Hawaii's Fiscal Crisis
Price of Paradise · Hawaii Public Radio · aired 1995-04-16
Guests: Calvin Say (Chair, House Finance Committee); Lowell Kalapa (President, Tax Foundation of Hawaii)
Duration: 1:08:51

[00:00:01] Randall Roth: Good morning. This is Randy Roth, host of the Price of Paradise radio show. We're broadcast live each Sunday morning on KHPR, 88.1 FM and KKUA, 90.7 FM and then rebroadcast each Sunday evening at 8:00 on KIFO, that's 1380 AM. People listening to our morning broadcast are invited to call us at 955-8821 to ask a question or make a brief comment. And neighbor Islanders are always invited to call us collect. Our topic today has to do with finances. Specifically, the state of Hawaii is looking at a projected deficit of about $350 million. Unlike the federal government, the state must balance its books each year. That means spending cuts, tax increases, or both. With me in the studio to discuss these possibilities and a host of related issues are Representative Calvin Say, who is chairman of the House Finance Committee, and Lowell Kalapa, who as president of the Tax Foundation of Hawaii, works with elected officials like Calvin and the public at large to help bring about a better understanding of government finances. Gentlemen, good morning and Happy Easter.
[00:01:11] Calvin Say: Good morning and Happy Easter to you.
[00:01:12] Lowell Kalapa: Good morning, Lowell and Randy. Thank you very much for inviting me and Happy Easter to all of you out there.
[00:01:17] Randall Roth: Calvin, uh, this has got to be a very difficult session for you and for everyone else in the legislature. Um, how does it feel?
[00:01:25] Calvin Say: Well, right now it feels very, very uh tough as far as I'm concerned. Uh, I personally feel that the budget that we have before us for the next two years will be a very, very tight one that will affect every everyone in the public at large. You're correct, Randy, that yes, in December and January the council did present to us a $250 million shortfall and a and as of last week, the council revised their revenue projections downward of another hundred million.
[00:01:52] Randall Roth: And in fact, I'm told that depending on what happens in Washington, DC, it's quite possible that that $350 million projected figure would increase again.
[00:02:01] Calvin Say: Absolutely right. And it all depends what happens in Congress by the end of September. Well, we'll get a better idea and grasp of the federal cuts.
[00:02:09] Randall Roth: Lowell, give us a little help here. From the public standpoint, myself included, it seems like that number just keeps [unintelligible — audio glitch] growing. Is there no end to this?
[00:02:20] Lowell Kalapa: I think the significant part of the $350 million is, in fact, a reflection of the slower economic growth. What our seven members of the Council on Revenues are basically saying is that the outlook is is much more dark and dismal uh as far as the economy is concerned and therefore, they've ratcheted the uh forecast for revenues, general especially general fund revenues and that's what we're looking at, downward twice. And that is a significant concern to all of us because what those seven people are saying is that, hey, it doesn't look like the economy is going to grow quite as fast as we anticipated even a year and a half ago and now we are headed for even greater doom if you will. If if Congress does pull back um the other about hundred million of that or 120 million of that is due in fact to some underestimations on the part of government with respect to costs that are kind of getting out of hand. Largely welfare costs uh welfare programs and also in the case of um the early out retirement as well as overtime for our corrections officers.
[00:02:43] Randall Roth: Okay, Calvin.
[00:03:24] Calvin Say: Yeah, just following up with what Lowell just stated, for the public out there, we have to realize that there are four economic pillars and Lowell is correct that the economists are correct that out of the three out of the four, agriculture, you've got five sugar plantation closures.
[00:03:38] Randall Roth: So that's a pillar gone virtually.
[00:03:39] Calvin Say: Absolutely and we're hoping that diversified agriculture will pick it up but this going to be the next two to four years that anything will happen as far as diversified egg. Secondly is our construction industry. You don't see the cranes that were out there before in the late 80s early 90s with the Japan investments. So presently that public construction and private construction is down and third, military spending is a major part also that has decreased in its federal appropriations to the state of Hawaii. What's holding us up right now, personally as I I feel, is the tourist industry and we've got to nurture it to continue this economic base for the people of the state of Hawaii.
[00:04:17] Randall Roth: Mhm.
[00:04:18] Calvin Say: Getting back to what Lowell also stated, he's correct, and what's been happening, Randy, which a lot of the general public out there don't realize too, is our increase in the amount of discount stores to the state of Hawaii. Discount stores such as Costco, Walmart, Kmart has made a major impact on the small mom and pop stores that are now closing. The lower prices for the general public at large whereby we're not getting that 4% excise tax on the goods that are being sold, and these are all of these issues that compound our general fund revenue picture.
