State lawmakers looking at new revenue or spending cuts to balance the budget have a fresh challenge: Find an additional $266 million.
The state Council on Revenues lowered its revenue forecast yesterday, a recalculation that would boost the state’s projected budget deficit to nearly $1 billion.
The new forecast also has immediate consequences on spending this fiscal year. The council’s forecast came after economists determined that the economy, while improving, would not recover quickly enough in the remaining months of the fiscal year to reach its December projection of 3 percent revenue growth.
The uncertainty caused by Gov. Linda Lingle’s decision last year to delay state income tax refunds also continues to influence the precision of the forecast.
The council agreed to lower the forecast this fiscal year to 0.5 percent growth, down from 3 percent, a $109 million loss of revenue for the state in the fiscal year that ends in June.
Gov. Neil Abercrombie did not follow the council’s last forecast when drafting his budget plan, so the loss in the administration’s calculations is closer to about $60 million. Still, the new projection means the governor will have to find the money over the next few months.
The council’s lower forecast also reduces the base for the two-year budget that lawmakers are now drafting for fiscal years 2012 and 2013. The council bumped the forecast for fiscal year 2012 higher — to 11 percent growth, up from 10 percent, which is a positive — and left 2013 unchanged at 6 percent.
With the new forecast, the state’s projected two-year deficit will swell to about $964 million. The previous deficit estimate, based on the council’s December forecast, was $698 million.
"In some respects what the Council on Revenues did today is confirm the point that I’ve been trying to make from the beginning, that this is less a question about the budget, and about balancing the budget, than it is about what our basic values are and how we’re going to approach it," Abercrombie told reporters last night after appearing at a community forum in Moiliili.
"The numbers are very, very formidable. That means that we’ve got to invest in ourselves, invest in our human capital, take advantage of the low interest rates, put people to work, get the economy moving again and figure out how we’re going to operate with the resources that we do have in a more efficient and effective manner."
Asked whether the higher deficit strengthens the argument for a broad-based tax increase, such as a general excise tax hike, the governor said, "This is a strong argument for us to come to grips with, no matter what approach we use, to figuring out basically where we want to go and how we’re going to do it."
Rep. Marcus Oshiro (D, Wahiawa), chairman of the House Finance Committee, said Abercrombie needs to immediately restrict spending and might have to consider tapping into the rainy day fund and Hurricane Relief Fund to get through the fiscal year. The governor and lawmakers had been hoping to hold in reserve the money left in those special funds in case it was needed for the two-year budget draft.
Lawmakers tapped the rainy day fund last year to help finance social service programs and the hurricane fund to help end teacher furloughs on classroom instruction days. Lingle declined to release the money, citing uncertainty about the economy, but Abercrombie agreed to let the money go his first day in office in December.
The House is preparing to vote on the committee’s budget draft and has passed nearly two dozen bills to increase revenue as options to reduce the deficit. The new forecast pushes the deficit higher and will likely require either more revenue or deeper spending cuts to close.
"This is like a bad nightmare. Deja vu," Oshiro said of the higher deficit, referring to the red ink lawmakers had to deal with during the recession.
"Here were are again, up about a billion dollars," he said. "It’s just tough."
House Minority Leader Gene Ward (R, Kalama Valley-Hawaii Kai) warned against new tax increases.
"Today’s Council on Revenues projections reaffirm the need to stop tax increases that will damage Hawaii’s economic recovery and hurt the pocketbooks of our residents," he said in a statement. "Our economic recovery is still precarious, and the last thing we can afford is to take another $500 million from families and individuals who need these funds to make ends meet."
The Senate Ways and Means Committee, which will tackle the budget next, will have to contend with the council’s new forecast.
Sen. David Ige (D, Aiea-Pearl City), the committee’s chairman, said he doubts Abercrombie’s hope for 5 percent labor savings in contract talks with public employee labor unions will be enough given the higher deficit.
"The challenge got a lot steeper," he said. "We have started to look at the budget, so we will have to revisit what that looks like. I think it puts a lot more pressure on labor savings, because clearly we definitely need to get more than 5 percent labor savings or the budget doesn’t balance.
"We would be also looking at the revenue issues."
Paul Brewbaker, the council’s chairman, said the new forecast could be off by a few percentage points, a caveat the council has been routinely adding after criticism that its forecasts have missed the mark. He complained about Lingle’s "refund shenanigans," which disrupted the flow of tax collections, and cited collections over the past several months that were not as strong as economists predicted given the recovery.
He acknowledged, however, that it is difficult for lawmakers to make public policy decisions based on the estimates.
"People were throwing out numbers like plus or minus four percentage points. That’s not an unreasonable range of variation," he told reporters. "And ordinarily we would be comfortable with plus or minus 1 percent, or at the outside plus or minus 2 percent. We’ve actually recommended in the past that, in deliberating, legislators contemplate just knocking a percentage point or two off the forecast to be safe.
"But the fact is that that widening of the confidence — or lack of confidence — interval makes it more problematic to do fiscal planning than it was before."