Director warns of state budget squeeze

State Budget Director Wesley Machida warned lawmakers Wednesday the state budget could drop into a deficit if any new expenses crop up or revenues decline.

The "status quo" general fundbudget submitted by former Gov. Neil Abercrombie late last year shows a $6.5 billion budget for the next fiscal year and $6.8 billion in fiscal 2017.

The problem, however, is that the state is required to draw up a six-year financial plan that currently shows each year’s expenses being greater than collections, requiring the government to draw from an ever-dwindling "carryover" balance, Machida said. In fiscal 2018, the end-of-year balance shows only $35.8 million.

"A slight reduction to revenue estimates or increase in projected expenditures during the financial plan period could result in a financial plan that fails to comply with the balanced-budget requirement," Machida said. "Furthermore, failure to maintain sufficient ending fund balances and reserves could jeopardize the state’s good bond rating, resulting in increased costs impacting bond issues, debt service payments and operating funds."

As a result, new Gov. David Ige’s administration is taking "a cautious approach to budgeting and spending," Machida said at a joint hearing before the Senate Ways and Means Committee and House Finance Committee.

But since the release of Abercrombie’s preliminary budget, the Ige administration has found that it will need an emergency appropriation of $29 million to fulfill obligations in its budget for the current year, and then add $117.3 million and $120 million to the 2016 and 2017 budgets, respectively, in "additional resources" sought by state agencies and determined to be required or essential by Ige and Machida’s Department of Budget and Finance. These amounts, alone, would not cause a deficit, Machida said.

The emergency appropriation would go to paying funding shortfalls or "just to maintain operations" in a variety of areas, including litigation expenses for ongoing lawsuits, the Hawaii Health Connector’s deficit, vacation payouts and operations shortfalls in the governor’s office, a Hawaii Health Systems Corp. deficit, National Guard expenses in response to the Pahoa lava flows, and deficits in the school lunch program and student transportation program, Machida said.

The budget director cited "the substantial costs of social assistance entitlements, support for public education, debt service and fringe benefits, and other critical requirements" as the key reasons for the budget increases of $117.3 million and $120 million in 2016 and 2017.

"We acknowledge the significant budget request amounts. However, this budget reflects the additional funding required to support critical government operations and to meet contractual and policy commitments that were put in place prior to this administration taking office," Machida said. Because the new fiscal year starts in five months, "there is insufficient time to implement major program and/or contractual changes at this juncture to significantly lower costs."

Machida emphasized that the $117.3 million and $120 million in additions came following requests from various state agencies for an additional $394.4 million for next year and $451.2 million in 2017, meaning that the administration ultimately rejected three-fourths of what was asked.

Machida had additional bad budget news. The state Constitution requires the state to give taxpayers either a tax refund or tax credit whenever the general fund balance is greater than 5 percent of the previous year’s general fund revenues in two consecutive years. The refund could be as little as $1 per taxpayer, but it has to be paid, he said.

On the positive side, the Council on Revenues revised its projections for the current year to show a 4.5 percent growth in receipts, up from the previous 3.5 percent. That gives the state "a little more breathing room," Machida said, in the form of an additional $53.6 million in the current year, $56.3 million in 2016 and $52.5 million in 2017.

Senate Ways and Means Chairwoman Jill Tokuda said Machida’s presentation gave lawmakers "a lot to be concerned about" when they had already anticipated a tough budget year.

"And this is even before any legislative requests that are going to be coming forward — or the Judiciary or OHA (Office of Hawaiian Affairs)," Tokuda said.