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State of Finance Dripping in Red

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By Lowell L. Kalapa

Regardless of which side of the fence you fall with regard to the recent overrides of the governor’s line item vetoes of certain appropriations, everyone should realize that the state is in dire financial straits. And as the saying goes, “that ain’t no bull.”
If one were to construct an outlook for the state general fund based on the forecast of revenues made by the state’s Council on Revenues and the appropriations that were approved by the 2003 session of the legislature, the outlook would show a projected deficit position for the fiscal years 2003 through 2005.
Again, this projection is based on: (1) the biennial budget and specific appropriations as approved and line- item vetoed; (2) the May 2003 state Council on Revenues’ downward revision in general fund tax revenue growth; (3) federal offsets for Medicare approved by Congress in the Jobs and Growth Tax Relief Reconciliation Act of 2003; (4) lapses in fiscal 2003 equal to lapses made in fiscal 2002, and (5) approximately $50 million in lapses per year during the 2003-2005 fiscal biennium.
The anticipated deficits in the three fiscal years in the outlook are largely due to the Council on Revenues’ May 2003 revision which lowered the estimated general fund tax revenue take by $143.4 million within two weeks of the close of the 2003 legislative session. The Council’s less than optimistic forecast was preceded by a $131.4 million reduction adopted at its March meeting after having predicted a 6.1% growth rate for 2003 prior to the convening of the legislature.
The earlier optimistic forecast had been fueled by a belief that because the aftermath of 9/11 hit state tax collections so hard, any kind of economic activity this year would contribute to a robust growth rate. However, as the Council later learned, the plethora of tax credits and tax incentives adopted by the past few sessions of the legislature began to take a heavy toll on tax collections this year.
The outlook includes $25 million per year in federal government offsets for Medicare expenses as provided in the Jobs and Growth Tax Relief Reconciliation Act of 2003 approved in May. Congress provided temporary assistance to the states in federal fiscal years 2003 and 2004. The assistance is in two forms: (1) increased Medicaid reimbursements, and (2) general assistance payments. While it is unclear how much additional Medicaid assistance Hawaii will receive, the minimum in general assistance is set at $25 million per state with additional amounts based on population. Thus, Hawaii will receive at least $25 million for the next two fiscal years which begin on October 1. Although there are restrictions on the use of the assistance, they appear broad enough to allow Hawaii to offset at least one-third of the projected budget deficit brought about by the Council on Revenues’ downward revision in May.
As bills moved from one house to the other, the administration and lawmakers began to make contingency plans for state spending as war with Iraq appeared imminent. Lawmakers began to speculate that the Council on Revenues would reduce its estimate of general fund tax collections leaving lawmakers with less revenues for fiscal 2003 and the fiscal biennium 2003-2005. Just prior to the Council’s March meeting, the governor was quoted in the press saying that she expected the forecast for fiscal 2003 to be reduced from 6.1% to 4%. And as it happened, the Council did lower its forecast to 4.3% with the cautionary note that they would reconvene if and when war broke out in Iraq.
Unfortunately, while war did break out in the latter part of March, the Council did not reconvene itself until nearly mid-May at which time they lowered their forecast for general fund tax revenues to 1.8%, citing the growing negative impact of various tax credits on the state’s general fund tax collections. Since the biennial budget had been constructed on the March estimate of 4.3%, the budget sitting on the governor’s desk awaiting approval was substantially “unbalanced.”
However, what the governor vetoed in general fund appropriations amounted to only $3.8 million. Hardly a dent in the more than $63 million difference between the March and May forecast. The other vetoes involved special funds including the emergency “rainy day” fund veto of $3.5 million for human services.
The point of the matter is that both the vetoes and the overrides of the vetoed items fall far short of making up the gaping hole between what we have to spend and what lawmakers would like to spend. The point of the matter is that the state has no money and seemingly lawmakers have set no priorities for what money we have.

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