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The Honolulu Advertiser
Posted on: Thursday, March 27, 2003

Budget plans hinging on war

By Gordon Y.K. Pang
Advertiser Capitol Bureau

It appears likely that if the war with Iraq doesn't end quickly, the Legislature, which adjourns May 1, would have to return for an emergency session to deal with the state's financial future.

One week into the U.S.-led war with Iraq, Gov. Linda Lingle's administration and other economic experts say it's difficult to tell how it will affect the state's dour revenue picture.

Some tourist industry officials say the anticipation of the war and the war itself have had a severe effect on tourism, which in turn would affect tax revenues.

But Ted Liu, director of the Department of Business, Economic Development and Tourism, this week issued a cautiously optimistic outlook of the economy and urged the public to not overreact.

Key economic indicators such as construction and consumer spending have remained strong leading up to the war, he said.

The administration and others have also pointed to studies showing that the Hawai'i economy recovered relatively quickly after the 1991 Gulf War.

But as Lingle put it this week: "It's just not knowable how long a war will last."

At this point, it looks like the Lingle administration and the Council on Revenues are going to wait until after the Legislature closes its regular session before deciding if further cuts to the $7.9 billion two-year budget for fiscal years 2004 and 2005 will be necessary.

The council, which makes the cash inflow projections on which the state budget is based, has scheduled its next meeting for May 9.

If the council projects revenue reductions that are not too severe, the administration could choose to deal with the issue in-house through a series of internal budget restrictions, Lingle said. But if the effects are great, she said, it could mean the Legislature will have to come back in emergency session to wrestle with the problem.

House Speaker Calvin Say is anticipating the need to bring the lawmakers back.

"I anticipate that if the war is a prolonged war, the worst-case scenario, she'll have to call us back or we'll have to convene ourselves," said Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise).

The council this month voted to lower its forecast to a growth rate of 4.3 percent for the year from the 6.1 percent it had projected through January.

That triggered a second round of trimming by the Department of Budget and Finance that totaled $133 million. But the adjustment was due to the impact of recently enacted tax credits and did not reflect the effects of a prolonged war.

Mike Sklarz, chairman of the Council on Revenues, said he and his fellow members want firmer economic indicators before they meet again to adjust the numbers based on the effect of war.

"It doesn't make sense to have a meeting, for example, tomorrow," he said. "We wouldn't have enough data. You really need to wait at least several weeks to a month to get some handle on the impact."

Rick Von Gnechten, another council member, said the panel wants to see a full month's worth of data. "Otherwise, you've got a partial month, and you don't know how much of it is war-related," he said.

But Lowell Kalapa, president of the Tax Foundation of Hawai'i, criticized the council's "nonchalant attitude" toward the situation. If lawmakers do have to be called back into session to deal with the budget, he said, council members "should be held responsible for the cost of reconvening the Legislature."

Georgina Kawamura, Lingle's budget director, and state economist Pearl Imada Iboshi, who is also a member of the council, backed the decision to hold the meeting in May. They noted that many of the leading indicators, including general excise tax collections, lag a month behind actual performance.

Kawamura said state officials are looking at the potential effects and possible budget avenues that can be taken. "Actually, we're doing that every day, looking at our financial plan — daily, hourly," she said. As for contingencies, "there are a lot of plans being considered now, the specifics of which I'm not at liberty to share right now," Kawamura said.

In recent weeks, Lingle has indicated a willingness to reconsider her promise not to take money from the Hawai'i Hurricane Relief Fund or rainy day fund, or to raise taxes. However, this week she told reporters emphatically that those options remain off the table.

Kawamura said that as well. "Right now, we're still working on the same assumptions — no tax increases, no layoffs, no hurricane fund," she said.

Kalapa said that even if the council does not believe it can give a firm adjustment before the end of session, it should give some indications to legislators about where they are headed based on numbers and other information that is known.

Senate Ways and Means Chairman Brian Taniguchi said he understands the reasoning behind the council's decision to wait, noting that it did the same thing following the Sept. 11 terrorism attacks.

"It's probably the same type of situation here," he said. "They'll probably have better numbers. It might be better to try to conclude with the numbers we've got now, and then take a second look when we get better numbers."

Taniguchi said in the meantime, his committee will be monitoring the war and other signs.

"If there are significant stuff already happening, then we're going to have to try to account for that and err on the side of being a little more conservative," he said. "Maybe we'll argue for keeping more options open like the half-percent (excise tax increase) or the hurricane fund."

Advertiser reporter Lynda Arakawa contributed to this story.

Reach Gordon Y.K. Pang at gpang@honoluluadvertiser.com or at 525-8070.