changes she wants to make.
She also contends the state should step up and pay back about $700 million it borrowed from the federal government to cover unemployment benefits for state residents.
Technically, that unemployment loan is the responsibility of the state’s employers, but Luke argues state government should repay the $700 million because it was the state that shut down tourism and much of the local economy to slow the spread of the coronavirus. Employers were given no choice.
If the Legislature accepts that argument, it will have big budget implications. Ige has said he hopes the federal government will help Hawaii to repay the unemployment loan, but did not include repayment of the $700 million in his proposed state budget.
Ige said in a written statement Tuesday that “we can’t afford to pay off the loans based on the current revenue forecasts.”
Even if the state did pay off the $700 million loan, additional unemployment claims would continue to be filed, and the state likely would need to borrow more to pay claims later, he wrote.
Federal Aid Still Expected
Another pivotal variable in the state budget saga is the next federal pandemic aid package, which could be finalized in early March.
Much of the recent improvement in the state budget scenario to date can be traced back to gobs of federal coronavirus aid that has flowed into Hawaii. Federal aid bills that have already passed have delivered substantially more than $11.3 billion to state and county governments, residents and businesses.
Now leaders at the State Capitol are again focused on Washington, D.C., where Congress is negotiating another aid package based on President Joe Biden’s $1.9 trillion relief proposal.
Ige has detailed what amounts to a wish list of items he hopes will be part of that federal package, including help with repaying $750 million the administration borrowed this fiscal year to help cover state operating costs.
Additional federal aid would also allow the state to walk back cuts in state programs that the administration has imposed, and would reduce the need for “labor savings ” that Ige built into his latest budget proposal, he said.
Ige is now in negotiations with the public worker unions, and is seeking about $300 million in labor savings over the next two years. That could take the form of pay cuts, furloughs or reductions in benefits.
On Monday, Ige said that if the version of the aid package bill backed by Democrats in the U.S. House were to pass, “it definitely would provide the resources we need to defer any furloughs,” he said. “The language does provide us flexibility to replace revenues and fill the gaps in our budget.”
When asked how much money the state needs to close its budget gap, Ige told reporters earlier this month that “clearly, if we had more than $1 billion, you know, that would help significantly if we could use it in a very flexible way, that we could use it to replace revenue that we’re not getting.”
Ige said his administration is also seeking help to repay the $700 million the state borrowed from the federal government to cover unemployment claims.
But Luke and others predict that probably won’t happen.
Luke said all indications are the new federal relief package will provide the money to “plug budget holes, deal with immediate demands, deal with the pandemic, all those things.”
But when that money runs out, the state may still be left with one of the highest unemployment rates in the nation, she said.
“If the federal government plans to give a large amount, they’re signaling to the states, ‘This is it,’” Luke said of the upcoming federal aid package.
And since there may not be much additional federal aid coming, the state should consider setting aside money from the relief package in the state emergency and budget reserve fund or “rainy day fund,” she said. That money will be needed in the years ahead, Luke said.
Ige said Tuesday that “we’re not sure that we can count on this federal relief package yet.”
The U.S. House position seems to include discretionary funds for states, but it is not clear the Senate will agree. “The (Senate) Democrats will need all 50 votes to pass the bill tied to budget reconciliation,” Ige wrote.
“Without substantial assistance from the federal government, we will be left with two mega loans outstanding,” he said.
State Needs To Tighten Its Belt
As for Ige’s labor savings, Luke said she wants to achieve that through attrition as employees quit or retire. She also wants to save by restructuring some agencies. For example, lawmakers are considering combining the state Office of Planning with the state Land Use Commission, she said.
Ige noted that “labor savings through attrition is slow and takes years. Restructuring will also take years, unless you’re talking about layoffs. However, layoffs mean cuts in services” and increased unemployment costs.
That cut would force the treatment centers across the state to close on nights and weekends, and “that is troubling to many legislators because you can’t tell rape victims to come back for service on Monday at 8 o’clock,” Luke said. “There’s kind of devastating cuts throughout the entire budget.”
Given all of those needs, Luke on Monday estimated the state budget shortfall at $1.4 billion to $1.8 billion over the next two years. That is about half of the shortfall that Ige announced in December, but Luke acknowledged that estimate “really depends on the assumptions.”
The state Council on Revenues, which is tasked with projecting state tax collections, is scheduled to meet on March 8 to update its estimate, which could also result in seismic shifts in the state budget. The council’s projections form the foundation of the budget.
The much-anticipated new federal aid package, meanwhile, is so critical to lawmakers’ budget deliberations that the House may take some extra time this year to sort through the budget issues, lawmakers said.
The deadline for the House to send its budget proposal to the Senate is normally in mid-March, but Luke and Senate Ways and Means Committee Chairman Donovan Dela Cruz said lawmakers may extend that deadline until after details of the new aid package are available.
Dela Cruz said the size of the budget shortfall today depends on what lawmakers pay now, and what they decide to pay later.
Senators are also concerned with some cuts imposed by Ige, including a plan to close the Youth Challenge Academy facility in Hilo, and cuts to the sex abuse treatment center.
“That’s unfortunate,” Del Cruz said. “I think the administrative proposal included cuts that they know we really shouldn’t be making, and now the Legislature’s going to have to find the funding.”
“We have to wait and see, unfortunately, how the feds provide the state some assistance within the next six to eight weeks, because then we can try to address things that are not going to get covered by the feds, just because there’s so much,” he said.
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