University of Hawaii budget cuts to reverberate throughout local economy

Hawaii’s already down­trodden economy may receive a couple more stiff hits over the next two years from a recent move by the Legislature to slash University of Hawaii funding.

An economic impact study released today suggests the $90 million cut in state general funds for UH over the next two fiscal years, made by lawmakers under pressure to reduce state spending due to coronavirus impacts, could sap around $650 million from the local economy.

The University of Hawaii Economic Research Organization analyzed how spending across the 10-campus UH system affects the local economy, including support for many businesses and jobs not directly linked with the university.

The report, which updates a similar 2013 study, was completed after lawmakers finished work earlier this month on a slimmed-down state budget in which they appropriated 8% less in general funds to UH over the next two fiscal years — a $48 million reduction in the fiscal year beginning July 1 followed by a $42 million decrease the following year — compared with UH’s current $544 million fiscal year appropriation.

Kimberly Burnett, the UHERO economist who led the study, said the university is unlike most state departments and organizations in that it leverages general funding for additional revenue that is then pumped into the economy.

“Without us, there’s just a lot of extra spending that wouldn’t happen,” Burnett said.

For every $1 of state funding for UH, another $3.07 is generated through research grants and from spending by four-year students who may otherwise attend college out of state, according to the study based on actual spending last fiscal year.

So a little over $500 million in state general fund spending on UH last fiscal year helped attract $1.5 billion in the form of $450 million in grants through university research, about $330 million in student tuition and $745 million spent by four-year campus students on food, books, housing, transportation and other items.

Other financial contributors that include the UH Foundation and special fund revenue added roughly $300 million, for a grand total of $2.3 billion in university spending last fiscal year, the report said.

A comparable total in each of the next two fiscal years could be curtailed by about $346 million in the first year and $303 million in the second year, based on the general leverage associated with $90 million being cut from UH’s general fund appropriation, Burnett said.

If UH was its own industry, Burnett said it would be about as big as the utility industry, representing roughly 3% of spending in Hawaii’s economy. By further comparison, construction represents about 7% and agriculture 0.6%.

Like industries in general as well as other state agencies, UH generates indirect and induced spending when, for example, an administrator buys a piece of equipment or an employee spends their income at a restaurant that in turn helps the restaurant pay its employees and vendors.

But Burnett said the special value of the university is that it attracts what are almost like matching funds that include research grants and tuition.

“It’s actually the leverage of all these additional dollars,” she said.

Another financial benefit to the state from UH, according to the study, is the higher future earnings of residents enabled by the university to obtain professional degrees.

UHERO said in its report that the 9,345 degrees conferred to UH students during the 2019-20 academic year should give these graduates more than $7 billion in lifetime earnings over the next 40 to 50 years.

Kalbert Young, the university’s chief financial officer and a former finance director for the state, questioned how much recognition UH receives for contributions to the broader economy.

“It comes down to what do you value as being important,” he said. “The University of Hawaii is an economic driver in that it brings in revenue.”

Young noted that UH’s total funding reduction ordered by lawmakers is weighted heavily against the main Manoa campus, where tuition is higher and more students pursue degrees in higher-paying fields compared with community colleges.

The cut for Manoa was 13.8%, compared with 2.8% for community colleges.

UH has flexibility on how it deals with the funding cut, so it could try to minimize impacts on the state economy. The university also can make a case for supplemental budget funds next year at the Legislature for fiscal year 2023.

The university has been challenged by lawmakers on a fairly regular annual basis to justify general fund spending amid competition with other funding priorities that include all state agencies, programs and other things that this year included nearly $30 million for public school teacher bonuses.

UH asked UHERO late last year to update its 2013 study and helped pay for the report because it would take time away from other work by the organization, which is financially supported mainly by general funds, research grants and contract work.

Some observers may question the study’s findings because UHERO is part of the university, but Burnett said the work is a pretty cut-and-dried analysis using a state Department of Business, Economic Development and Tourism input- output model.

“It’s really just an accounting exercise,” she said.