It’s tough to plan ahead when the state economy is a shambles, but Gov. David Ige and state lawmakers will have to make tough spending and policy choices for next year, and they don’t have much time to make them.
In the span of just two months, debate among insiders at the state Capitol has shifted from the best ways to develop affordable housing and launch new preschools to whether it will be necessary to furlough public workers just to balance the state budget.
They all had big plans at the start of the year. The ruling Democrats mapped out a legislative session that was supposed to improve the lot of working people in Hawaii. They advanced bills to increase the state minimum wage, increase the state tax credit for food purchases, and finally establish a refundable earned income tax credit for lower-income working folks.
The Legislature also was supposed to put up many millions of dollars to fund negotiated pay raises for tens of thousands of government workers, and Ige wanted lawmakers to appropriate millions more for extra pay for public school teachers who work in hard-to-fill positions such as Hawaiian language instruction and special education.
And then the coronavirus crisis upended those plans and just about everything else, shutting down tourism and virtually all of the economic activity that goes with it.
Last week Carl Bonham, executive director of the University of Hawaii Economic Research Organization estimated that in the year ahead, state tax collections may decline by an unprecedented 10% to 25%.
He cautioned there is a great deal of uncertainty surrounding those estimates, but House Finance Chairwoman Sylvia Luke said state economists are also projecting tax collections will decline by 10% next year.
“I do think that is optimistic. I think it’s going to be worse than that,” said Luke. “If you look around, businesses are closing, people are being laid off, small businesses, some of them may never recover. We don’t know when tourism will be at the level that we have seen in the past, and there are no significant alternative industries that can fill those voids.
“We’d better really think about what does this do to our economy for the next, I would say, at least the next two years.”
As a point of comparison, the drop in state tax collections as the Great Recession washed over Hawaii in fiscal year 2009 was nearly 10%.
And the state budget hole may be even deeper because Ige and lawmakers assumed state tax collections would grow by 3% or 4% next year when they developed the budget for the fiscal year that begins July 1. With the new predictions of a decline in tax collections of 10% or more, the money flowing into the state treasury next year may end up being 13% less than was projected in the budget.
Each percentage-point reduction in tax collections works out to a loss of about $74 million in revenue, which suggests the state could come up short on the order of $1 billion next year. As it stands now, the total general treasury budget for next year is $8.4 billion.
According to research by the Pew Charitable Trusts, most states have taken steps to boost their budget reserves to higher levels than at any time in the past two decades, and Hawaii has generally followed that pattern.
State government closed the books on the last fiscal year on June 30 with a healthy $752 million cash surplus, and data compiled by the National Association of State Budget Officers shows Hawaii built up the balance in its rainy day budget reserve fund from zero in 2011 to nearly $400 million today.
But that rainy day fund is still less than 5% of the state’s annual general fund spending, and it will only go so far. The median size of rainy day funds in 2020 across the country is 8% of annual spending, according to the association report.
Luke said the Ige administration has asked state departments to develop plans for 10% budget cuts from this year’s level, but she said executing the necessary spending cuts won’t be that simple.
Some smaller departments such as the state Department of Defense, which is leading the emergency response to the pandemic, simply cannot absorb deep budget cuts, she said.
Senate Ways and Means Committee Chairman Donovan Dela Cruz said it makes sense for Ige to restrict state spending right now to increase the amount of cash the state can carry over into next year, which would hopefully soften the impact of the budget crisis ahead.
In response to questions about the upcoming budget crunch, Ige issued a statement though a spokeswoman last week saying that “It is clear that COVID-19 is having a significant impact on state revenues. We are evaluating different options to ensure that we have a financial plan that best supports the people of the state of Hawaii.”
“Right off the bat, for sure there will be no new hiring,” Luke said. “It’s too early to say what certain things will take direct hits as far as different programs and what’s going to happen.”
Ige introduced bills this year seeking more than $160 million to pay for negotiated raises for unionized public workers for this year and next year, and just weeks ago those appropriations bills were virtually certain to pass the Legislature. But today is a completely different story.
