When the fiscally conservative Gov. David Ige exits the State Capitol in about two weeks, he will leave behind the largest budget surplus in state history, and his administration is projecting even larger cash balances in the years ahead.
The outgoing administration and the Legislature also have squirreled away nearly $1 billion in the state’s “rainy day” emergency reserve fund — a fund that was drained during the pandemic — and about $3.7 billion more in a separate fund to help pay for future health care costs for state workers and retirees.
Those cash reserves and the rosy budget outlook present a rich opportunity for Gov.-elect Josh Green, who is promising a “new era” in state politics featuring aggressive efforts to provide more affordable housing and put more Native Hawaiians on Hawaiian homelands.
Some fault Ige for being too fiscally conservative during his eight years in office and for failing to do bigger things. But Ige makes no apologies.
“The state is in historically the best financial condition it’s ever been,” Ige said last week in an interview. “From where we were to where we are today, it’s like 180 degrees.”
Always the master of the understatement, Ige added that the incoming Green administration “should be positioned to be financially able to pursue a lot of different initiatives, if that’s what they want to do.”
Even the Grassroot Institute of Hawaii, a fiscally conservative group that has fretted over Hawaii’s budgets for years, acknowledged dramatic improvement in the state’s fiscal position. In fact, the group now argues the state is so flush that it is time for a tax cut.
New budget data the Ige administration distributed to investors in connection with a bond float early this month shows the state ended the last fiscal year on June 30 with a cash balance of nearly $2.62 billion, more than any previous budget surplus.
That happened on Ige’s watch, but the governor concedes that much of the credit for the sunny budget situation belongs to the federal government, which propped up the state government in at least two major ways.
The most obvious support was a huge direct subsidy through the American Rescue Plan Act, which provided $1.6 billion in a cash bailout last year to assist the Hawaii government during the pandemic. That injection of federal support put an end to the fraught, yearlong local debate over the possibility that the state might need to furlough state workers to help balance the budget.
The other critical support was the surge of federal money that was distributed to local residents and businesses after the pandemic hit in March 2020. That included generous federal unemployment benefits, stimulus checks sent to Hawaii families and Paycheck Protection Program loans to businesses that were forgiven and don’t need to be repaid.
That support was so effective at putting money in the hands of residents that inflation-adjusted personal income in Hawaii increased by 3.4% in 2020 and increased again by an estimated 2.6% in 2021, according to state data. That extra money fueled consumer spending that helped state tax collections to soar.
In all, the federal delegation reports federal support for Hawaii over the last two years totaled more than $20 billion, including enhanced unemployment benefits, the Paycheck Protection support for businesses and extra spending for social programs such as food aid and health care, Ige said.
Ige also credits the state’s Safe Travels Program, which brought nearly 12 million visitors to Hawaii during a 15-month window of time during the public health crisis. That program was so effective that visitor traffic from North America in 2021 was above pre-pandemic levels, he said.
“We are way ahead of where people thought we would be, and I do think a lot of that is Safe Travels,” he said.
At this time last year the Ige administration was projecting that state revenues would increase by 6.3% in the year that ended June 30, but revenues actually grew by an astounding 29% in that year.
That sudden surge in tax collections dumped an extra $1.65 billion into the state general treasury in the fiscal year that ended June 30, which accounts for much of the current budget surplus.
The outgoing administration also projects enormous budget surpluses in the years ahead, but those numbers are more speculative than the data for last year and this year.
The data disclosed to investors shows the state expects to have a cash balance of more than $2 billion when this fiscal year ends in about seven months, and a much larger surplus of more than $3.9 billion in the fiscal year that ends June 30, 2024.
The disclosure document projects the state surplus will then reach an astronomical $10.3 billion at the end of fiscal year 2027. But experts generally caution against taking the state’s long-term tax and spending projections as gospel since economic conditions and state policy can change rapidly.
For example, those longer-term state projections assume no recession will happen between now and fiscal year 2027. Ige acknowledged they also don’t take into account the cost of pay raises the new administration will almost certainly negotiate with the public worker unions in the years ahead.
The state also calculates that inflation-adjusted personal income in Hawaii this year is decreasing by 4.7% even as the tourism industry recovers, in part because of escalating prices and the end of the federal pandemic support. That may translate into less consumer spending and less state tax revenue.
“The state is in historically the best financial condition it’s ever been.” — Gov. David Ige
Economist Paul Brewbaker points out the supposed monster $10 billion surplus projected for 2027 is nearly equal to the administration’s projection for all state general fund spending that same year. For that projection to be accurate, the state would need to actually reduce inflation-adjusted spending in the years ahead, which seems very unlikely.