[00:05:03] Randall Roth: You know, I think a lot of our listeners and I would put myself in this camp, feel that in large part this projected deficit is the result of of the increase in the size of government over the last five or 10 years. A number that one hears quite often is that the size of state government is measured by the number of state workers. I'm told increased about 41% during the Waihee administration's eight years in office. And I think there are a lot of people who feel that rather than focus on on revenues the the answer is easy, you cut back, put government on a diet. Uh you cut back a bit. Is is that too simplistic, Calvin?
[00:05:32] Calvin Say: It's a very simplistic ideal as far as trying to right-size or downsize government. Two years ago, we already started in looking at downsizing government and we did. Correct me now, we did abolish about 225 to 231 positions. We did away with 11 deputy directors and the governor, the former governor, did come up with a mandate or a directive that a thousand positions be abolished by this particular biennium.
[00:05:59] Randall Roth: Isn't that just taking back one or 2% of that 41% or um and and let me ask Low, Lowell, your job among other things is to um uh keep an eye on this sort of thing. Is that 41% figure correct, did government grow that much in terms of government workers?
[00:06:18] Lowell Kalapa: Well, if I can inject a new concept here, one of the difficulties we all have, and this is where the debate went back and forth over the last couple of years is how big. And one of the things that has made the true picture somewhat murky, if you will, a little bit of uh hard to understand, is that many of the positions that started out as general fund funded positions have been shifted into what we call special funds. And this is the creation of those special funds that we have been haranguing about for the last few years, uh special funds were created, and all of a sudden we see people's salaries or they the costs moved from what we call A funds or general funds into B funds. So it makes it difficult to compare. In fact, the former director of the department that handles uh the personnel for the state came up with a figure and said, well, it's not really that bad because it only went up by 17 or 18% or 20%. And what she was doing was looking only at general funded funded positions, rather than taking all positions and not acknowledging that many of those formerly A funds or general fund positions went into B funds and were now hidden in the B funds. Um so if you want to use a figure, 33 to 40% uh would be on a relative basis.
[00:07:32] Randall Roth: And and as I was listening to Calvin a minute ago, it sounded as though the cuts are are small by comparison to those increases during that eight year period of time.
[00:07:42] Calvin Say: Well, Randy, if I can respond to that, the reason why you would consider it small but I don't is that if there was a growth of 8,000 new employees during the past eight years, 4,000 of them were committed to the Department of Education. That was what the public wanted. That was what the public demanded that education was second to none. What the legislature is concerned about now is that we don't have any accountability with the Department of Education. And that's where the Senate went after the department in really trying to get superintendent Izawa, his budget director, as far as telling us what the true figures are.
[00:08:18] Randall Roth: Yeah, she uh as as I understood it, uh Donna Keta who is your counterpart in the Senate. She's the head of the money committee there and you're the head of the money committee in the House. She basically said that the the DOE was getting the public all whipped up saying that the DOE wasn't given enough money. But as I understand it, she was saying that the DOE was playing games within its own budget to where money that was supposed to go into the classroom was simply keeping uh an oversized bureaucracy in place.
[00:08:47] Lowell Kalapa: In the state and district administration, you're correct. How does the the House money committee feel about that?
[00:08:52] Calvin Say: What we did really is that uh there's a bill that has passed the House and Senate bill and we're mandating the Department of Education to redeploy 110 resource teachers that are at the district and state level back into classrooms with a report 20 days prior to the 96 legislature to tell us what schools those resource teachers are at.
[00:09:15] Lowell Kalapa: And at at the other end is the Senate is doing something very similar. They are mandating that no transfers be made out of what we call EDN 100 which is the basic instructional budget of the of the DOE and what they are saying is that basically uh money was given to the DOE in EDN 100 which is the instructional program and DOE administrators then transferred money out, creating what appeared to be a vacuum that not enough money was going in and so shifting the blame back to the legislature. So there are a couple of things the legislature is doing, so I just wanted to inject that there.
[00:09:46] Randall Roth: You know as I listen to this, I don't like what it sounds as though the DOE is doing but isn't the legislature's response uh micromanaging?
[00:09:56] Calvin Say: Randy, I would say no, because I threw my hands up in 1986 or 87 when we gave the board of Ed the full autonomy. The question of autonomy is similar to the University of Hawaii board of Regents. In '78, concon the general public at large said to the legislature the board of education, the board of Regents, those two educational systems will have their separate body to operate and managed it. My concern was that, why should I as an elected official standing out there waving my sign relinquish that legislative authority? In '86 or '88, the legislature gave carte blanche to the Board of Regents and to the Board of Ed, the internal management control and now it's rethinking that.
