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The Honolulu Advertiser
Posted on: Tuesday, August 4, 2009

Hawaii may raid its hurricane relief fund to plug state's deficit


By Derrick DePledge
Advertiser Government Writer

With no easy options left to close a $786 million budget deficit, Gov. Linda Lingle and state lawmakers are being tempted to use the $185 million in the state's hurricane relief fund to help balance the budget.

Tapping the hurricane money may allow the governor and lawmakers to avoid deeper labor cuts for state workers and save some state programs without imposing new taxes. Draining the fund, however, may leave property owners vulnerable after a catastrophic storm.

The hurricane relief fund was established after Hurricane Iniki tore through the Islands in 1992, devastating much of Kaua'i and leaving $1.6 billion in insured losses statewide. Many private insurance companies either left the market or restricted renewals and new hurricane insurance policies, creating a crisis for property owners who needed adequate and affordable insurance to meet finance and mortgage requirements.

The fund provided coverage to property owners and produced enough stability in the market for private insurers to return and compete.

Now with the fund flush and private insurance readily available the money has become a target for lawmakers looking for extra cash.

This isn't the first year lawmakers have coveted the fund.

After the economic downturn following the Sept. 11, 2001, terrorist attacks, Gov. Ben Cayetano proposed tapping the entire fund to help close a deficit.

But Republicans argued that the hurricane money should either be left intact or refunded to homeowners who helped build the fund through premiums. Cayetano countered that homeowners had already received insurance coverage for their premiums and were not entitled to refunds.

The public backlash over a potential raid led majority Democrats, particularly state Sen. Robert Bunda, D-22nd (North Shore, Wahiawa), who was Senate president at the time, to only agree to skim interest from the fund.

Lingle, in her first State of the State speech in 2003, vowed that she would "not raid this (hurricane) fund under any circumstances."

Earlier this year, when Lingle said every option should be on the table for solving the state's budget deficit, the governor seemed more open.

"There is a possibility each of us the Legislature, myself, the community we may have to agree to changes that we didn't expect we ever would because the circumstances have changed so drastically," she told reporters.

Cayetano said he believes Lingle will wait for majority Democrats to propose using the hurricane money rather than have to explain her past opposition. "The fact that the HRF funds are not being used is a shame and a consequence of what happens when politicians say whatever is politically advantageous at the moment," he said in an e-mail.

PRESSING QUESTIONS

The policy question is straightforward: Should the state preserve the hurricane relief fund as a safeguard in the event private insurance companies flee after another hurricane? Or should the money be used now to help with the budget deficit?

J.P. Schmidt, the state's insurance commissioner, said Hawai'i will inevitably be hit by another hurricane. He noted the recent warnings about the return of El Nino, a weather pattern that involves warmer ocean surface temperatures in the Pacific that has been linked with greater storm activity.

"It has the potential to really destroy the economy, far worse than what we're experiencing now," Schmidt said of what could happen if there is turmoil in the private insurance industry after another hurricane.

State Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui), the chairwoman of the Senate Commerce and Consumer Protection Committee, said the state should consider using the hurricane money now.

"I don't think there's enough money in the fund to make a difference if a hurricane hits O'ahu, and I really think that's why people were keeping it around," she said. "We need to take care of the economy now. And we can put that money back into maybe keeping some of the services that are on the chopping block that are really impacting families and children.

"It's crazy some of the stuff that they're cutting. Mental health. Looking at education. Looking at guards at some of our facilities. So I think it's time to have that conversation."

'A TEMPORARY THING'

State lawmakers created the hurricane relief fund in 1993. The fund was financed through premiums, annual assessments on private insurance companies and mortgage recording fees.

At its peak, the fund covered about 160,000 mostly residential property owners and had the capacity to meet $1.6 billion in losses. Private insurers began leaving the fund and writing hurricane coverage again in the late 1990s.

"That was the intended outcome, that this would be a temporary thing," said Linda Chu Takayama, an attorney who was the state's insurance commissioner when the fund was created. "We were confident that eventually, in the absence of any more hurricanes, the industry would come back and want to pick up and write the coverage again."

A 1996 study by University of Hawai'i researchers found that the hurricane relief fund would have likely covered losses if an Iniki-strength storm hit one of the Neighbor Islands. But researchers Michael Hamnett and Kristine Davidson Oh determined the fund would not have absorbed an Iniki-like strike on O'ahu, the state's population center, and would have only been able to cover about 51 percent of claims. Homeowners would likely have needed federal aid to rebuild, the researchers found, and a new surcharge would have been imposed on private insurers to cover the fund's debt.

INDUSTRY STABILIZED

Takayama said the presumption was that the hurricane relief fund would run its course and any money left over would be placed in the state's general fund. She recalls reassuring skeptical lawmakers.

"I had to assure them that it was a temporary thing and at the time I said, 'In 10 years, we won't need this anymore,' " she said. "At the time, of course, I was making it up. But as it turned out, 10 years almost to the day we shut it down."

Both Takayama and Schmidt believe the private insurance industry is more stable now and better prepared with reserves and reinsurance essentially insurance for private insurance companies to respond to catastrophic storms.

But if a hurricane did hit Hawai'i, and private insurance companies did leave or restrict coverage, the surplus $185 million left in the fund would not be enough to cover losses.

Schmidt, the insurance commissioner, said it is better to have the money available than to start over from scratch.

"Whenever you're talking about a catastrophic event such as a hurricane, to say that you have everything under control would just be foolish," Schmidt said of the degree of preparation among private insurers. "There are good indications, but whether all that will actually hold up is really subject to doubt.

"And having a safeguard is very important, I believe, from a policy perspective for the state."

Schmidt said there have been some discussions within the Lingle administration about a paperwork transaction to count the hurricane relief fund toward the budget deficit but leave it intact in case of a hurricane. Such a scenario would allow the administration to balance the budget on paper in the hopes the economy will improve and the hurricane money will never actually be lost.