Civil Beat: Pandemic Is Scrambling State Budget Priorities

The COVID-19 calamity means the Hawaii Legislature’s grand plans for the 2020 session may be just pipe dreams.

By Chad Blair    / April 12, 2020

April at the Hawaii State Capitol is usually the busiest time of the year and a driver of news and developments.

The Senate and the House of Representatives were scheduled to vote last week on hundreds of bills to meet the Thursday deadline ahead of the Good Friday holiday.

Instead, both chambers of the Legislature have been in recess since March 17 because of the coronavirus. It was obvious that 76 lawmakers, their staffs and hundreds of other people (including me) who spend time at the Capitol could not gather with social distancing measures in place.

It’s not clear when the Legislature will reconvene this year, even to formally gavel out the session that was to have ended May 7. And that means the status of the $8.1 billion supplemental operating budget for the 2021 fiscal year that begins July 1 is in limbo.

Hawaii leaders showed rare agreement before the 2020 session began on issues such as cost of living, affordable housing and education. COVID-19 is testing that unity like never before.

The reason: Hawaii’s general fund is by all accounts expected to take a giant hit due to the near full collapse of the visitor industry, closing of businesses and furloughing of employees statewide.

General excise taxes and income taxes are the largest drivers of revenue into state coffers, and University of Hawaii economist Carl Bonham said earlier this month that tax collections could drop this year by at least 10% and as much as 25%.

If just a 1% drop works out to about $74 million in lost revenue, simple math suggests a 25% decline amounts to a possible shortfall of $1.85 billion. The state’s rainy day fund of about $400 million would cover maybe six weeks of government expenditures.

“We are worried — very worried — about the state’s funding in the short and long term,” said House Speaker Scott Saiki.

Sen. Donovan Dela Cruz, the chair of the Senate Ways and Means Committee, expressed similar concerns.

“It means that we are going to have to focus on basic needs, and that’s where we would have to have some hard discussions with the House and the governor to make sure we are all on the same page of what those needs are to get a balanced budget,” he said.

In the meantime, even though session is on hold, the Senate special committee on the state’s COVID-19 plans and procedures (of which Dela Cruz is a member) has been meeting several times a week to gather information and ask questions of officials and experts. Though closed to the public, the meetings are livestreamed.

The House’s select committee on COVID-19 has also convened several times. Saiki, who chairs the committee, said Monday’s meeting will consider what criteria must be met to reopen the state, even incrementally. The presenters will include health officials such as Bruce Anderson and economists, including Bonham and Sumner La Croix.

Where All The Money Goes

The Hawaii Constitution requires that the state operate under a two-year budget. That means lawmakers and the governor approved last year the $15.6 billion needed to run government for fiscal year 2020 (ending June 30) and a similar amount in 2021.

About half of that figure each year — roughly $8 billion — is for fixed costs like state employee pensions (currently $1.01 billion), health plans ($1.13 billion) and $862 million for debt service.

Essential services include $2 billion for public schools and libraries, $275 million for public safety and $150 million for the Hawaii Health Systems Corporation.

All of these together — $6.5 billion of the $8 billion in general funds — leave a balance of $1.5 billion for remaining state government programs such as public health monitoring, environmental regulation and regulation of agricultural food production — all of which are needed now during the COVID-19 crisis.

Half of the state’s annual budget is composed of non-general fund revenues, derived from special funds, federal funds, revolving funds and the transit accommodations tax levied on visitor lodging. These monies can’t be used for other purposes unless the Legislature changes the law.

The Ige administration’s budget proposal to the Legislature in December is modified by lawmakers, in no small part based on updated revenue projections. Because of COVID-19, revenues are forecast to drop severely.

Ige Administration

But that other $8 billion for 2021 — the general fund monies — make up the part of the budget that can be tweaked. This is the money that goes to fund the executive, legislative and judicial branches and the Office of Hawaiian Affairs as well as for capital improvement projects and a host of other appropriations.

This year’s $8.1 billion supplemental budget was passed by the House on Feb. 18. It was $300 million less than Ige had requested because some funding for homelessness, affordable housing and other issues were to be funded through separate bills.

Among the bigger-ticket items in House Bill 2200 were $7.7 million to repair Aloha Stadium, $2.3 million to control the coconut rhinoceros beetle and other pests, $2 million to renovate the King Kalakaua Building, $1.2 million for traffic signal maintenance on Hawaii island, $2.1 million for lifeguard services at state parks and $18 million for Maui Health Systems.