[00:10:40] Lowell Kalapa: Absolutely. For me, I'm rethinking it, I'm telling members of the House Finance Committee and members of the majority caucus, hey, let's rethink about all of this as far as what we have done. You have relinquished your legislative authority to a board that is not accountable to the general public at large. It seems like every other year, I'm on this side, you know, side on the streets waving my sign, walking house to house and they're asking me what's happening to the Department of Education.
[00:11:07] Randall Roth: Yeah. But but you guys have a tough enough job without deciding how each unit of government is going to be spending its hundreds of millions of dollars, don't you? If I can inject right there, and I mean I don't want to bail Calvin out, he can do his own bailing out. But I think I think what I think what is it I would uh characterize it as giving having some trust and and your your son or daughter coming up to you and saying, can I now have the ability to drive and give me a car? And you give them the car and he says, well, I expect you to use it responsibly and well and be home on time and that son or daughter of yours now goes out and stays out until 2:00, 3:00 in the morning and you kind of say, well, wait a minute, I gave you I trusted you, I gave you the responsibility, but you're abusing it. And that's basically what I think the legislature is saying is that they gave them a lot of money, I mean 700 million dollars and yet the schools have not improved. Uh we have a supposedly a policy a governing body called the department of the Board of Education, Department of Education and instead of putting it into the classrooms where we would hope that that money was going, much of that money was going into administration. And I think that's why the legislature is pulling back now and saying, hey, can we trust you?
[00:12:21] Calvin Say: And the other point, Lowell and Randy, that I bring up is a number of bills this year that are requesting the legislature which I felt should be administration. Minimum class size, why should the legislature be addressing something like that? Minimum class size when it's the Board of Education's responsibility in setting up these policies. Eight the creations of more parents center networks, community network centers. That's the board's decision if they're going to increase it or not. Don't bring it to the legislative table. But these proposed legislation are from the general public to their elected official telling us, the board is not doing its job.
[00:13:01] Randall Roth: Okay. You're listening to the Price of Paradise Radio Show. Our topic today has to do with the state's budget. It's facing a $350 million deficit and something has to be done. Our guests in the studio talking about it are Tax Foundation President Lowell Kalapa and House Finance Committee chair Calvin Say. If you're listening Sunday morning and would like to ask a question or make a brief comment, just call 955-8821. And neighbor Islanders are invited to call collect. The number again, 955-8821. Calvin, let's talk a little bit about possible sources of more revenue. Uh some people would say tax increases, but I guess there are a lot of uh different ways of describing uh sources of revenue to the state. Is gambling completely dead? That's been discussed as a partial solution to our fiscal woes?
[00:13:54] Calvin Say: Gambling is dead for the session, yes, Randy.
[00:13:57] Randall Roth: Okay. What about uh your bill, I believe it is, that would increase the excise tax by 1% for one year? And I should quickly add as I understand it, this isn't part of the solution so far as the $350 million projected deficit is concerned. This instead was designed to come up with uh $320 million to settle the Department of Hawaiian Homelands claims. Uh how does it stand?
[00:14:24] Calvin Say: Right now, this particular measure is in conference and uh the Senate took the posture similar to the administration. And for the House, we are looking at continuing the effort in getting that 1%. And primarily the 1% is for a settlement. Nothing dealing with public service at large.
[00:14:40] Randall Roth: Okay. Lowell, does the Tax Foundation have any uh thoughts or position or anything with respect to that proposed increase of the excise tax from 4% to 5% for a one year period of time?
[00:14:53] Lowell Kalapa: Why I would point out that, um we're concerned that that temporary tax increase would have a dramatic and negative effect on the economy at a time when the economy is, as we all acknowledge, not doing very well. Um I would also point out that it has does not have not only community support, but it doesn't have the support of the Hawaiian community. Um basically, they are satisfied with the 20-year payout of of $30 million a year for a total of $600 million dollars and whether or not we pay that in cash, or as the administration has suggested uh totally in bond monies or borrowed monies, uh that is up to the legislature to decide. I think that we can have some flexibility in using both cash and borrowed monies.
[00:15:32] Randall Roth: Okay. In just a couple of minutes I want to go through a number of other possible sources of of funds and then we want to get into some specifics on the spending cuts, what you see down the road, Calvin, and how we in the public would would feel those cuts. But first, we have several callers on the line. Our first is Steve from Manoa. Good morning, Steve.
[00:15:53] Steve: Good morning. My concern is uh what the effects of the state and for that matter the city and county fiscal crisis is going to be on the ratings of Hawaii muni bonds.
[00:16:03] Randall Roth: Great question. Uh which one of you two would like to take that one?
[00:16:07] Calvin Say: I would like to take it on at this point, Randy and I would say to Steve that uh it will have some effect and that's why we are looking at a cash carryover balance of about $48 to $50 million dollars.
[00:16:17] Randall Roth: So that $350 million figure that I've been using, really we're looking at a projected deficit of 300 million, but you've put an extra 50 in there to uh protect our bond rating?
