New policy would bank $680M in state rainy day fund

Gov. David Ige has adopted a new budget reserve policy that seeks to sock away hundreds of millions of dollars in the state’s “rainy day” budget reserve fund in the years ahead, creating a cash pool for future emergencies that would be far greater than any amount the fund ever held before.

That effort to bank $680 million or more in the emergency and budget reserve fund is part of a larger, aggressive administration strategy to squirrel away cash for the future, but some observers worry Ige’s conservative budgeting approach may cause the state to neglect some of today’s pressing social service and other needs.

The new budget reserve policy declares the state will try to maintain a balance in the emergency budget reserve fund equal to 10 percent of the state’s annual general treasury collections, which are now about $6.8 billion a year.

To help develop that policy, Ige said state officials studied the impact of economic recessions on the state budget over the years to gauge how much in reserves should be held in the rainy day fund. That research included an analysis of the impact of the Great Recession that began in 2007, which triggered a $1.3 billion state budget shortfall.

“When the economy goes bad, the revenue drop is very significant,” Ige said. The new policy requires the state to maintain much larger cash reserves than it does today, but that is “what we should have in order to have the rainy day fund truly serve its purpose to help us through a change in the economy,” he said.

The rainy day fund currently has just $100.9 million, but the administration is now processing another deposit of $201.4 million into the fund for this fiscal year and the state likely will be required by law to deposit at least an additional $32 million into the fund next year.

Beyond that, Ige said there is no firm timeline for building up the fund to the 10 percent target of $680 million or more.

“I think we are looking at what’s appropriate,” Ige said of the timing. “We do know that the sooner we can establish that 10 percent guideline in the rainy day fund, the better prepared we would be for the economic downturn.”

Health care obligations

Officially known as the “Emergency and Budget Reserve Fund,” the rainy day fund can be tapped when there is a sudden, unexpected decline in state tax collections or other revenue, or when money is needed to cope with emergencies or other unexpected events.

Once money is placed in the rainy day fund, it cannot be used for certain purposes, including paying the expenses of the state Legislature, or paying raises or other benefits negotiated by public workers in their union contracts.

Ige said the state adopted the new budget reserve policy in part to put the state in a better position to improve its bond rating. A higher bond rating allows the state to borrow money at lower interest rates, and the state was awarded a higher rating last month.

Ige has also been aggressive in banking money to pay for future health benefits for public workers, retirees and their families. Last year the administration set aside almost $250 million as part of a long-term effort to prepay those future health care obligations, which was $86 million more than the state was required to contribute by law.

This year, the administration plans to contribute almost $328 million to cover future health care benefits for public workers, which is almost $98 million more than the minimum contribution required by state law.

The state has an unfunded liability of more than $9 billion for the Hawaii Employer-Union Health Benefits Trust Fund that provides health benefits to public workers, retirees and their families, and has an additional unfunded liability of about $6.2 billion for the public workers’ pension fund.

The state makes regular payments to try to reduce those liabilities, and the booming state economy has allowed the Ige administration to commit tens of millions of dollars extra to prepay the state’s health care obligations.

In fact, Ige signed his new budget reserve policy on Aug. 5, just weeks after the state closed out the last fiscal year with a cash balance of more than $1 billion, the largest cash surplus in state history.

Little help for residents

However, there are many demands for state resources apart from its unfunded liabilities. Such a large cash surplus traditionally triggers calls from special interest groups advocating additional spending on social services, schools and other programs.

Victor Geminiani, co-executive director of the nonprofit Hawaii Appleseed Center for Law and Economic Justice, said the administration’s conservative approach to budgeting won’t help lower-income residents cope with the severe economic challenges they face in Hawaii.

“I appreciate the intention,” Geminiani said of Ige’s approach. “I’m a fiscal conservative, and I believe that you really have to watch how you spend dollars, but at some point you’ve got to deal with the current realities, not necessarily the future contingencies.

“We’ve got the highest cost of living, the highest cost of affordable housing in the nation, we’ve got the highest tax burden in the Unites States, and the lowest wages when you factor in the cost of living,” he said. “When are people in the state government going to start to deal with the current realities of our low- and moderate-income people, and the struggle that they go through on a day-to-day basis?”

The state has failed to take even minimal steps to help families cope with economic stresses such as rapidly increasing rents, low wages and a burdensome state tax structure, he said. Instead, the state has maintained “atrocious” and regressive tax policies that burden working families, Geminiani said.

Appleseed has advocated for years for an increase in the renters tax credit and creation of a state earned-income tax credit for low-income workers to provide relief to poorer residents, but has been unable to get the state to approve those measures. The state renters tax credit has not been increased since 1981.

“Every single year, the same thing happens: Either the revenues go down, or the liabilities and the fear of the future goes up, even in good times … and still, the low- and moderate-income people don’t get any significant increase in terms of their ability to survive,” Geminiani said. “Why is that? Are they gonna do it in bad times? Are they going to wait for a recession to actually make some improvements in the ability for people to survive in our community? I don’t think so.”

Present vs. future

At the same time, the state’s unionized employees including teachers, professors, and white-collar and blue-collar workers are all bargaining for pay raises and new contracts this year. Randy Perreira, executive director of the Hawaii Government Employees Association, said the union has its own concerns about Ige’s cautious approach to budgeting.

“This governor’s administration so far has been very, very conservative, to the point where every cent, it seems, that is available is either going toward an unfunded liability, or now toward the reserves,” he said. “The growing concern that we have is that there are so many needs in the community that could be met when government has the resources as it does today, but they’re not being met.”

“That’s where this administration has got to find a balance between trying to be what they view as fiscally responsible, versus prudent use of resources to help people today who are in need, and there are a lot of needs,” Perreira said.

Those include the need to improve the public education system, the need to deliver more social services for the poor, and more, he said.

HGEA is the state’s largest union, and Perreira said some of his members’ wages are not increasing fast enough to keep up with the increases in the cost of their health coverage, let alone the increases in Hawaii’s cost of living.

“Yeah, it makes some good sense to put money aside, but we can’t overdo it; there has to be a balance and has to be some mind toward the needs of the present,” he said. “It sounds good, it’s going to sound good to the average taxpayer who thinks it’s a good thing to save money, but if we’re just sitting on money that is not being put to good use today when there are a lot of good uses for it, then I don’t think we’re being responsible.”

Ige said the state is still working to restore state functions and programs that were cut during the Great Recession, including critical agencies such as the vector control branch in the state Department of Health. Among other duties, that branch is responsible for helping to halt the spread of mosquito-borne diseases such as dengue and the Zika virus.

The administration plans to put more money in the rainy day fund next year, but officials would not say how much. Ige said his administration will use a “balanced approach” as it develops its next two-year budget that will be submitted to lawmakers in December.

“I think we are trying to find a balanced way forward,” Ige said. “We want to restore and increase the fund balance in this emergency fund. At the same time, we will be looking at the budget requests from all of the departments and agencies and really looking for priority programs that we want to initiate or restore.”