Senator Sam Slom continues to urge spending restraints because of the slow recovery of the state and national economies.
The 2014 April General Excise Tax (GET) collections are still down compared to the same month last year, although slightly improved on March 2014.
The USA national Gross Domestic Product (GDP) numbers for Quarter 2 are up 4% in comparison to Quarter 1, although on an annual basis the GDP numbers for 2014 are relatively low at around 1.1%.
Senator Slom explains “For the short term, it indicates that both the state and national economies are somewhat improving, however, the improvement is only on a quarter-to-quarter basis. This does support that there is only a very slow recovery going on for Hawaii and the nation. Hawaii needs to be frugal in its spending of taxpayers’ monies, as the economy is very fragile at this moment, and both the state and the nation are cash poor.”
“To ride this slow ride out of recession, Hawaii needs to put away some cash reserves, just like our everyday families do. At this time, as the Hawaii Senate Minority has previously indicated, Hawaii is due run out of cash reserves somewhere between 2017-19 if no significant changes are made in cutting costs (or raising revenue), possibly resulting in a constitutional crisis of the unbalancing of Hawaii’s budget.”
According to the recently released Department of Taxation’s monthly tax collection reports, the general excise tax collections for the first quarter of 2014 are down 4.6% in comparison to last year. To make matters worse, the Federal Bureau of Economic Analysis recently downgraded its -1% estimate of real gross domestic product for the first quarter of 2014 to -2.9%, which is, by far, the worst quarter since the recovery began in mid-2009.
The Senate Minority is pleased that the Abercrombie Administration has finally taken a step to curb a portion of the government overspending in the recent decision to restrict 10 percent, or $14 million, of state discretionary spending, however, Senator Sam Slom points out that “this is clearly a reactionary step to the March tax collection reports and steps should have been taken much sooner. The Senate Minority has long cautioned that Hawaii’s economy has not turned a corner yet.” Senator Slom notes “when you talk to small business owners in various industries across the state, it becomes apparent that many businesses have not yet recovered from the recession.”
“While the legislature entered this year’s legislative session, with a Governor boasting of a record high surplus of $844M and a very optimistic outlook of the state’s economy while skirting the subject of our state’s unfunded liabilities (employee retirement and medical benefits) of over $22 billion dollars, it is becoming more and more apparent that the growth spurt in our economy was short lived. Based on these recently released tax collection reports, it is even more important we tighten our belts and identify sensible cuts for the long term to ride this slow recovery out.” says Senator Slom, Hawaii’s Senate Minority Leader.
Senator Slom’s more conservative outlook of the state’s economy was validated by the Council on Revenues, which downgraded the state revenue growth projections from 4.1% at the beginning of the year, to +3.3% shortly prior to the legislative session, then 0% on March 11th, and most recently on May 29th to -0.4% . According to Senator Slom, the recent -0.4% projection of state revenue is still overly optimistic. Slom notes that “if the general excise tax collections for the first quarter of 2014 as well as the recently released U.S. GDP statistics are taken into account, further downgrades of state revenues should be expected.”
Rather than waiting on the next Council on Revenues tax revenue projections, which will be released sometime in September, Senator Slom urges the Abercrombie Administration to take immediate action to avoid the current $450M biannual budget deficit from growing even larger.
The State Council on Revenues significantly reduced the revenue growth projections that are used to determine the budget spending levels for the two upcoming fiscal years. Specifically, the Council lowered the revenue growth forecast for FY 2014 from 3.3% to 0% and for FY 2015 from 7.4% to 5.5%. This downward forecast is important because it will be used by the legislature in the current budget negotiations. At the present time, only the Governor and the House have formally introduced their respective drafts of the state operating budget. However, the House budget is expected to cross over to the Senate this week and the Senate is expected to release its version of the state operating budget in the following weeks.
Now, what are the implications of the current forecast with respect to the various budget drafts and the $844M carry-over surplus?
The downward forecast means that the state has now fewer projected revenues that could be used to fund some of the proposed spending initiatives. As Table 1 indicates, both the Governor and the House budget drafts are not in balance. Because of the imbalance, more than $500M of the current $844M carry-over surplus is projected to be swept away.
In addition, what is largely excluded from the discussion in the media is the fact that the current budget doesn’t account for the required payments the state is obligated to make to pay down its unfunded liabilities for the EUTF. The EUTF is the health insurance trust fund for current and retired state and county employees. Last year, the governor signed into law ACT 268, which requires that the state in FY 2019 will have to pay 100% of the annual required contribution that is needed to pay down the current $13 billion unfunded liability for the EUTF. Under the current budget proposals, only $100M of the required $500M is included. In absolute terms, it really means that the projected carry-over balances in FY 2015 are not somewhere around +$300M but rather closer to -$100M.
Finally, what does the downward revenue forecast signal about the overall economy?
Last year’s $844M surplus has often been politicized and interpreted as a sign of an improved economy. Coming out of the recession, many states experienced significant budget surpluses similar to Hawaii’s. However, according to The Rockefeller Institute, “Any of the unexpected surges in state revenue growth in 2013 is (sic) at least in part borrowed from the future. It will be tempting to treat unexpected revenue growth as a sign of continuing economic improvement, when it could mean instead that future revenue will be lower.” This week’s Council on Revenues confirms the notion that last year’s surplus is not based on an improving economy and that the legislature should be cautious with respect to spending decisions on new initiatives.
 State Budget Crisis Task Force: Final Report, page 4. (2013). http://www.statebudgetcrisis.org/wpcms/wp-content/images/SBCTF_FINALREPORT.pdf
by Paul Harleman, Senate Minority Budget Director
To the majority of taxpayers who are not accountants, the amount of money that government is currently spending in the esoteric categories of “tax exclusions,” “tax exemptions,” “tax deferrals,” “preferential tax rates,” and “tax credits”–though significant–essentially becomes invisible.
Senator Slom is firmly committed to transparency in government, and has introduced SB2153 to require the Department of Taxation to provide an annual report on the estimated costs of all tax expenditures, as well as an analysis on whether or not the expenditures have achieved their intended purposes. This way, state government is held accountable for the cost-effectiveness of every type of tax expenditure.
by Lisa Davidson, posted 2/6/14
Senator Slom talks to Lowell Kalapa of the Tax Foundation of Hawaii.