[00:16:28] Calvin Say: Uh no, no, Randy. If you were to look at it from a different another perspective, it's a shortfall of 350 that you would have to have another 50 on the top. We already have that as our cash carry over balance.
[00:16:41] Randall Roth: I see. Okay. Lowell, any thoughts uh with respect to Steve's concerns about our bond rating?
[00:16:47] Lowell Kalapa: Yeah, I think um not only looking at the carryover balance that uh Representative Say here has already pointed out, but I think also looking um bond holders and bond buyers will look at how the state is doing uh as far as the economy is concerned and what kind of burden of taxes has already been imposed. I think bond buyers are probably concerned if we have to raise taxes again this year um and the impact that it will have on the ability of the economy to support that kind of debt.
[00:17:14] Randall Roth: If if our bond rating uh were reduced, then that would significantly increase the cost of of government.
[00:17:20] Lowell Kalapa: Well, the interest the interest rates would go up and therefore the payments that we have to make back to the bond buyers would go up as well and therefore it would exacerbate the the shortfall.
[00:17:28] Randall Roth: Steve, is that answer your question? Okay, we've lost Steve. Let's go to well we have another Steve in Waikiki this time. Good morning Steve in Waikiki.
[00:17:39] Steve: Good morning. Very much uh pleased to hear you all. I I want to just start out with a little quick comment which is that I used to live in St. Louis Heights and I remember Calvin Say's very first campaign.
[00:17:49] Randall Roth: Thank you very much, Steve.
[00:17:50] Steve: And he came and sat on my front doorstep for about half an hour. And we had a long talk and I said here is a young man who's going to go some place. And I remember the time that he was his main claim to fame was that he was uh washing dishes down at the uh Flamingo Chuck Wagon.
[00:18:04] Randall Roth: Wagon. 1970s.
[00:18:06] Steve: And uh so I I have to congratulate him. He really has uh made a name in the career for himself and uh so uh this is a young guy with a lot of gumption and I I really do uh admire his uh progress. But I want to throw him a curve ball.
[00:18:19] Randall Roth: Go right ahead, Steve.
[00:18:22] Steve: Uh Ben Cayetano in a lot of his uh talks around town and this is also before he got elected when he was going to coffee hours and things like that. Um had one theme that reoccurred and he said that the uh he saw the University of Hawaii as the main economic engine for the future of the state. That is to say uh the state had agriculture, the state had tourism and so on. But that uh [unintelligible — audio glitch] we had to diversify, we had to uh create other kinds of bases for our for our economy and that he saw the university as really the source of that creation of new essentially new revenues eventually.
[00:19:00] Calvin Say: new money is eventually some of the solutions to our economic woes.
[00:19:05] Randall Roth: So my question is, with the current cuts, and I have to say that President Mortimer has been um
[00:19:12] Lowell Kalapa: You're going to have to get to the questions, please.
[00:19:13] Randall Roth: President Mortimer has been slashing across the board. With the current cuts, aren't we sort of like eating our own seed corn? Or, I mean
[00:19:20] Lowell Kalapa: Okay, let's let's Well, let me let me inject there because some interesting things are going on in the legislature that maybe hasn't uh gotten media attention, and one of the things that the Senate has done for example, is set up basically what it intends to do in the future, that is to put the University of Hawaii on its own. And I agree with that uh point of view that is, um, basically what the Senate has said is that you need to understand that there is a just so much money in the pot, and that you cannot live off the general funds forever. I think one of the sore points with the and that's reflected in the Senate uh committee report on the budget is that it needs to look at its tuition, its fees, all the charges, and where the money is going. Um, you know, when we talk about cuts and the media talks about cuts, we always think, well, we're just going to get rid of a lot of programs and everything like that. And, you know, across the board cuts are no longer appropriate. I think all of the departments are getting the message that they need to look internally. Uh it isn't just 5% slash across the board, but they have to decide what are the priorities. At the University of Hawaii, I think where both the House and the Senate basically are going, and and Calvin, the Representative say makes reference to 1988, when they set off the the UH and the higher ed and department of education on their own autonomous uh journey, is that they have to be responsible for raising a certain amount of their own funds. The tuition at the University of Hawaii is ridiculously low by comparison to many of its counterparts on the mainland. The question is, should those direct beneficiaries be paying more of their own way as opposed to living off the general fund of the state?
[00:21:02] Randall Roth: Hey, that was Low, Kalapa, but Calvin, say, what do you think of Steve's suggestion that maybe we're eating our seed corn?
[00:21:07] Calvin Say: I think that Steve is absolutely correct and that's where the House has taken a very frugal, fiscally responsible position in not cutting more into the the University of Hawaii. As far as questioning what the Senate measure is all about in regards to the creation of a university operation special fund with the special fund difference coming from tuition increases allocated to the university. That's something for discussion that we will be addressing with the Senate.
