Jogging The Memory Of Past Mistakes

Sometimes it pays to recall some past mistakes so that we don’t make them again with the inevitable dire consequences that were realized after they were made. 

And apparently we have come full circle as for the first time since the late 1980’s both the administration and the state legislature decided to exceed the general fund expenditure ceiling. This is the constitutionally mandated provision that state general fund expenditures grow no faster than the growth in the state’s economy. Added to the constitution in 1978, the logic behind the provision is that the size of state government should grow no faster than the economy that supports those expenditures to run state government. 

If the growth in state government expenditures out paces the growth in the state’s economy, then one can expect more of the economy’s resources being required to shoulder the burden of government expenditures. As the percentage of the economy’s resources needed to support state government grows, it places a greater and greater drag on the economy and sooner or later the economy will begin to suffer. 

This was the case in the late 1980’s and early 1990’s, when faced with a bulging general fund surplus of more than $600 million, the administration and lawmakers took every opportunity to exceed the spending ceiling. With so much money available, administrators and lawmakers found novel ways to spend those tax dollars, in some cases creating brand new programs or in other cases appropriating the funds knowing full well that they would not or could not be spent in the allowable time given. In the latter case, appropriating the money knowing that it would not be spent allowed lawmakers to create the illusion that there was no surplus in the general fund. 

And why would lawmakers and administrators want to create the illusion that there was no surplus in the general fund? If there was no surplus, they would not get any heat from taxpayers to return those excess funds in the form of a reduction in taxes. When lawmakers ran out of ways to appropriate those excess funds because they continued to go over the spending ceiling, they resorted to the then novel idea of creating special funds into which they could tuck those excess general fund dollars. After all, they reasoned, it is so hard to raise taxes, why should we lower them?

However, in creating all these new special funds, lawmakers put themselves into another predicament. When the economy started to stumble and tax revenues began to lag, lawmakers had to scrounge for money to keep programs operating. Instead of reducing programs and services, they ended up raiding many of the special funds they had created with those surplus general funds. So instead of belt tightening, as one would expect in difficult times, they kept on spending, albeit with money they had hidden in special funds.

Some observers might view this as prudent, that is “saving excess dollars” in a piggy bank called special funds.  But one has to ask to what degree did the hoarding of those tax dollars contribute to Hawaii’s sluggish economic performance during most of the 1990’s when the rest of the nation was enjoying an economic boom? In fact, by 1998 many of Hawaii’s leaders decided that the cure all to the state’s economic woes lay in an across-the-board reduction in the state’s income tax.

But even that reduction in taxes could not be accomplished overnight because state leaders just could not bring themselves to reduce state spending to the point where the tax cuts could have been adopted in the next year. No, it took four years to phase-in the income tax reduction.

Now, Hawaii’s robust economy has once again filled the state’s coffers to overflowing and this past session the administration recommended going $50 million over the state-spending ceiling. The legislature concurred and exceeded the ceiling by more than $111 million all of which went to school maintenance and repair. After all, who can argue against repairing and maintaining our school facilities?

However, that’s like saying someone sees a glass half-full while another sees the glass half empty. One has to ask whether or not other programs and services could have been reduced or eliminated so that the cost of repairing schools facilities could have been done without exceeding the state-spending ceiling. What is even more disturbing is that in addition to that $111 million for school maintenance, lawmakers funded new construction of state facilities with general fund cash. That means today’s taxpayers are paying for facilities that will be used by future generations. Taxpayers, as well as elected officials, should think twice about state government growing faster than the economy that pays the bills is growing.