Sen. Donovan Dela Cruz at the January press conference when a joint package on cost-of-living issues was unveiled. The COVID-19 catastrophe underscores his argument that the state’s economy badly needs to diversify.

If House Bill 2200 is not passed, all that funding and much, much more will not be approved. The Senate Ways and Means Committee was to have held a public meeting on the measure March 17, the same day the session was halted.

Also on hold is House Bill 2725, for supplemental capital improvement projects totaling more than $4.9 billion. It passed the House March 5 and was set to be heard by WAM on March 17, too.

HB 2725 included $17 million for the modernization of the state finance system, $16 million for the Veterans Affairs Long-term Care Home, $21 million for improvements and replacement facilities for Mokapu Elementary School, $11 million for Kaanapali Beach Restoration and Berm Enhancement, $30 million for design of the Diamond Head concourse extension at the Daniel K. Inouye International Airport and $25 million for minor repairs at community colleges statewide.

Unless the Legislature reconvenes, those bills will not become reality. Same goes for some $160 million in pay raises for public sector unions, as those bills were also placed in limbo in mid-March when legislators went home.

It is not clear if the Legislature will regroup. As it is now in recess, it can resume when it chooses. It can also later call a special session, or the governor can order one.

But Saiki said COVID-19’s social distancing requirements, as long as they are in place, would make it challenging for lawmakers to convene.

“We would have to review the constitutional provisions,” said Saiki. “When Hawaii became a state in 1959, no one contemplated remote voting or attendance.”

Still, Dela Cruz said he hoped to work on the budget and capital improvement bills and the parts of the House-Senate joint package on cost-of-living issues that do not include large funding amounts.

“When we go back we may have to increase the amount of capital improvement projects to get the economy moving and to shore up government,” he said. “That includes infrastructure and maintenance.”

Ultimately, Dela Cruz makes a point that he has been making for years now but today has an urgent relevancy.

“I go back to how we are going to have to come up with new ways to generate revenue,” he said. “It cannot be taxes. So we will have to look at public-private partnerships or reducing liabilities or diversifying the economy with new industries.”

The Governor’s Authority

If the Legislature does not or cannot act, the governor has the authority to do many things. Under emergency powers, for example, he can move around or withhold monies that have already been appropriated for other purposes. He has already ordered departments to restrict spending.

Ige can also shift around funding allocated to major expenditures like education and Medicaid, or adjust the state’s unfunded liabilities for health and pensions. Such actions, though, would very likely be seen as unpalatable.

If the virus somehow dramatically subsides in the near term — say, in May — and the economy begins to return to life, the state could also choose to go with the supplemental budget that was already approved last year.

But the Constitution requires that Hawaii not spend more than it takes in, and so Ige — a former Ways and Means chair — would have to wield a mighty scalpel, likely in consultation with the Legislature.

What the governor cannot do is print money like the federal government, which can pass budgets with deficits and drive up the national debt. Congress and President Trump approved a $2.2 trillion coronavirus relief funding package late last month and $4.4 billion of it is expected to go to Hawaii, nearly $900 million of it to state and county governments in the response to COVID-19.

These estimates are also from the budget that the Ige administration submitted to the Legislature. Lawmakers are very worried that COVID-19 will decimate state revenues and thus the ability to fund government operations.

Last Wednesday Saiki and Senate President Ron Kouchi were part of a press conference on the Capitol’s fifth floor when Ige announced that former Hawaiian Electric executive Alan Oshima will lead state efforts to develop and implement a plan for “economic and community stabilization, recovery and resiliency.”

Because of social distancing, the leaders did not stand side-by-side when speaking to the media as they did in January when — in a rare move — they and other state officials and business leaders said they had agreed to the joint initiative to address Hawaii’s high cost-of-living.

That package of bills included ones allowing a modest increase to the minimum wage, more funds for affordable housing and expansion of affordable preschool programs.

Like the budget, capital improvement plan and pay-raise bills, of course, those initiatives are also up in the air and perhaps moot. Saiki said the minimum wage bill, for example, was very unlikely to become a reality this year when so many business are collapsing. Dela Cruz agreed.

And yet, the display of working together was real and suggested that Hawaii’s top leaders had found a new way to come together despite their many differences.

That same solidarity seemed evident on Wednesday when Ige said, “There is no time for personal agendas and self-interest — Hawaii is one community, one family. We need to work together. This is the only way we are going to survive.”