[00:21:35] Lowell Kalapa: Okay. Steve?
[00:21:37] Randall Roth: Well, and this means in other words, they're going to turn the university's revenues over the university, because every every nickel that goes the university right now drops right into the into the general fund. We don't see that side. Idea is to give it back to them and let them kind of stand on their own and be responsive to their immediate constituency, which are the students.
[00:21:53] Calvin Say: Absolutely. And that's where I think Randy will see the impact as far as the university law school also.
[00:22:00] Randall Roth: Is that a prediction or a threat?
[00:22:02] Calvin Say: It's a prediction.
[00:22:04] Randall Roth: Okay. Steve, thank you for your call. Thank you. Happy Easter, Steve. We have a call from Wahiawa. Clarence. Good morning, Clarence.
[00:22:11] Clarence: Hi, good morning. What what can we do for you, Clarence?
[00:22:14] Lowell Kalapa: is the subject this morning, but anyway, uh when uh when H took over the administration, there was an 80, I think to 80 to $100 million surplus. So now we find out that on top of the surplus missing, you have this huge deficit. My question is uh who was watching the store? I mean, this money wasn't spent overnight, and you had eight years of this constant drain on these resources, and the legislature and the loyal opposition of Republicans uh just all sat back and watch this money drain away.
[00:22:45] Calvin Say: Well, that's a fair question. Calvin, Clarence, I would respond by saying that the legislature was very fiscally responsible in trying to address the needs of the general public at large. Yes, we did have a big surplus, but what happened to the surplus was that it was used for other public service needs out there. Secondly, we did have a lot of cash improvement projects that instead of using bonds, we we did use our cash for projects that you are now seeing statewide such as the uh Kaakaako State Park, the green belt of all of Waikiki, Kioala Basin, and also the fact that uh we did put a lot of money into the housing finance development corporation, which is now developing affordable housing in Kapolei, Hanapipi, Lahaina, and also Kialakehi.
[00:23:29] Randall Roth: So basically, you're saying the money was spent but it was well spent. Yes. Low Klappa, do you have a different perspective on this? I would not certainly agree with that with that with money was well spent. And certainly, I think uh one of the things that troubles us and and you're asking me who was watching the store. Well, I think we were watching the store, we did raise the issue, but because there was so much money there and because, in a sense, you the public out there felt that there was a lot of money. You all you all came in to to representative say's office and and other elected officials at the legislature demanding this or that program without realizing that they all added up to eating up that half a billion dollar budget. And the silent majority was silent. And the silent majority was silent, and, you know, it was somebody one representative said, you're like a lone voice in the wilderness, and I go, yeah, well, you know, we do point it out. If the, you know, the general public wants bread and circus, well, they'll get bread and circus, but somebody's going to starve at the end and it's going to be bread and water. And basically, um the thing that troubles us is the fact that the legislature and the administration both decided to go over the spending limit to half tune of a half billion dollars and a lot of it was cash financing of capital improvements, which we disagree with because basically, it puts a heavier burden on this generation of taxpayers um to the benefit of those in the future who will have no responsibility for paying for those capital improvements.
[00:24:16] Randall Roth: Do you agree with Clarence that uh the legislature should have been more on top of this than it was uh or or do you feel [unintelligible — audio glitch]'s not a part of of the current situation?
[00:24:21] Lowell Kalapa: I think that um the legislature was probably lulled into um serenity, if you will, because there was so much money.
[00:24:35] Randall Roth: So it basically same answers when you're talking to the community lulled into a You know, for me, Randy, I wish the public out there would realize that we did have proposals that was submitted to the ballots in regards to a rainy day special fund, and it was the public at large who voted against this rainy day special fund as part of our constitutional amendment. Mhm. Okay. Clarence, does that answer your question?
[00:25:36] Clarence: Yes, thank you. Thank you. We have a caller from Hauula. George. Good morning, George.
[00:25:42] George: Morning, sir. Enjoy your program. Good. Just want to ask you um if the um your experts would comment on why don't we we bond our governor to see that our um um our our governor doesn't spend more than it takes him.
[00:26:01] Randall Roth: Uh Calvin and and I think partly what George is referring to is that there are a couple of people in the legislature in the last few weeks who suggested that um during the Waiahea administration that some of this spending hasn't at least to them, been appropriately accounted for. Um George is suggesting that we bond the governor as if if the governor does something improper that some bonding company will be on the line. Is there any doubt in your mind as to whether or not these allegations and and I believe Rod Tam is one of of the legislators who've um who've been talking about this. Is there any doubt in your mind about what he's suggesting?
