Leaders of Hawai'i's Neighbor Island counties say they'll manage to get through the fiscal year without budget deficits, but next year could bring employee furloughs and property tax increases.

Maui and Hawai'i counties anticipate budget shortfalls of roughly $45 million in fiscal year 2011, which starts July 1, 2010. On Kaua'i, the expected shortfall is $8 million.

"We're OK for this fiscal year. Our concern is really about 2011," said Maui Mayor Charmaine Tavares. "We've already asked departments to look at their budgets in light of the fact we know we're going to be worse off next year. What makes it harder is that they already have been cutting for two years; they're already operating on pretty slim budgets. If we cut any more, what do you cut and how does it impact the community?"

Neighbor Island mayors fear they may find themselves in an even deeper hole if the state makes a grab for the counties' share of revenue from the transient accommodations tax to offset a portion of its $1 billion shortfall projected through fiscal year 2011.

Maui anticipates $17 million in TAT funds this year, down 23 percent from 2009 because of the slump in tourism. The Big Island budgeted for $17.4 million in TAT money, down 13.5 percent; and Kaua'i, $11.2 million, a 15.5 percent drop from the previous year.

"The biggest concern we have is if the Legislature takes the TAT, then we're in a world of hurt," Tavares said. "It just seems very unfair to take our TAT, which is supposed to be used here to address the impacts of our tourism industry. Without that $17 million, we have to get that from somewhere."

Tavares, Hawai'i County Mayor Billy Kenoi, Kaua'i Mayor Bernard Carvalho Jr. and Honolulu Mayor Mufi Hannemann have been working in unison to lobby state lawmakers on the importance of TAT money to the counties.

"Last year we managed to keep it by the skin of our teeth, so we're sitting on the edge of our seats," Tavares said.

Even with those worries, the three Neighbor Island counties are in far better shape than the City & County of Honolulu, which is facing a $147 million budget shortfall this year, or the cash-strapped state, which is using layoffs and employee furloughs to save money.

Hawai'i County plans twice-a-month furloughs for 1,300 of its 2,700 workers starting July 1, but Maui and Kaua'i are holding off for now.

The counties' contract with the Hawaii Government Employees Association also allows up to 24 furlough days in the next fiscal year, and officials hope concessions come from contract talks with the United Public Workers union.

BIG ISLE COST CUTS

Big Island officials "could see the economy was going down quickly" last year and departments were asked to make 5 percent spending cuts and prepare for 10 percent cuts this year, according to Deputy Finance Director Deanna Sako.

The county, home to 176,000 residents, is managing with a $387 million operating budget, down 4 percent from the previous fiscal year.

Cost-cutting measures included formation of an expenditure review committee by Kenoi to review all requests for filling positions, out-of-state travel, equipment purchases over $5,000 and professional service contracts over $25,000.

The county also has a Budget Stabilization Fund to help offset unexpected shortfalls, and the current balance of $2 million can be tapped if necessary, said Finance Director Nancy Crawford.

Kaua'i Finance Director Wallace Rezentes Jr. said it is too early to tell whether his county will impose furloughs on any of its 1,200 employees.

"However, we are currently looking at various scenarios of how furloughs would be implemented and what kind of savings they could yield," he said. "Priority must be given to areas that involve the health, safety and welfare of our community."

DECLINING REVENUES

Kaua'i put a freeze on hiring, reduced travel budgets by half, deferred raises for the mayor and appointed department heads, and is delaying major equipment purchases and public works projects, Rezentes said.

The county, which has a population of 63,700, pared its operating budget to $154 million, down 2.5 percent from last year.

On Maui, Tavares said she is not proposing furloughs, which she sees only as a last resort. The county has 2,500 employees.

"I don't like furloughs. I don't know that in the long run it really saves money," she said.

Maui's $462 million operating budget for fiscal year 2010 was even with last year's figure. The four-island county is home to 143,600 residents.

"We're in a better position than most counties. We saw it coming and started to pull back and try to economize back in 2008," Tavares said.

Maui County department heads last year were asked to achieve 16 percent savings, and on average were able to realize half that, according to Finance Director Kalbert Young. That was enough to spare some programs from cuts this year, and the county also clamped down on discretionary spending such as travel and professional training, and is extending the life of equipment due for replacement, he said.

Managers must justify any hiring to a fiscal implementation team, and Tavares said she has been using her own money to pay for some of her out-of-state travel expenses.

Young said he is optimistic the county will stay on target this year, but he's already bracing for an anticipated 10 percent drop in county revenues from declining property assessments and lower collections for water, sewer and landfill fees because of conservation and recycling efforts.

"Departments are being asked to construct a budget for next year at same level that it is for this fiscal year and to start thinking of a strategy right now to absorb a 10 percent cut. We're not saying that's what it's going to be, but based on what we're looking at, there's going to be a need to reduce spending even more," he said.

"We've been cautioning everyone that the down cycle was going to affect the county maybe a year after the state felt it. We're right on (the) cusp of starting to feel that pain."

Property taxes are the single largest source of revenue for the counties. Tax rates on the Big Island, Maui and Kaua'i were unchanged this year, but county leaders are hinting at likely increases to offset lower revenues.

Maui's property tax revenue increased 5 percent this year, to $232 million, but Young expects that figure to drop 8 percent in fiscal year 2011.

"I don't see any way of preserving any rates from being examined and reconsidered, including real property taxes," he said.

PROPERTY TAXES

Hawai'i County's current budget forecasts $217 million in property taxes, down 6.5 percent from the previous year. Nearly five months into the fiscal year, Sako said those revenues are expected to decline an additional 8 percent, largely from delinquencies.

"We noticed last year and into this year there are more delinquencies," she said.

The amount of lost revenue could be even greater, Sako said, since the financial crunch is affecting how and when property owners are able to pay their taxes, which are billed biannually.

"Some who used to pay the whole payment in August are waiting and paying in February, so it's difficult to know for sure where we're going to be at," she said.

Crawford said that with property values expected to decline further, "there may be a need to adjust rates to maintain existing revenue levels."

On Kaua'i, Rezentes said tax increases are one option under consideration, "but no decisions have been made." The county anticipates $90.6 million in property tax revenues this fiscal year, about the same as last year.

It's early in the budget process for fiscal year 2011, and officials aren't ready to say whether residents should expect major cutbacks in county services. However, Hawai'i County plans to reduce hours at refuse transfer stations, Sako said. The county does not provide residential trash pickup, so residents must haul their garbage to transfer stations or hire a private service.

Crawford said all county services are under review.

"Every effort will be made to maintain services, but we are facing an unprecedented budget shortfall next fiscal year. It is unlikely that we will be able to balance the budget without some impact on services," she said.

Nonprofits that receive county grants also can expect leaner support. Tavares said agencies are being asked to trim their own budgets and partner with other nonprofits to increase efficiency and cut costs.

She said the county is more likely to maintain funding for the Maui Food Bank, agencies that help the homeless and other human service programs offering critical services that are in greater demand because of the growing number of residents facing unemployment, wage cuts and other hardships.

Despite the bleak outlook for fiscal year 2011, the Maui mayor said she has detected a glimmer of an economic comeback in recent months.

"I think we're looking at the road to recovery. Some of the hotels are doing better," Tavares said. "Next year is going to be the hardest year, but I think we'll see a slow but steady recovery in '12 and '13."