Legislature faces tough choices on budget deficit
By Derrick DePledge
Advertiser Government Writer
State House Speaker Calvin Say has a crude, hand-drawn graph on an easel in his fourth-floor offices at the state Capitol, a visual reminder of the state's $1.2 billion budget deficit for advocates and lobbyists who come around asking about money.
The graph shows state expenses creeping north, while state revenues fall perilously south.
The projected deficit through June 2011 is still hard for many to grasp — it is the equivalent of about $1,200 for every man, woman and child in the Islands — but the full force is likely to hit lawmakers in the 60-day session that opens on Wednesday.
State spending cuts and targeted tax increases approved last session were not enough to offset the decline in state tax collections. Furloughs and pay cuts negotiated with public-sector labor unions and layoffs and budget restrictions imposed by Gov. Linda Lingle have still left the state with a hole in the two-year budget.
Lingle will restrict spending, refinance debt and delay state tax refunds from April to July to get through the fiscal year that ends in June. The governor has offered lawmakers a budget for next fiscal year that would cut state spending by another $378 million and generate new revenue by scooping hotel-room taxes from the counties, raising taxes on insurance commissions, and adjusting tax credits.
Lingle wants to stop paying life insurance premiums for state workers and retirees and end reimbursements for health care services in Medicare Part B for the spouses of retired state workers.
With 70 percent of the state budget devoted to labor costs — and education, health and human services programs the thrust of state spending — there are no longer any easy choices.
Educators and advocates for the poor will ask lawmakers to prioritize and restore some state spending, possibly undoing some of the across-the-board cuts made by the governor.
If negotiations between Lingle and the Hawaii State Teachers Association on teacher furloughs continue to lag, lawmakers will also likely be asked to step in with money to bring back classroom instruction days.
These pressures, along with a belief by many that Lingle has deferred significant budget decisions on state worker health care and retirement benefits, will force lawmakers to consider whether to tap the state's hurricane relief and rainy day funds and raise the state's general-excise tax.
Some fear that all of these options may not be enough, especially if the state Council on Revenues, which has predicted a slow recovery from the recession, lowers the revenue forecast when it meets again in March.
The council has estimated revenues will decline 2.5 percent through June, yet the actual numbers through the first half of the fiscal year are down 8.3 percent.
"You know what? I don't think they've got it," John Radcliffe, one of the state's top lobbyists, said of solutions for the deficit.
State House and Senate leaders, seeking to set an early tone for the session, have canceled traditional Opening Day receptions. They have also chosen to adjourn a week earlier than usual by reducing recess days, compressing the legislative timetable, which they hope will get lawmakers to focus on the budget.
Committee chairmen and chairwomen have been advised not to advance new programs that involve state spending unless there are credible sources of revenue.
Issues such as civil unions or restricting fireworks, potential minefields in an election year, have already cropped up. But leadership has warned against time-consuming detours.
"The state of Hawai'i is on the operating table, and we're just hemorrhaging. The doctors cannot control the bleeding," said Say, D-20th (St. Louis Heights, Pälolo Valley, Wilhelmina Rise). "Very simple, that analogy. And I'm trying my best as an individual representative to stabilize that bleeding."
Say, like last session, intends to introduce bills to contain state worker health care and retirement costs. He said it would be irresponsible not to have the discussion, even if it upsets the party's allies in labor, and leave the problem for the next governor.
"I don't believe we can sustain ourselves in state government. I don't believe we can afford what we have today," he said. "So let's go back to the drawing board, gang."
State Senate Vice President Russell Kokubun, D-2nd (S. Hilo, Puna, Ka'u), said the good news, if any, is that economists believe the recession appears to be bottoming out.
The safest political route may be to do the bare minimum now to get through June 2011 on paper — or what Radcliffe described as "smoke and mirrors" financing such as delaying tax refunds — and defer some of the tougher decisions.
"I think that's the safe way out, frankly," Kokubun said. "But, to me, it's when you're in a crisis that real values come forward."
'NO FREE LUNCH'
State Rep. Marcus Oshiro, D-39th (Wahiawä), the chairman of the House Finance Committee, which will get the first crack at Lingle's budget request, said lawmakers are going to be skeptical about the governor's figures.
"No silver bullets. No simple answers. And no free lunch," he said.
Despite the call to restore some services, and the pushback from counties against grabbing hotel-room taxes, many House and Senate leaders describe raising the GET as a last resort.
An increase in the GET — the state's largest source of tax revenue — could be politically difficult in an election year unless there is consensus in the community that it is necessary to preserve essential services.
Last session, lawmakers raised state income taxes on the wealthy, the conveyance tax on luxury and second homes, and the hotel-room tax over Lingle's vetoes.
"For me, it's the last resort," state Sen. Donna Mercado Kim, D-14th (Hälawa, Moanalua, Kamehameha Heights), chairwoman of the Senate Ways and Means Committee, said of a GET hike.
"Coming out of meetings with my community, they're saying 'No more taxes.' They just can't afford any more taxes, and that we're just not listening to them."
Minority Republicans will be vocal against broad-based tax increases, noting that Lingle was able to present a budget request that would close the deficit without raising the GET.
The Republican governor has also opted not to dip into the hurricane relief fund, although she has proposed using much of the state's rainy day fund to reduce teacher furloughs.
Preserving money in special funds has helped keep the state's bond rating high.
"There is this whole possibility that we are on the verge of recovery, and there are signs of a good economy," said state House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Hälawa). "So the best thing we can do is weather the storm right now and not put additional burdens, and — for me — not put additional tax burdens, on the community."
Republicans will also likely demand more scrutiny of the state Department of Education, which commands the largest share of the budget, and support Lingle's proposal for a constitutional amendment to bring the schools superintendent out from under the state Board of Education and into the Cabinet.
"The DOE is by far the largest spender in general funds, and that's an area where the governor has the least amount of flexibility," Finnegan said. "So scrutinizing the DOE's budget, to me, is extremely important at a time when we're trying to save general funds."
State Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau), said reducing teacher furloughs and restoring classroom time should be at the top of the Legislature's priority list.
Hooser believes lawmakers should reduce spending or raise taxes if necessary to balance the budget, but not take hotel-room taxes or other revenue from the counties, which were already looking at property tax hikes to remedy local budget shortfalls.
But Hooser said it appears House and Senate leaders and the governor agree that hotel-room taxes should be temporarily diverted.
"It's not a responsible policy," he said. "It's just taking money away from somebody else."