[00:26:43] Lowell Kalapa: At this point, no. I I don't think that we'll ever see the legislation to bond the governor, primarily because he is the chief executive officer of of our government. I I I I think the suggestion is tongue-in-cheek, [unintelligible — audio glitch] there are two things here. First of all, I think that there is a bond and it's called the electorate. And if the electorate was not in tune and kicked the governor out of office the first time around, then they're just as much as responsible. You keep you keep blaming me and the public. You You better believe it, because that's the that's the whole point of our democratic government, if not we'll just have a dictatorship of some sort. The second thing is I'm surprised that Senator Tam would raise the issue. I I can't blame uh Representative Kaikena because he wasn't there until last November. But Senator Tam, I was wondering, you know, when he put that suggestion forward to audit the state government, I was wondering where he was during the last eight years. Mhm.
[00:27:40] Randall Roth: You're listening to the Price of Paradise Radio show. Our topic today has to do with the state's $350 million projected deficit. Our guests are Tax Foundation President Lowell Kalapa and House Finance Committee chair Calvin Say. If you're listening Sunday morning and would like to ask a question or make a brief comment, just call us at 955-8821. Uh George, are you still there? I guess we lost George. Something that again, I believe a lot of our listeners wonder about are these so-called special funds. And the last thing I want to do is to get into a detailed technical explanation of exactly what they are, but there's a sense, I think, that there are a bunch of piggy banks out there with many millions of dollars stuffed in them, and they're called special funds, and now's the time to go break open those piggy banks. Um, are they out there? Yes. Low, or go ahead Calvin? Yes, there's a lot of special funds out there and two years ago, we did address it with the legislative auditor's report, and we did uh repeal or abolish some of these special funds and what we have been doing this past 2-3 years is draining some of these special funds where the excess funds are not needed for their operations of a particular program. To what extent can special funds that haven't yet been drained be part of the solution to this $350 million challenge that we're facing? Okay, and in response, Randy, that would be House Bill 48 House Draft 2, which whereby the House Finance Committee with the concurrence of the subject committees, drained it a total of about $21,672,000 from all special funds and revolving funds. Okay, Low, any thoughts on special funds? Yeah, I think we can go even more. I think um the auditor's report indicated there were more than 160 some odd special funds, true special funds out there. Um, many of them created within the last 8 to 10 years and the question is are they piggy banks? In a sense, yeah, they're piggy banks and they're also dangerous from the standpoint that in pretty good times um the legislature doesn't pay very much attention because what happens is that because they're special funds, they can only be used to say purchase red paper cups or uh buy pink automobiles. They can't be used for other purposes. And so, the administrators of those funds like sit there and say well don't you can't touch my money, so don't worry about it. So those funds don't get the kind of scrutiny. We found that this year with a particular special fund in the Department of Health where three out of every $4 that was for a fund that was supposed to set up a reserve to fight oil spills was being spent on basically what we call overhead travel, office equipment, salaries, um per diem. The question is until we asked that question, I think it was in Representative Say's committee, even the administrators of that fund could not tell lawmakers how the money was being spent. Uh, that's what special funds I think that's the real evil of them is that they they don't pass under as close scrutiny, at least until we get into a financial crisis as we are now. I know, right.
[00:38:00] Randall Roth: count it. Mm-hmm. Where they're making the money is in the activities this. It's not food and beverage. If you look, if you walk down Waikiki, you can see more and more of the fast food type of operations compared to the old days.
[00:38:15] Calvin Say: So they simply can't tack a tax increase onto the cost that's already there, they would have to reduce. Absolutely.
[00:38:22] Randall Roth: I think we should remember the original 5% that went into effect in 1987 passed by the 86 legislature was intended to fund visitor promotions. Unfortunately, in 1990, the legislature gave the the proceeds of that 5% tax to the counties. So, in essence, the counties have benefited from the hotel industry, and yet, as the senate points out, the hotel industry is still getting it between the the chops, if you will, with a higher hotel uh real property rate on the hotel property.
[00:38:52] Calvin Say: Okay. Thank you, Ken. We appreciate your call. We have a caller from Kaimuki. Good morning, Marsha.
[00:38:58] Marsha: Good morning. Good morning. Good morning. Do you have a question or brief comment for our guest? Yes, I do. My question is regarding the Board of Education, which was granted free autonomy in the as as they point out in '88, but, and the last ballot was limited to policy decisions only. How can you manage an operation if you are dependent upon information which is given to you by the very bureaucracy which as you point out, has used that to increase their own ability while limiting the abilities of the Board.
[00:39:32] Calvin Say: Okay. Calvin? The constitutional amendment that we were proposing was that it'd be a appointed school board rather than a elected school board. So so the accountability would be held with the chief executive officer, which is the governor that makes the final appointments.
