UHERO BRIEFS ARE CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS. WHILE BRIEFS BENEFIT FROM ACTIVE UHERO DISCUSSION, THEY HAVE NOT UNDERGONE FORMAL ACADEMIC PEER REVIEW.
The impact of COVID-19 and the efforts taken to contain it have led to a rapid deterioration in the state’s short- and medium-term fiscal outlooks. At its May 28 meeting, the State Council on Revenue (COR) cut its general fund tax revenue forecast for FY2020-FY2026 by almost $10 billion. The Hawaii Constitution requires the Legislature and the Governor to “consider” the COR forecast numbers in developing their budgets. If the Legislature and/or the Governor prepares a budget that exceeds the Council’s revenue estimates, they must publicly declare this fact, including the reasons for it.
10 thoughts on “How Can the State Government Restore Fiscal Balance?”
Historical perspective and budgets are a good base, but there has never been anything like this. Historical spending is probably very accurate and people will be very resistive to any changes. Managers will point to anyone else to take up the slack as I’m sure they feel whatever they are doing if far too important to cut, which is normal.
If it were me, I’d set a defined time frame to fix the budget of 3 years as anything beyond that is really just kicking the can down the road. There were many suggestions to look for budget cuts/determinations which is both good and bad. What I think is needed is a clear outline of the low hanging budgetary fruit, the easiest to get and implement. Suggesting anything that requires extensive reviews, studies, consulting analysis while likely worthwhile will only exacerbate the problem. So if I were trying to manage this, I’d ask all to take a United Way approach where everyone chips while targeting the most likely areas for cuts and tax increases. Sources and uses. When the boat is sinking, everyone has to bail and repair…or take money out and put money in.
I didn’t see any mention of borrowing from the Fed to cover unemployment benefits which as I understand is available, interest free.
I’d like to see a section of what residents can do now to help…specific suggestions to help reduce costs while helping local businesses survive and generate tax revenue. I’d like to see public service messages as a call to action for all residents to help each other beyond food drives. Like you can help by …going out to eat…or updating your house…or repairing your car…things that don’t depend of tourism.
I’d like to see an engaged public working to pull Hawaii out of a pandemic caused crisis. I’d like to see a public figure be able to do this, a call to action, I just don’t know who has the trust and could be the voice of the people…Maybe Josh Green.
They run through the Fed’s lending program on page 4 actually.
I agree with your thoughts on an engaged public working together, particularly by using their power as consumers. I disagree that any public figure, particularly Green, is a necessary nor sufficient condition to achieve this tho.
Mahalos for this brief, it’s a really good and concise dissection of state revenues and expenditures. Can you tell me where the general fund expenditures came from (noted on page 2 as $7.9 billion in FY19)? My googling didn’t come up with anything and I’d like to see it historically.
Thank you also for mentioning again your fiscal notes recommendation, which I don’t think got enough attention at the time or now. I’d add to it though strong spending limits similar to Sweden (I think?), which has been recommended by economists like Dan Mitchell.
Although this is being discussed a lot I only see the revenues (or spending) being discussed in terms of growth rates and how horrible it all is. But when I look at historical levels, it just doesn’t seem like the sky is falling IMHO. As noted in the brief, tax revenues are projected to fall to $5.8 bln in FY21, which can be level-set by noting that the last time it was around the same level was all the way back in… FY15. So if you took revenue generation/borrowing off the table, this means that spending would need to drop to FY15 levels with a smaller population to service (a population that may get smaller by FY21 if cost-of-living continues driving people away)? I dunno, just doesn’t seem like the marginal dollar of per capita state spending creates sufficient value to make this unworthy of explicit discussion. But I acknowledge that our assumptions of state value-add likely diverge substantially since you cite the 0.7%/year cut in payrolls between 2008 and 2012 as detrimental, and based on the econometric fiscal multiplier models you’ve cited previously.
For general expenditures, try the State of Hawaii Comprehensive Annual Financial Reports noted in footnote #6.
Found em, mahalos!
We are working on adding the CAFRS data to the data portal. Should have it available in easy to use form shortly.
Locking down the economy was the most misguided action ever taken in the history of Hawaii or the US. As Stanford University scientist John Ioannidis wrote, the lockdown response was “a once-in-a-century evidence fiasco.”
The fatality rate from COVID-19 approximately 2% that of the 1918 influenza pandemic. In fact, *every* year before the mid ’40’s (when antibiotics came into widespread use) had more deaths from the flu than COVID-19 has killed this year. (Reference: Trends in Recorded Influenza Mortality: United States, 1900–2004, Peter Doshi)
Greg and Laron, thank you for your comments. Permit us to pick-up on/further develop a couple points.
1. Multiyear Financial Plans. We are in full agreement that multiyear financial plans make good sense. Such forward-looking documents not only inform citizens and their elected representatives of the likely implications of short term actions, but also helps to discourage “kicking the can down the road”. Moreover, it is a technically “doable” task for the operating budget. Indeed, just such a medium term financial approach is routinely practiced in the capital budget process.
2. Annual budgeting? An option Hawaii might consider is moving from a Biennial Budget with an off-year Supplemental Budget process to Annual Budgeting. Such a change would allow policymakers to more readily adjust the state’s tax and spending as new information/data becomes available regarding the economic, demographic, institutional changes that frame (and constrain) budget policy. One can find a good discussion on annual vs. biennial budgeting in the state case studies that are included in the Report of the State Budget Crisis Task Force (Ravitch/Volker Report, 2014).
3. The Hawaii Budget and Revenue Offices. On a related point that too often goes unsaid (eg., it is not addressed in our Restore Fiscal Balance brief), and thus is a matter that we wish to add to our dialogue: the citizens of Hawaii have been well served by the first rate work of the state’s budget and revenue officials and their staffs, including those at UHERO who provide the forecast of the state’s economy. Economic base and expenditure and revenue is forecasting is very difficult stuff in the best of times. And it gets even more challenging when, as we have with C-19, a series of externally-imposed demand (recession) and supply shocks (disruptions in supply chains). It takes a high degree of technical skill and just plain good judgment to get the numbers right. Moreover, as soon as the forecasters get one set of numbers “right”, along comes externally-imposed event, and those “old numbers from last week” numbers need to be re-estimated (e.g., will parts of Californian continue to extend stay-at-home and will Japan re-impose its lockdown?). So, it is back to the office to re-issue the fiscal forecasts. Unglamorous and stressful work? For sure. Widely appreciated? Not so much—except for a moment here.
“Council on Revenues,” not “Council on Revenue.”
Your work here should be expanded to incorporate accrual accounting. In particular, if you examine the budget in terms of accrual accounting, you will find that the so-called “surpluses” of the past are, in fact, deep deficits, owing mainly to unfunded liabilities for accrued pension and health benefits for retired State workers. If you look at the growth rate of the projected future cash costs of these benefits, it will become clear that budget spending that grows with inflation will involve a serious reduction in the real level of government services.
Put simply, the State’s budget was headed for big trouble before the pandemic. It is now in much worse shape than implied by your study.
Turn the GE tax into a sales tax by narrowing its base while raising the rate for a revenue-neutral result.