“It’s pretty hard to justify any sort of raises at this point knowing that if we’re looking at a 10% to 25% reduction in state government, we just won’t be able to afford some of those raises,” Luke said. “We may not be able to afford many of the programs.”
Dela Cruz said that it will be difficult to fund the public worker raises, and “that’s something I think that we’re going to have to sit down with the administration on.”
Randy Perreira, executive director of the Hawaii Government Employees Association, said the union views the negotiated raises as “an obligation that will be fulfilled at the proper time. In some cases, HGEA members are literally risking their lives to provide essential services that our community needs. Our focus right now is making sure public workers who are on the front lines of this battle against COVID-19 are provided a safe workplace as they keep vital government services running.”
It also seems entirely possible the state may again resort to public worker furloughs, a strategy that was adopted in Hawaii during the Great Recession.
House Speaker Scott Saiki said at the end of February he was determined to avoid that option, saying the furloughs of a decade ago were “very traumatic, for students, for parents, for teachers, for everyone.” But that was before state government was mostly shut down to prevent the spread of coronavirus.
Ryker Wada, director of the state Department of Human Resources Development, told members of the state Senate on Tuesday there have been discussions within the Ige administration about the possibility of furloughs, but the plan at the moment is to pay all state workers through April 30.
After that, “a follow-up conversation would have to be made,” Wada said. Senators have been seeking lists of which employees are deemed to be essential and which are considered non-essential, categories that would be particularly important if there are furloughs.
Luke predicted some pieces of the Legislature’s package to benefit working families may survive — she said the drive to expand preschool access for 3- and 4-year-olds still makes good sense, and would take about a year to stand up anyway — and lawmakers’ proposal to develop leasehold affordable housing on state lands can be financed with borrowed money.
The tax credits that lawmakers had hoped to put in place for working families would cost more than $70 million a year, and “we’ve got to have some assessment,” Dela Cruz said.
Some form of tax relief for the working class may also still be viable if it is provided by the federal government, or if it can be funded by Hawaii’s share of the federal $2.2 trillion CARES Act coronavirus relief funding that was approved by Congress and President Trump on March 27, Luke said.
Hawaii state government is expected to receive about $867 million from the CARES Act, she said, but a portion of that funding is supposed to be passed on to help county governments on Kauai, Maui and Hawaii island to respond to the COVID-19 crisis.
To hear Luke tell it, the proposal to increase Hawaii’s $10.10-per-hour minimum wage is unlikely to move forward in the midst of an economic crisis that is pummeling Hawaii’s small businesses.
“I don’t know if at this point minimum wage is a viable option, especially when people have lost jobs. I don’t know if we can justify providing any type of minimum wage increase when at least 10% of our population has lost employment,” she said. Hawaii workers filed nearly 161,000 unemployment claims last month.
Others argue that increasing the state minimum wage — now — still makes sense. Nate Hix, director of Living Wage Hawaii, said that “workers deserve to be paid a living wage, especially now.”
“Over the last few weeks we’ve obviously seen that we have tons of low-wage workers and essential workers working through this pandemic, so if it’s important enough for them to be out there now, it’s important enough for them to be paid enough to make ends meet,” he said.
Luke said lawmakers need to authorize the administration to borrow more to finance construction projects during the downturn to keep that portion of the state economy moving, and House lawmakers have identified $1.57 billion in projects they say are ready or will soon be ready to break ground.
It’s not clear what happens next. The Capitol is closed until April 30, but Hawaii runs on a two-year budget cycle, which means the Legislature appropriated enough money last year to keep the state running in the year that begins July 1. Ige can use his emergency powers to shift money around as needed to cover unexpected expenses.
“I’m not as concerned right now about making sure that a (new) budget is passed,” Luke said when asked about the next steps. “Our priority right now is to get a handle on making sure that basic needs for our citizens are taken care of.”