[00:39:47] Marsha: Yes, but there was also the second one which said that the Board of Education should be limited to policy decisions only.
[00:39:53] Calvin Say: Yeah, policy decisions as far as developing policies for the operations of the Department of Education. As far as the financial side, they had nothing to do with it.
[00:40:04] Randall Roth: And Marsha, I think your point is that um um the Board of Education has to rely upon the DOE, just as the legislature is getting a little bit frustrated uh having to rely upon numbers from the DOE.
[00:40:17] Marsha: That's right.
[00:40:18] Randall Roth: Okay. Marsha, I feel the same concerns as you and this year we did I did introduce a bill looking at repealing over 60 educational programs that are on the HRS, the Hawaii Revised Statutes. And it's ridiculous sometimes, Randy, because who's doing the evaluation?
[00:40:38] Marsha: Exactly.
[00:40:38] Randall Roth: And who's doing the accountability? That's why we we introduced this particular measure, and bringing the DOE out to say how successful has these programs been. If it's not being funded, where have these funds gone to?
[00:40:51] Calvin Say: Okay. And I think I I I was very disappointed um that the appointed school board proposition failed uh at the polls last November because I think basically what you have now is a duality of responsibility. In fact, you have a superintendent who is not responsible to the governor. You have a superintendent that is responsible to the Board of Education. You have a legislature that is getting blamed for basically uh the spending that the Board of Education is supposed to oversee and ensure is being done properly. So, who do you hold responsible? I think the appointed board would at least put the blame back on the governor's back and said, "You are responsible for education." Um you appoint the board and if you appoint a rotten board, then you should be kicked out of office as well. So, having, you know, so many elected bodies I think kind of um makes the the system uh less responsible, if you will.
[00:41:43] Randall Roth: Marsha, you've convinced me it's time to have another show uh on our educational system here in Hawaii. Thank you very much.
[00:41:50] Calvin Say: We have a caller from Kailua, Jonathan. Good morning, Jonathan.
[00:41:54] Jonathan: Uh good morning. I was driving by uh a shopping center in my car and listening to your show and decided to jump out and call you up. Uh there was a couple of comments made about the budget that just uh basically uh
[00:42:06] Randall Roth: We touched a nerve.
[00:42:07] Jonathan: It touched a One of them was uh comment by I don't know your guests because I didn't quite catch everything. It was just uh
[00:42:14] Randall Roth: Well let me tell you, we have Calvin Say, who's the chair of the House Finance Committee, and Lowell Calapa who's president of the Tax Foundation of Hawaii.
[00:42:21] Jonathan: Okay. Well, let me let me just put it this way. There are a couple of comments. One of them was someone made a comment about the electorate being at fault as well as the uh our elected officials for this budget deficit. And and that really touched a nerve because we don't know what's going on. We elect people, elect people to appoint people, uh to hire people, to run the government, to make sure that it's run correctly. If I were the chief financial Chief Officer, Chief Executive Officer of uh a corporation the size of Hawaii, and my Chief Financial Officer came to me one day and said, "Oh, we just found out we have a $250 million deficit." And then a few months later comes says, "Oh, I made a mistake for $350 million," I would have fired the guy. Not only would I fired the guy, I would have fired all the people in his section, in his accounting and hired somebody that's competent and willing and able to do it.
[00:43:09] Randall Roth: Jonathan, I'm going to come right back to you. Hang on the line, but I want Lowell Calapa to respond to that.
[00:43:14] Lowell Kalapa: Well I don't think necessarily it's the financial officer that that made the mistake. I think basically the seven-member Council on Revenues was only doing its job and basically taking opening the window, looking out there and looking at the economy and saying, "Hey, the economy's not doing real great as great as we thought it was going to be doing a year and a half ago. And so, when they, you know, it's better than having us thinking, oh, well, we're doing all right, and go out and spend all of this money, and that's basically where the Council on Revenue has been an objective board to come in and say, "Things aren't doing great, we need to pull back, um the forecast is not as good." And and basically that's it. It's not the CFO or or the the budget director. Um these forecasts, the bulk of the $350 million shortfall is in fact due to an evaluation of what's happening in the economy.
[00:44:05] Jonathan: I understand that fully. I mean, that's pretty apparent. My point is is that why wasn't it viewed uh way before the election? Why you know, you said you you someone pointed out that we as electorate are as much at fault as anybody else, because we could vote people out. But we have a four-year cycle to vote people out. That cycle just passed. We found out just after the election. And I think that's totally unfair to the electorate, totally unfair to the people of Hawaii and uh to be frank, you guys are a bunch of rank amateurs. You love your work, but you are very good at it. That's my point.