In fact, Brewbaker said reaching a surplus of $10 billion in 2027 would require that the Legislature and the Green administration refrain from spending about $2 billion in surplus tax collections each year, and let all of that extra, unspent cash to pile up. That also seems implausible.
“They’re going to have extra money — if this revenue forecast works out — that they can add on and add on (to state spending), to make sure they get reelected, and make sure they fix problems,” Brewbaker said of lawmakers and the new administration.
The Legislature knew last spring that it had a cash surplus on the order of $2 billion for the fiscal year that ended June 30, and lawmakers got a head start on some of that spending.
Lawmakers approved $600 million for the Department of Hawaiian Home Lands to make good on promises to put Native Hawaiians on homestead lands and appropriated money for a $328 million settlement to resolve claims by people who have waited for decades for homes.
They also committed $300 million to the Rental Housing Revolving Fund to develop affordable rentals, and $200 million more for the new School Facilities Authority to develop new preschools. Lawmakers also approved more than $260 million to boost pay for public school teachers and another $250 million in rebates for state taxpayers.
Most of those initiatives amount to one-time spending that won’t affect future budgets and those are the kinds of undertakings lawmakers should focus on as they decide what to do with the windfall of another $2 billion surplus at the end of the current fiscal year, said state Rep. Sylvia Luke, the longtime chairwoman of the House Finance Committee who has been elected as the next lieutenant governor.
By contrast, if the state instead suddenly goes on a hiring spree, the cost of those new employees will continue for many years into the future. Even contracting for services can have a similar effect because contractors may come to expect their contracts will be renewed each year and terminating a contract may result in layoffs.
“Hopefully the Legislature will continue its practice of making large, one-time investments,” Luke said of the handling of the surplus.
There has been less fanfare surrounding efforts by lawmakers and the administration to replenish the state reserves and make a dent in the state’s unfunded liabilities, but the money committed to those areas in recent years will help the Green administration in the years ahead.
The Emergency Budget and Reserve Fund, better known as the state’s “rainy day” fund, was tapped out early in the pandemic, but Ige and lawmakers have rebuilt the balance in the fund to about $830 million. The administration plans to deposit another $130 million in the fund this year, raising the total balance to about $1 billion.
The Ige administration also pushed hard to pre-fund public worker and retiree health care costs by setting aside money in the Employer-Union Health Benefits Trust Fund. The state has managed to build up the value of that fund from about $100 million when Ige took office to $3.7 billion as of June 30, 2021.
“I know that lots of people would like to spend state dollars on a wide array of things, and I just felt that it would be irresponsible, primarily because we’ve made promises” to public servants to provide pensions and health coverage to public workers after their retirement, Ige said.
Those costs are embedded in hiring additional public workers, “and we’d better be keeping track of that and making sure that we are able to afford to pay the entire cost of an employee,” he said.
And the startling recent growth in state tax collections may not last. Luke said the economy may slow in part because the overall visitor industry still has not fully recovered from the pandemic, particularly the Asian market.
Ige said experts in the visitor industry tell him the lucrative sector of Japanese tourists in Hawaii will not fully recover to pre-pandemic levels until the end of 2023 at the earliest. The state projects Hawaii will have 9.2 million visitors in 2022, and visitor arrivals in 2024 will once again equal the all-time high visitor total of 10.2 million who came to Hawaii in 2019.
But Brewbaker worries there may be trouble ahead, economically speaking. “Hawaii’s economic performance was already fading pre-pandemic, and we haven’t done any better subsequently,” he said. “The prospects for economic growth into the mid-2020s aren’t all that good, or should be of greater concern.”
He cited the public pushback against non-stop arrivals of millions of tourists, and the crackdown on illegal vacation rentals at a time when there is limited growth in the inventory of hotel rooms that could possibly accommodate more tourists.
He is also concerned about public resistance to other projects that could contribute to growth, including disputed plans to build the Thirty Meter Telescope on Mauna Kea and GMO crops. And he is concerned about the downward population trend in Hawaii in recent years as more locals move to the mainland.
One positive development on the horizon is the federal Infrastructure Investment and Jobs Act, which is expected to pump about $2 billion into Hawaii’s construction industry in the years ahead.
Joe Kent, executive vice president of the conservative Grassroot Institute of Hawaii, says the state will need to navigate some “choppy waters” ahead as the mainland appears headed for a recession. Inflation is high, the housing market is “starting to buckle” from high interest rates and the labor market is still unhealthy, he said.
But in the near term, Kent said the state is in such a good fiscal position that it should pay cash for construction projects rather than floating bonds to borrow money. He contends this is “a perfect opportunity” for the state to cut residents’ taxes.
“For example, the state could reasonably cut $500 million to $1 billion in taxes, and still have a $1 billion surplus with an additional $800 million in reserves,” Kent said.
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