(Released on 4/3/11)
As anticipated, the state’s Council on Revenues again downgraded the outlook for general fund tax revenues not so much because of the recent disaster in Japan, but because tax collections have not grown on a monthly basis as originally anticipated.
This bad news came on the heels of a pronouncement by the state’s budget director that the state is anticipating that it will not have enough money to keep the doors open during the last four months of this fiscal year – from now until June. The price tag the budget director labeled for the shortfall totals more than $230 million. Add that to the two percentage point drop in the tax revenue forecast and state leaders are looking at a $330 million shortage in the cash flow to keep the state operating.
What is scary is the immediacy of the need to shore up resources. Enacting a tax increase won’t help this immediate problem as a tax increase would not produce the needed revenues soon enough. Thus, lawmakers and the state administration must resort to scraping the bottom of every barrel in the state’s vault for whatever idle cash is lying around. Although department and agency heads dug their heels in earlier this session opposing the legislature’s proposal to raid or eliminate special funds, lawmakers may have no alternative but to do so. Perhaps now lawmakers will have a better accounting of what special funds have been sitting around with cash balances and how they have been able to keep those funds out of the sight of the public.
Although members of the Council on Revenues bemoaned the withholding of income tax refunds by the last administration, that might be one of the options that this state administration may have to exercise to close the cash flow shortfall. Since refunds represent cash in hand, delaying the payout of those refunds would allow the state to meet its financial obligations during the next four months. Should that happen, then the revenue forecast will again be skewed as the Council had not planned on a retention of state income tax refunds for this year.
Although the administration has indicated that it is imposing an immediate reduction in spending of 10%, that edict does not apply to labor expenses. However, with the deepening problem officials may just have to reach out to Hawaii’s various public employee unions for a temporary concession in the existing contracts. If concessions can not be reached, there is the very good possibility that the state may actually have to lay off employees, having no choice because there isn’t enough money to keep expenditures at a status quo level.
Thus, the unions will have to weigh heavily the choice of either offering some sort of wage reduction concession or watch as some of their membership is laid off so that the state can continue to pay those who are not laid off at the same rates that were negotiated.
Is all of this a result of the national and global recession? Well, yes and no.
Yes, because to a large degree the economic activity on which the state tax system depends to generate the necessary revenues to run government did come to a standstill. Although nationally many agree that the bottom of the recession occurred two years ago, the recovery, both nationally and globally, has been slow. As a result, Hawaii’s economy, which is largely dependent on the visitor industry, has also been slow to recover. In addition, lawmakers not only made reductions in state spending, they also turned to “revenue enhancements,” otherwise known as tax increases. Those tax increases did not help the pace of economic recovery as they imposed added costs on economic activity at a time when contributors to economic recovery were trying to make a come back.
Combine that with what many already acknowledge as a burdensome government bureaucracy, and the pace of the recovery was hindered even more. Often cited is the cost of government regulation in Hawaii, and the behemoth layers of bureaucrats who stand in the way of economic activity and one begins to understand why the state has not been able to recover despite a return of the visitor industry in recent months.
And the slow pace is not confined only to the attempts by the private sector to make a comeback. The slowness with which government moves also affects how well government performs. This was noted by one legislator who asked why the state has not been able to move on all the capital improvement projects that have been approved despite the millions of dollars that have already been authorized. The response was silence, prompting the query about where the structural reform that had been promised was which, unfortunately, has not been soon enough. Restructuring state government is key to the state’s recovery.