[00:44:40] Randall Roth: Jonathan, I can understand your feelings and your concerns and being a finance chairman, this is my third year. We are trying our very best and I'm very happy that the Randy folks invited me here this morning to discuss this issue that is uh on the table. I'm sorry to say that the public doesn't come out as often to the public hearings, but uh your frustration is well warranted throughout the state of Hawaii and we are trying our very best in trying to balance this particular budget. Like I've said to the uh Finance Committee members that uh and to the majority caucus and the members of the House. My responsibility, my role here now is not for representative say or for Low Calapa or for Randy Rock. My responsibility is for the next generation to see that we are fiscally sound in this operations of state government. That's the whole objective as far as my mission.
[00:45:33] Randall Roth: Jonathan, we'll give you one last uh brief comment, then we need to move on.
[00:45:37] Jonathan: Yeah, I appreciate uh very much your comments and your soothing talk. At the same time, we didn't get into the situation blindly. Somebody knew about it, somebody saw it coming, or else if they didn't, they were asleep at the job. And well, good luck in the future because we're going to need it. Thank you very much.
[00:45:54] Randall Roth: Thank you, Jonathan. Uh there's a lot of frustration there, uh Calvin, and and I'm sure you're hearing a lot of that and having a lot of those folks um You wouldn't believe the phone calls that we've been getting from to the House Finance Committee and the staff that's been, you know, willing to listen to all of these frustrations and concerns. It's certainly understandable. Um let's go to Suzy from Hawaii Kai. Good morning, Suzy.
[00:46:17] Suzy: Uh good morning. The state deficit is 350 million, right? Can somebody tell me what the annual budget is for Medicare nursing home payment, Medicaid nursing home payments?
[00:47:07] Randall Roth: I would give you a rough estimate of about uh 9 million per year.
[00:47:07] Lowell Kalapa: 7 to $9 million.
[00:47:09] Suzy: 9 million per year. Uh what is being done to look at that and see if that can be lowered, the Medicaid portion?
[00:47:45] Lowell Kalapa: Well, you should know that there is a the one that I think uh representative Say and I will not agree on, but there is an extension of a proposal to that's presently uh imposing a 6% tax on nursing facilities. Um This was supposed to be a temporary tax of 2 years and acted by the '93 legislature to sunset at the end of June 30th '95. The Department of Human Services, which administers Medicaid and particularly for the nursing homes as well as for acute care, um has come forward and said uh that the 6% tax should be extended for 2 years and I think the current proposal says indefinitely. The question is um and I think I am as representing the taxpayer, a little upset because DHS or human services people did not spend the last 2 years trying to figure out a way to address the shortfall in Medicaid and um supporting nursing facilities and coming up with alternatives but instead waited until the '95 legislature and then come forward with an extension of the tax.
[00:48:22] Randall Roth: Calvin? Yeah, that's that's correct, low. And and the other flip side of the coin for low and Randy and for uh Suzy, Suzy out there in Hawaii Kai, the the concern is that with this tax, we were able to get federal reimbursement on a 50/50 match. The concern for the long out years is a question of the operations of our nursing homes. If this tax was not implemented in getting this federal reimbursement per se, nursing homes would not be an operation at this point, and that's the scary part because of our population also, that there is a waiting list of individuals wanting to get into nursing homes or private hospital facilities. Okay. Well let me let me just say that. Uh that's one reason why I'm kind of glad, I mean, all the callers will call up and say you're nuts. I'm glad we're having a tight fiscal situation because as long as we had a lot of money, the immediate and easy answer was say, "Let's just put more money into it." Now that we don't have what we call resources and money, maybe it's time we start using our ingenuity and creativity to come up with alternatives that don't require as much in resources.
[00:49:21] Randall Roth: Okay. Suzy, thank you for your call. I I have several people on the line and I do need to move on.
[00:49:22] Suzy: Randy, I didn't understand what tax. I tried to interrupt. I guess you couldn't hear me. I I just didn't I couldn't follow that. I tried to interrupt. I couldn't understand what kind of tax it is. The words were garbled.
[00:49:36] Lowell Kalapa: It's a nursing facilities tax. It's an additional in addition to the 4% general excise tax. Tax rate is 6%.
[00:50:05] Suzy: Who would pay this tax?
[00:50:07] Lowell Kalapa: It's the people in the nursing homes. Um the bulk of which are on Medicaid. So what happens is the state actually ends up paying the 6% tax, but for those people who are not on Medicaid, what we call the for-pay patients, say at uh Manalani, um they are paying the 6%. Their families are paying the 6% tax.
[00:51:09] Suzy: That's no solution at all. You're burdening the people who are already suffering. We agreed.
[00:51:20] Randall Roth: Yeah, you you've got some uh agreement here. Thank you, Suzy. We have a caller's been waiting patiently in Kailua, