Debate swirling over state hurricane fund

By Kevin Dayton
Advertiser Capitol Bureau Chief

In July 1993, Helen Awaya became one of the first people to pay into the Hawai'i Hurricane Relief Fund when she refinanced her home and was charged a mortgage recording fee.

What she wants, she said, is for lawmakers to keep their hands off the $217 million that is now in the hurricane fund.

"It's just supposed to sit there and make money," she said.

The board of directors of the Hawai'i Hurricane Relief Fund agrees, arguing that the money should be left there in case of hurricanes. But midway through the legislative session, both House and Senate leaders predict they will dip into the fund for tens of millions of dollars to balance the state budget.

Lawmakers admit this will anger some voters and that draining the fund could become a damaging political issue in the fall.

But they say they have no choice: Without that money, Gov. Ben Cayetano and lawmakers warn, they will have to impose deep budget cuts.

House Finance Chairman Dwight Takamine also told House members last week that spending $100 million from the hurricane fund is "necessary to meet our social obligations and prevent the loss of essential services in the absence of other funding sources."

Without that money, the state would have to impose layoffs and cuts that would "erode consumer confidence and impede our own recovery," said Takamine, D-1st (Hamakua, N. Kohala).

Republicans counter that the Democrats should have looked harder for places to cut spending so they wouldn't need to tap the hurricane fund. They argue the money should either be refunded to those who paid in, or should be held in reserve for the next hurricane.

"Fundamentally, it's not ours to take," said Rep. Joe Gomes, R-51st (Lanikai, Waimanalo). "If a transfer is effectuated, there's going to be a lawsuit to stop the transfer because it's not the state's to take."

The fund was established by lawmakers in 1993 after private insurers stopped offering wind-damage coverage in Hawai'i in the wake of Hurricane Iniki. That hurricane cost insurers about $1.6 billion in losses, and many canceled their wind-damage coverage or pulled out of Hawai'i altogether. Homeowners and people who wanted to buy property were stuck because banks and mortgage companies refused to make new loans without hurricane insurance, and threatened to call in some existing loans unless the owners obtained coverage.

The state provided $100,000 in seed money to create the Hawai'i Hurricane Relief Fund on July 1, 1993, to offer that coverage. It took almost a year for the fund to develop a program and build up enough in reserves to issue its first policy.

The basic concept of the fund was to deposit income from new mortgage recording fees, new assessments imposed on insurance companies and premiums paid by policyholders into the fund to cover claims and buy "reinsurance."

The reinsurance coverage, which was purchased from other insurers, was to cover potential losses that could not be covered by the cash reserves in the fund. At its peak from 1996 to 1998, the fund provided coverage of $40 billion, but never had anything remotely close to that amount in cash.

In the late 1990s, private insurers began to return to Hawai'i to offer coverage, allowing the hurricane fund to close out its business and stop writing new policies.

The fund's last policies expired in December, leaving the fund with a pool of cash of more than $200 million, but no existing policies for which the fund would need to maintain reserves.

However, lawmakers and state insurance officials believe another major hurricane strike would again trigger a withdrawal by the insurance industry, meaning the hurricane fund would once again need to step in to provide coverage.

Last week, the directors of the hurricane fund instructed the fund's acting executive director, Lloyd Lim, to urge lawmakers to leave at least $100 million in the fund.

"I guess what we're saying is, any money that's taken out of the fund is detrimental to the future policyholders' interests, but if you start going below $100 million, you're really weakening the fund in a way that's not responsible," Lim said.

What triggered the debate at the Legislature this year was Cayetano's proposal to use the money in the hurricane fund to balance the state budget. He contends the money should be used to help make up for a steep drop in projected tax collections in the wake of the Sept. 11 attacks, allowing the state to avoid making deep budget cuts.

Cayetano contends people who bought insurance from the fund received the coverage they paid for, and have no right to a refund. He notes lawmakers specified in 1993 that any leftover money would be deposited into the state's general treasury.

Cayetano and others charge the Republicans have "politicized" the issue by making people who paid into the fund believe they are entitled to a refund. But Gomes noted that Cayetano himself favored a refund in late 2000 and has since changed his position on the issue.

"The fact of the matter is, I think it was a grass-roots effort," said Gomes. "People are saying, give it back to us."

The House has stopped short of Cayetano's proposal, and proposed using only about $100 million of the money in the fund to balance the budget. The Senate is considering borrowing $50 million to $100 million from the hurricane fund, said Senate Ways and Means Chairman Brian Taniguchi, D-11th (McCully, Mo'ili'ili, Manoa).

For her part, Awaya wonders what will happen next year if the lawmakers are still struggling to balance the budget, and the hurricane fund money is gone.

If lawmakers and the governor are going to use the money for other purposes, "call it a tax then," she said. "I don't believe they were helping me out of their own good volition and will."

Reach Kevin Dayton at kdayton@honoluluadvertiser.com or 525-8070.