Expecting what its chairman, Richard Kahle Jr., forecast as a solid economy in the coming years, the state Council on Revenues gave state officials a green light in putting together a healthy two-year state budget.
The projection is more than just advice because the executive and legislative branches are required by the state Constitution to pay attention to what the seven-person Council calculates to be the budget ceiling based on tax revenues. In March, the Council forecast 12 percent in growth over the year ending next month, a 7.5 percent growth in the 2013 fiscal year, and increases ranging from 7 percent to 5.2 percent for each of the four following years.
Kahle, 76, arrived in Hawaii with the U.S. Air Force, stayed to obtain a degree from the University of Hawaii, earned his law degree at the University of California at Berkeley and has spent most of his career since then in economic positions in state government.
He worked in the Hawaii Legislature’s nonpartisan Legislative Reference Bureau from 1969 to1986, including a decade as assistant director of research. Kahle was appointed the state’s director of taxation in 1986 by then-Gov. John Waihee. Following the Waihee administration, Kahle returned to the Legislature as an assistant majority attorney until 2004.
In 2007, then-Senate President Colleen Hanabusa named him to the Council on Revenues, and he was elected chairman by other members last year. While a lawyer by education, Kahle has been immersed in fiscal issues through his career, making him uniquely suitable for the position.
"I was director of taxation," Kahle says, "and part of our discussion does deal with taxes, in the overall, how much general excise taxes are we getting, how much income taxes are we getting — and certain aspects of the department I know better than the people sitting on the Council, because I lived through them."
QUESTION: How does the Council go about predicting the revenue trends?
ANSWER: We look at the years for total personal income that is projected by the U.S. government. It’s the Bureau of Economic Analysis that sets it afoot, but you can use only one year because they have a lag of two years, so we then project the second and third years.
Then we take an average of that and multiply it by the most recent expenditure ceiling, and then you get the new expenditure ceiling. That ceiling comes from the total personal income times the previous expenditure ceiling. This goes all the way back to 1974, I believe … Total personal income reflects payments like Social Security, reflects true income, like working, and it’s put out by the Bureau of Economic Analysis at the federal level.
Q: Is that a difficult process?
A: You should go to one of our meetings. They can take up to two hours, generally. It’s not so much difficult. It’s just, … we have three economists on the Council, (and) we have the Department of Taxation and the Department of Budget and Finance staffing us. It’s basically a consensus opinion, what the economists see in the economy. We have a (lawyer/accountant) woman on there who does a lot of tax work; she tells us what she’s seeing. Ron Migita is on there (as a member), he used to be with the bank, and he has a number of people who talk to him about what’s going on. But it’s basically information-gathering, like how is tourism doing, how are building permits going, how much of a lift have we got. We put it all in there and then they sort of say, well, OK, do you like this number, do you like that number? It sounds sort of crazy, but it works out pretty well.
Q: Are there are a lot of disagreements or is it mainly consensus?
A: It’s mainly process and consensus. Every once in a while somebody will vote against the consensus opinion, but not very often. The most recent dissent we had was the (lawyer/accountant) who felt we should spend more time looking at her figures regarding income problems that she has got on Maui. Basically, we’re doing macro stuff; that was micro stuff, and we just disagreed.
Q: What has been the Council’s record in terms of accuracy?
A: Well, OK, let’s put it this way: On the way down, we lag, when the economy is going in the trash can. On the way up, we lag, because you just can’t predict how well things are going. By a lag, I mean point or two, not just totally off. Where we are now, we’re going to be pretty good, because it’s fairly flat, so we’ll be fairly accurate. But this is an art, it’s not a technical sort of thing.
Q: Carl Bonham, the chairman of the Economic Research Organization at the University of Hawaii, is a member of the Council. So how does UHERO fall into the Council’s forecast?
A: They do not. UHERO very carefully does not tread on our kuleana, nor does the Department of Business, Economic Development and Tourism. They pretty much leave us to where we are. We were created by the Constitution. The 1978 Constitutional Convention put us in the Constitution, so we just don’t interact to UHERO. What is good about UHERO for us is they’re busy gathering the information we need, not totally but partially, to make our projections as a Council.
Q: What figures developed from UHERO did you use?
A: UHERO has done some recent studies on tourism, they’ve done some other economic studies. We’re not looking at a number. We just want to know what they’re seeing. Is tourism going up, which it is. Are building permits going up — which they’re not, they’re pretty flat — to maybe downsize. And so we’re taking it at that level, we’re not looking at particular numbers.
Q: The projected general fund tax revenues are forecast as far ahead as six years, by law. Isn’t that a pretty large jump?
A: We’re really good on the first year. But once you get the first two years, it’s all the economic model spits out for the whole six years. Like Greece. Who knows what’s going on in Greece? It could be tomorrow, it could be six years from now. If one of the Council members feels that six years from now is the way to go, then it’s not an automatic spit-out by the economic model that we have. It’s somebody saying OK, let’s lower that a little bit to reflect Greece. That’s a hypothetical; that’s not real life.
Q: So there is conjecture in some areas?
A: Oh, there has to be, with six years out. …
Q: The state Constitution provision requires that the Council’s forecast should be considered by the Legislature in considering estimates in appropriating funds and enacting revenue measures, and the governor should consider it in preparing the budget. How have governors and legislatures done in the past in doing that?
A: In certain time periods that the Legislature has been in session, they have superseded the expenditure ceiling. Whatever we give them, they take what they want to do their own projection, or they need to spend the money. By superseding the way the Council has given the expenditure ceiling, a two-thirds vote has to be taken. They have to tell us by how much the ceiling is bypassed in total dollar amounts and in percentage amounts, and the governor does the same thing except for the two-thirds. The same thing with the state chief justice, when he submits his program: If he’s going to supersede the expenditure ceiling, he has to do the same thing in terms of telling the public that they’re going to supersede the ceiling and this is the percentage and these are the numbers, and this is why. So it applies to everybody. …
They can take our estimates — and they have in the last couple years — and not argue with it. In the late ’80s and ’90s, the Legislature with frequency overrode, with the two-thirds vote. … There have been periods when the Legislature just flat-outright ignored the expenditure ceiling. The latest group of legislatures have not. And, in fact, if I understand what happened in the House, they put out a budget that was something like $10 million under our projection, which is good; I’d much prefer that than over. The Legislature has its periods when it feels it has to supersede the ceiling. It has its periods, like now, with the current finance chairs, that they’re not superseding it, that they’re saving some money. …
I think the system is working, in terms of general funds. The trouble is all these special funds that are coming up are not subject to the expenditure ceiling, and they keep multiplying, which means we don’t know how big state government really is. We know the general fund, but we have — what? — 400, 500 special funds today, I sort of lost track. That’s a lot of special funds, and it’s all off the books. It’s not subject to the expenditure ceiling. … It’s not on our plate. … They have all these special funds that are not subject to general fund projections. They’re not subject to our estimates.
The Department of Commerce and Consumer Affairs is totally run by special funds. I guess the tobacco people have a couple of special funds, the insurance people have a couple of special funds. They’re scattered all over the place. The aluminum can fund had a lot of money in it at one point, and they’ve been scooping it out — and, of course, when they scoop it out, it then becomes general fund discussion.
