Hawaii will have almost a billion dollars less than expected to fund state government programs and pay public workers over the next two years, according to a new economic forecast.
The state Council on Revenues in January had projected 3.3 percent growth in general fund revenues for fiscal 2014, which ends June 30. The council voted Tuesday to change its forecast to no growth, although the reasons varied wildly among the seven appointed members who blamed everything from Russia and rain to shark attacks and traffic.
“It’s going to have a tremendous impact,” Council Chair Kurt Kawafuchi said after the two-hour meeting.
The downgraded forecast translates to $180.4 million less revenue this year, which the state can weather with relative ease thanks to a record $844 million carryover balance.
But the council also lowered its forecasts for 2015 and 2016, which leaves lawmakers with a lot less money to work with than expected as they hammer out the supplemental state biennium budget over the next several weeks.
The council now expects the general fund to grow 5.5 percent next year instead of 7.4 percent, and only 5 percent the following year instead of 7.7 percent. In dollars, this means the state is forecast to take in $297.6 million less than expected in 2015 and $476.3 million less in 2016.
House Finance Chair Sylvia Luke said Tuesday that the forecast came in lower than she thought it would. She was planning on 1 percent or 2 percent for 2014, but not zero.
Still, she expects the state to end with a $589 million carryover this fiscal year and a $68.3 million balance in 2015, plus a budget reserve of roughly 5 percent of expenditures. The 2014 operating budget is $5.98 billion.
The House is set to send its state budget plan for 2015 over to the Senate after a procedural vote Wednesday. Reps trimmed $53 million off the administration’s proposal when the bill went through the Finance Committee last week.
Luke and her counterpart in the Senate, Ways and Means Chair David Ige, were criticized for taking a conservative approach to the budget last legislative session. They said the council’s forecast justifies their strategy.
The Legislature funded many programs as pilots last year, for instance, instead of appropriating enough money to launch them statewide, including some of the governor’s initiatives like early childhood education.
“If we had funded those programs, we would probably have to look at stopping them this year,” Ige said.
Gov. Neil Abercrombie, who is seeking another four-year term this November, has been touting the state’s “historic” $1.1 billion fiscal turnaround that has happened since he took office in 2010.
The state’s financial health was the top issue the governor underscored in his State of the State address in January.
And he and his budget chief, Kalbert Young, highlighted the fiscal turnaround at a Hawaii Chamber of Commerce function in December.
“The administration’s budget and six-year financial plan were developed anticipating the likelihood of revenue fluctuations,” Abercrombie said in a statement Tuesday. “The result is both the budget and the six-year plan are solid and sound.”
Ige, who is running against Abercrombie to be the Democratic nominee, paints a different picture.
The council’s latest projections take $500 million out of the current biennium, Ige said, which was even more than he anticipated. The result is Abercrombie won’t get everything he wanted.
Sen. David Ige talks about the revenue forecast at his office, March 11, 2014.
“It’s like starting from scratch,” Ige said. “A lot of (the governor’s) requests will not be funded in order to balance the budget.”
When Civil Beat first reported the $844 million surplus in November, Ige cautioned that the state was planning to spend $145 million more than it expected to bring in next year and $341 million more than it would likely take in the following year.
With the revenue forecast downgraded, Ige said, “the surplus has evaporated.” He said the governor’s proposed budget would be in the red by 2015.
Looking more big picture, Young seemed confident the state was still in fine fiscal shape.
“The Council on Revenues adjusted forecast is signaling that revenue growth for the state may have peaked, at least for the short term,” he said in a statement.
“My approach as finance director is to manage the budget and financial condition across multiple fiscal years. As a result, near-term revenue revisions are evaluated and accommodated on a multi-year basis. As in the past, the state’s financial management team is prepared to exert measured controls of the state’s budget to ensure that programs are sustainable through any economic cycle.”
The council’s downgraded forecast was cushioned by the administration reporting Monday that a 4 percent growth in statewide employment is expected from the first quarter of 2013 to the first quarter of 2015.
The report is normally done using the third quarter as the basis, but the Department of Labor and Industrial Relations said future forecasts will use the first quarter. The U.S. Bureau of Labor Statistics dictates the timing, according to DLIR.
Even with the downgrade in the financial forecast, Ige and Abercrombie both believe the state won’t have to dig into the emergency reserves that it has just now started to replenish.
The governor signed bills in July to put $100 million into the rainy day funds that the state used to help weather the recession.
Putting $55 million into the hurricane reserve fund is money out of the general fund, Kawafuchi said. It’s factors like that, he said, that are keeping the growth rate flat.
“We’re not saying the economy is declining; it’s actually a little bit up,” he said.
General fund collections were down 1.1 percent last February compared to a year ago. For the state to hit its zero growth rate for 2014, it has to grow at 2 percent for the next four months.
Kawafuchi said the council is taking a more cautious approach in part because of wildcards.
“We see some strong construction but there’s a lot of dynamics going on in the world like Russia, the potential instability there,” he said, referring to Russia’s recent invasion of Ukraine.
House Finance Chair Sylvia Luke talks about the revenue forecast at her office, March 11, 2014.
Vice Chair Marilyn Niwao said during the meeting that nationwide publication of shark attacks hurt economic activity, especially on neighbor islands. She added that the rainy weather hasn’t helped either.
The effects of legislation, both prior and pending, hit the state’s bottom line.
Niwao told lawmakers last month that errors in forecasting growth rates can come from delays in the collection of taxes or payment of refunds and errors in estimating the effect of new tax laws and tax credits.
The council currently has to determine the effect of tax credits with data that is several years old.
In 2013, the state passed a law to give the film industry a bigger tax break, raising the cost of the credit by an estimated $21 million over the level in fiscal 2013, according to a Council on Revenues report in December.
The state added $6 million annually to its coffers though by eliminating the general excise tax exemption for liquor, tobacco and food sold to common carriers.
After making permanent the transient accommodations tax rate of 9.25 percent and capping the allocations to special funds last year, the state is expected to lose about $11 million in 2014 and 2015. But the state stands to gain an extra $177 million in 2016 to $246 million in 2020.
It’s one of many fiscal bills, including tax credits to help the poor, that the new forecast could put a damper on. Ige and Luke didn’t rule anything out, but said the forecast definitely makes it harder to consider certain proposals.
The council forecasts general fund tax revenues on a quarterly basis. The next is due June 1.