Pandemic budget crunch leaves Hawaii with unpleasant options

HONOLULU - The coronavirus pandemic has pushed Hawaii’s unemployment rate up to 22.3%, generated miles-long food bank lines and led hotel operators to close their doors and board up their windows.

Taxe revenues are plunging and policy makers must plug gaping budget holes to allow the government to function.

“The math is relatively straightforward on that. The options are also straightforward. They’re unpleasant,” said Jack Suyderhoud professor emeritus of business economics at the University of Hawaii.

The good news is that Hawaii entered the crisis in relatively strong financial shape. It built up reserves over the past decade that left the state with a rainy day fund of about $400 million that lawmakers plan to tap into now.

Hawaii has also been boosting contributions to its state pension and other employee retirement benefit funds. The state had the second highest possible rating from credit rating agencies like Moody’s Investors Service.

The bad news is that April tax revenues sank 33% after the state effectively closed off tourism to prevent the spread of the virus. The outlook for May revenues, due for release on June 12, is even worse. Three major credit ratings agencies said in April there was a chance they could downgrade Hawaii’s rating.

The state's Council on Revenues, which forecasts tax receipts for the governor and Legislature, predicts tax revenue will drop 7% during the fiscal year ending on June 30, followed by 12% the next year. That translates to a combined $2.3 billion shortfall over the two years.

Gov. David Ige’s budget director, Craig Hirai, told a Senate committee hearing on May 21 that making up the decline “will be an extremely arduous task.”

“More than likely the state will no longer be able to afford current levels of programs and services it provides in the ensuing fiscal bienniums,” Hirai said. He said “difficult budget choices will have to be made.”

For now, lawmakers have passed legislation plugging the hole for this fiscal year and next year with the rainy day fund and unused money they’ve found in various departments, including vacant positions they’ve eliminated.

But that could still leave a gap. Lawmakers plan to address this and ways to spend federal coronavirus relief funds during a short session scheduled to begin June 22.

The problem with turning to typical ways to balance budgets — sharply cutting spending and raising taxes — is that they would further depress demand at a time when the economy is already hurtling into recession.

“Taxe increases and furloughs will exacerbate the problem as opposed to helping us get out of the economic crisis right now,” said Rep. Sylvia Luke, the chairwoman of the House Finance Committee.

Further, she said, if the state furloughs staffers they would go on unemployment and the state would need to pay those costs.

“So in our point of view, it’s what pot are we going to take it out of?” Luke said.

Another option would be taking on debt. Credit agencies frown on borrowing to pay for budget deficits because it’s not sustainable in the long term and raises costs down the line when the debt is paid off.

Ken Kurtz, Moody’s senior vice-president and the company’s lead analyst for Hawaii, said such a move would be a “credit negative” for the state.

“Not only do you solve your problem with a one-time measure which is deficit financing but you’re also burdening future periods with repaying that financing,” Kurtz said.

Moody’s indicated there was a one-in-three chance it would downgrade its rating for Hawaii in the next two years when it issued a negative outlook for the state's finances in April. A lower credit rating would force Hawaii to pay higher interest rates to borrow money, boosting the state’s costs.

Despite this risk, Luke advocates borrowing between $600 million to $900 million from a special program the Federal Reserve created to lend money directly to states to help them during the pandemic. The money would have to be paid in three years.

Luke said doing so would make sense because the Council on Revenues has predicted tax receipts will rebound 12% during the fiscal year beginning July 2021, meaning the state will soon have more revenue to repay the money.

By borrowing short-term from the Federal Reserve, she said the state could spread out the pain over a longer period.

Suyderhoud said the only way out of the predicament was to get tourism, and the economy, going again.

“If we’re not devoting 99.9% of our energy to getting that job done, then we’re allowing ourselves to stay in a hole that’s getting bigger,” he said.

The quandary is how to do that in a way that doesn’t flood Hawaii with the virus. Hawaii’s strict traveller quarantine, faithful adherence to stay-at-home orders, mask-wearing and social distancing have left the state with the lowest number of COVID-19 cases in the nation on a per capita basis.

Ige has declared that starting June 16, he will eliminate the state's requirement that travellers between the Hawaiian Islands quarantine themselves in their lodgings for 14 days. But plans for lifting that same mandate on people arriving from outside Hawaii are pending.

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