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Taking It to the Arbitrator

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By Lowell L. Kalapa
(Released on 9/6/09)

This past weekend representatives of the largest public employee union huddled in the state’s convention center while across the room, representatives of the state administration quietly strategized their next witness.

These groups were gathered there this past weekend as part of the arbitration panel’s fact-finding hearings that will help them determine what sort of contract would be awarded this group of public employees. The union position is that there be no pay increases or step movements for the next two years, and perhaps a supplemental agreement to be negotiated over the possibility of implementing furloughs. On the other side, management, or the administration, is asking that employees take a 14% pay cut. So what it all boils down to is whether or not workers will take a pay cut up front or later should economic conditions worsen and the state’s revenue picture continue to decline.

The problem with the union’s position is that it fails to recognize the current state of affairs in Hawaii’s economy where the state’s largest cylinder in its economic engine continues to experience declining hotel occupancies, discounted room rates, and frugal visitor spending. And although the cumulative general fund tax collections for the current fiscal year reflect only one month’s experience, they are 9.8% below the forecast of 0% revenue growth for the entire fiscal year.

Since the decision of the arbitration panel is not expected until December, nearly half way through the fiscal year, the financial position may be in even more dire straits than if pay reductions had been initiated at the start of the fiscal year in July. So instead of a 14% pay reduction or three furlough days, the state might be in a financial situation where a 14% pay cut won’t be enough to stave off layoffs.

No doubt one of the arguments the union will make is that the state has the ability to raise taxes as a way to avoid pay cuts or layoffs of public workers. Unfortunately, this would be devastating for economic recovery as more capital is shifted from the private sector to the public sector. The union may argue that with money in their hands, public employees would re-circulate that money back into the economy. And that might be true if these were normal economic times. But these are not normal economic times. The lack of consumer confidence on the part of the resident population, as well as the de facto population of visitors, would only deepen as consumers tighten their belts in fearful anticipation of what could be just around the corner. That fear is already evident as consumers exercise extreme frugality at the cash register, purchasing only what they truly need and not what they might wish to have.

This scenario is much akin to lawmakers’ inane action to raise the TAT or hotel room tax thinking they could squeeze more money out of the visitor. Even the average math student knows that zero times any number is still zero. And that is just what the TAT rate increase represents. With nobody in a bed, there is nothing to tax. And even if there is a visitor in that bed, they are now paying deeply discounted room rates. The result is that the state may see even less TAT revenues although the rate went up a percentage point on July 1.

Because the collections of the TAT and the general excise tax are so dependent on the fortunes of the visitor industry, any increase in the rate of either tax may not generate revenues sufficient to cover the union’s position. Visitor spending is already down by nearly 12% for this year with only a slight rebound forecasted for 2010 of less than 3%. Instead, an increase in the general excise tax rate will merely punish residents including the union’s rank and file members as they struggle to cope with a crippled economy.

Both the rank and file and their union leaders must recognize that state and county governments must undertake the same actions that the private sector has already undertaken as the national and global recession has affected Hawaii’s economy. Just ask the housekeepers in the hotels or the waiter at your favorite restaurant as they work fewer hours and see less business come their way. At least the private sector has done right by its employees, instead of massive layoffs, they have reduced hours or compensation. At least most workers in the private sector have some kind of paycheck to take home.

If the union refuses to take pay reductions, the only alternative might be the unemployment line.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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