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The Honolulu Advertiser
Posted on: Thursday, January 5, 2006

COMMENTARY
Honolulu property taxes can cut both ways

By Mufi Hannemann

The reaction by homeowners to the announced increase in real property tax valuations has been understandable. The hot housing and condominium market has been wonderful for homeowners who've enjoyed rising asset values, home sellers, the real estate industry, developers and the construction industry.

But the resulting jump in property tax valuations has had its most severe impact on island folks who've lived in the same home for decades, and particularly those on fixed incomes.

Although our present tax rates were established well before I took office, to grant relief, we're offering a number of proposals, some that provide immediate relief and others that take a longer-term approach to our tax policies:

  • Tax credit: My administration is proposing to cut taxes by $40 million — a third of the additional revenue we expect to receive. How this tax cut is to be apportioned will be determined during the next several months, in consultation with the City Council. But rest assured our priority will be longtime owner-occupants. If approved, the cut would be effective this August.

    If every homeowner were to receive the same tax cut, it would be the equivalent of having an additional $80,000 exemption, on top of the standard $40,000.

  • Homeowner class: My administration will seek legislation to create a new homeowner classification of property, just as our sister counties have done. As we have seen on the Neighbor Islands, this category will reduce tax rates for owner-occupants, as well as distinguish the owner-occupant from other classifications of property owners or those who are purely speculators. We hope to have this new classification in place through legislation by July 2007.

  • Reserve: We will insist on creating a financial reserve to ensure the fiscal stability of the city government. While we continue to believe a reserve of 5 to 8 percent of our annual operating budget (roughly $50-80 million) is necessary, we're willing to build that fund over time.

    So, rather than our original proposal of $50 million (by comparison, the governor is proposing a $110 million state reserve), we'll set aside $20 million this coming fiscal year and add to that in subsequent years. This savings account is absolutely essential if the city is to survive a Hurricane Katrina-type disaster, a plunge in the economy like we experienced in the aftermath of the Gulf War and Sept. 11 attacks, or unfunded mandates and lawsuits.

    It also improves our bond rating so that we can reduce the amount of interest we pay on our debt.

  • Tax policies: Perhaps we need to examine our tax system. Therefore, I am appointing a Mayor's Tax Policy Committee, which will consist of private sector economists, tax experts and business leaders. The committee will work with the City Council to pursue sound fiscal management and accountability policies.

    Why can't we offer a bigger tax cut? Why not give back more?

    We need to be reminded of the fiscal predicament my administration inherited. The city is suffering from the hangover of years of fiscally irresponsible spending, and will continue to suffer for years to come. Many of the problems and obligations we face today were created by years of profligate spending.

    Rather than fix the roads, the city built water fountains. Rather than repair an aging sewer system, the city diverted your sewer fees to construct expansive playgrounds and install hand-chipped cobblestones in Chinatown. As we reported in February 2005, the previous administration deferred $925 million in debt service and operating expenses, such as repairs, equipment, technology and the basics of city government. It raided our special funds, i.e., funds designated to pay for specific expenses.

    It shifted money set aside for capital improvements to offset daily operating expenses. The city now owes its creditors $3 billion, or $3,000 for every man, woman and child on this island.

    The proposed tax cut of $40 million and the reserve of $20 million account for roughly half the additional $125 million we expect to receive this coming fiscal year. The reason we can't offer bigger tax cuts is that the remainder is committed to the following fixed costs:

  • An increase in debt payments owed by city — $16 million.

  • Increases in fuel and salaries for TheBus — $10 million.

  • Previously negotiated and approved salary increases for public safety employees (police, firefighters, emergency medical personnel, etc.) — $15 million.

  • Previously negotiated and approved salary increases for other city employees — $24 million.

    The city has these obligations while continuing to struggle with an under-funded road repair and maintenance program, fire stations in disrepair and fire engines that have long outlived their replacement dates, parks and public facilities desperately in need of fixes, and severe manpower shortages, particularly in key maintenance and engineering fields.

    While we attempt to catch up with these long-deferred obligations, our problems are compounding.

    Our fixed costs and annual debt service — fueled largely by years of unchecked spending on nice-to-have, not need-to-have construction projects — are rising. Thanks to some disciplined fiscal management, we expect to make ends meet for the current fiscal year (which ends June 30) and the next. But beginning in 2009, our deficit will climb. The city will be $15 million in the red in 2009, $92 million in 2010, $137 million in 2011, and $174 million in 2012.

    We are attempting to repair the damage. We have redirected our resources at fixing our roads and sewers and public facilities. We canceled the Bus Rapid Transit project, Waikiki Natatorium renovation, dozens of construction projects, and encouraged private sponsorship of Sunset and Brunch on the Beach events. You can expect us to continue to cut unnecessary spending and emphasize public-private sponsorships, whenever possible.

    But Honolulu will not be rebuilt overnight.

    Our goal remains to make the City and County of Honolulu the best place to live, work and raise our families.

    During the next several weeks, I will be working with the City Council and reaching out to the community to discuss the city's financial situation, our current needs and our many long-term obligations. Until we have those discussions, I ask that you bear in mind that changes to the property tax rates must be balanced against their near- and long-term impact on the everyday services you receive from the city.

    Mufi Hannemann is mayor of Honolulu.