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Monday, December 22, 2014         

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Repairs tab may top $32B

Past spending decisions and priorities led to the list, economists say, and it is mostly necessities

By Sean Hao

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Hawaii taxpayers are on the hook for billions of dollars in construction projects over the next few decades, ranging from sewer upgrades to undersea power cables.

When unfunded liabilities for state pension and health benefits are included, the tab tops $32 billion, or an average of $781 per person per year for 30 years.

Taxpayers might groan at the multibillion-dollar burden, but economists say the projects are mostly needed and that the tax burden can be handled.

"When you say billions, people have a cow about it, but a billion dollars is not that much money anymore," said Paul Brewbaker, director of TZ Economics. "People need to understand that the state spends $10 billion a year."

Hawaii residents will not necessarily pay all of the $32 billion because a portion of some projects will be paid for with federal funds, and tourists will help cover part of the costs. The burden also will be shared by more residents as the population of the state grows from 1.28 million now to a projected 1.55 million in 2030, according to a state estimate.

In addition, some of the envisioned projects might never go through, such as a $1 billion-to-$3 billion undersea cable to bring renewable energy produced on neighbor islands to Oahu.

Supporters of the spending plan say the projects will improve the state and are, in many cases, long overdue.

The harbor modernization program, for example, is aimed at preventing bottlenecks for goods coming into the state, said state Transportation Director Brennon Morioka. Airport improvements are meant to keep the state's airport facilities competitive with other destinations from an aesthetic and efficiency standpoint.

"I think the road (improvement needs) are self-evident," Morioka added. "We needed some of these improvements a long time ago. A lot of these larger projects have been deferred, and the need has continued to grow." The long list of high-priced projects and liabilities is a result of past spending decisions and priorities, Brewbaker said. That includes big bills resulting from deferred maintenance and an inability to fundamentally restructure generous state employee benefits, he said.

"Let's get rid of the idea that you get something for nothing," Brewbaker said. "That's why you have to make really hard choices about competing and popular projects."Earlier this month the Hawaii Institute for Public Affairs released a study that found the state faced $14.3 billion in infrastructure costs during the next six years, excluding operating and maintenance costs. The report released by the institute was the most comprehensive analysis of infrastructure costs to date.

However, the institute's total excluded portions of a planned elevated commuter rail scheduled to open in 2019. It also excluded much of the $4.7 billion in city sewage and waste-water treatment upgrades needed to comply with terms a recent legal settlement.

Recently announced projects to bring Honolulu into compliance with sewage standards will lead to 3 percent to 5 percent sewer fee increases each year for about 25 years, according to the city. That means the average single-family home's sewer bill could rise from $91 a month today to between $191 and $308 a month, excluding inflation, in 2035.

Separately, Honolulu's planned rail line, which will cost an estimated inflation-adjusted $5.5 billion, has a projected per-person cost of about $4,000 for Oahu residents through 2022. That money will come from a half-percentage point general excise tax surcharge.

Some projects will be funded primarily by visitors, including a $497 million plan to build consolidated rental car facilities at airports. Starting in September, the state will raise a current $1-a-day rental vehicle facility surcharge to $4.50 a day. That hike represents about a 30 percent increase in the $11.47 in typical fees and taxes due on a $45-a-day airport car rental.

When it comes to infrastructure improvements, political leaders need to balance the public's needs against economic reality, said Jeanne Schultz Afuvai, interim president and chief executive for the Hawaii Institute for Public Affairs.

"We wanted to bring the subject of infrastructure ... to the average person so they have an understanding of the gap between what's available and what people want," Afuvai said. "For example, everybody wants their overhead lines buried underground, but that would cost

$8 billion to $11 billion on Oahu, so that's not going to happen in my lifetime."

The HIPA report did not attempt to assess the ability of state and local governments to cover those costs, but the likely options are clear: raise taxes and fees, cut spending elsewhere or borrow.

Overall the state had about $4.7 billion in tax-supported debt in 2008, according to a state debt survey released earlier this year by Forbes Magazine. Based on that figure, Hawaii had the third-highest debt per capita among all states at $3,675. Only Massachusetts and Connecticut ranked higher, the magazine reported.

That debt figure excludes billions in unfunded pension and health care liabilities. As of December the state had an unfunded liability of $6.24 billion in its public employee retirement plan. In the past the plan has suffered because contributions were diverted to other uses and because of declining stock values.

Separately the state had $10.8 billion in unfunded liabilities for retiree health care in part because workers were living longer, according to a February study by the Pew Center.

Although those unfunded liabilities appear massive now, higher future investment returns and changes to benefit plans could alleviate some of those liabilities without dipping deeper into taxpayer pockets.

Hawaii's debt, unfunded liabilities and deferred maintenance problems are not unique among states.

"Everybody has pensions with unfunded liabilities in health care and retirement plans," said Carl Bonham, executive director of the University of Hawaii Economic Research Organization. "That seems to be the American way.

"It really does beg the question of how do we fix the policy situation so we make these decisions. When you put up a building, you need to put aside money for maintenance and not use that money for something else," Bonham said.

Thirty billion dollars in spending spread out over three decades should be manageable given the size of the state's economy, which now tops $70 billion in annual economic activity, Bonham said.

"The (planned projects) are manageable mainly because many of them are investments, but they need to be good investments."






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