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But Shouldn’t We Do Something About The Two Gorillas In The Bar?

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By Tom Yamachika, Interim President
(Released on 3/30/14)

Often I am asked to summarize what’s going on with the tax bills in the current legislative session. I usually say that it’s obviously an election year, because a very large number of the tax bills moving are attempts to give money back, usually in the form of credits or incentives, as opposed to “revenue enhancers,” which is what politicians often call attempts to grab even more of your hard-earned dollars. There are, in addition, quite a few bills designed to give relief to the poor or the elderly through our tax system, mostly through tax credits of one kind or another.

And why not? The Governor is trumpeting that under his watch there has been an economic turnaround. “Upon taking office,” says a booklet called Abercrombie Administration Accomplishments 2010-2013, “the Administration faced a budget deficit of $220 million at the end of 2010. In response, it established responsible fiscal management practices while creating a sustainable financial plan for Hawaii’s future. As a result, the State of Hawaii ended fiscal year 2013 with a positive general fund balance of approximately $844 million.”

That sounds a little like a guy getting up in the middle of a bar and saying, “Hey! I have money in my pocket and I’m feeling good. Let the good times roll!” and then buying everyone in the bar a round of drinks. But is tossing all that cash around a responsible thing to do, especially if he is up to his eyeballs in debt?

The budget deficit, and the positive general fund balance, are measures of how much money the state had in its pocket on given dates. We need to remember that these measures need to be considered along with other things, especially what the state owes, in assessing its long-term sustainability.

So here is where the gorillas come in. The state long ago agreed to pay post-employment benefits to its workers. ERS, or Employees’ Retirement System, represents the retirement benefits. EUTF, the Employer-Union Health Benefits Trust Fund, represents the medical benefits. At June 30, 2013, ERS had an “unfunded actuarial accrued liability” of about $8.4 billion. For EUTF, the number was about $18.2 billion. Those numbers represent the present value of what we taxpayers owe for these future benefits. In comparison, the total annual state general fund budget is $5.5 billion.

Compare this with the City of Detroit, Michigan. Detroit has a population of about four million counting its suburbs, and it had a long-term debt of $18.5 billion when it filed for, and late last year was ruled eligible for, bankruptcy! Hawaii is smaller, and its debts are bigger. So let’s make no mistake: the gorillas were able to bring down governments bigger than ours. Maybe we’d better pay attention to them.

I don’t know about you, but if I find out that I have more money in my pocket than I expected, I take some of it and pay down my mortgage a little. So shouldn’t we use a bit of the money the state has in its pocket and set it aside to deal with these issues? It’s not that we don’t sympathize with the poor – we agree that Hawaii is taxing people deeper into poverty and that needs to be fixed. It’s not that we are ridiculing the idea of stimulating business – certainly, if we can grow the engine that’s feeding us, there will be more to throw around. There are many other worthy causes, too.

Okay, maybe we can’t resist the temptation to jump up in the middle of the bar and throw money around…but at least when we’re doing so, let’s toss a few bananas toward those two big fellows in the back of the room.

Tom Yamachika is the Interim President of the Tax Foundation of Hawaii. Mr. Yamachika’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

 

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One Response

  1. Tom Yamachika
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    From the Grassroot Institute of Hawaii President’s Corner:

    Promoting best practices for the state’s unfunded liabilities
    Keli’i Akina, Ph.D., President/CEO, Grassroot Institute of Hawaii

    It’s no secret that the state’s unfunded liabilities demand decisive action in order to avoid serious consequences for the state’s budget and economy. But do our policymakers have the courage to make the bold decisions that may be required?
    According to a recent report from State Budget Solutions, Hawaii may one day be forced to break the promise it made to its employees regarding their pensions and benefits. Though we are not one the top ten states for total fair market valuation of unfunded liabilities, when the size and funding ratio of the state is taken into account, Hawaii ranks among the worst ten states in the country. The funded ratio (which is a more accurate indication of the health of a state’s pension plan) in Hawaii is only 29%. Moreover, if the fair market value of the state’s total unfunded liabilities were viewed on a per capita basis, the average Hawaii citizen would be responsible for $21,852 (the seventh highest per capital share in the nation).

    So what can we do? Most agree that some effort has to be made to pay down the unfunded liabilities, but that’s just the beginning. We would do well to consider stronger policies, like those recently enacted in Silicon Valley. San Jose, California was struggling with a system that had created a budgetary crisis. With many workers able to take early retirement on six-figure pensions, the city found itself in a situation where it couldn’t afford to pay its current workers because it was spending so much to pay the retired ones. The only way to halt these exploding costs was through reform measures that modified benefits for current workers as well as future ones. Employees are given a choice between paying more of their salary for the current benefits or choosing a more moderate plan that includes a higher retirement age, a lower cost of living adjustment, and smaller future accruals. Though the city’s mayoral election became a referendum on the pension reforms, the voters understood the depth of the crisis and elected the candidate who pledged to uphold the changes.

    The state has a responsibility to fulfill promises it has made to state employees and, at the same time, must stop making future promises it cannot keep. While that’s a tough act, courageous leadership can make it happen. Specifically, lawmakers must ensure an airtight commitment to pay down current unfunded liabilities and at the same time raise revenues by measures that boost the economy and the prosperity of businesses and tax-payers. In addition, government and citizens need to accept the reality that state compensation and pension plans must be restructured based upon successful best-practices of other states and local governments.

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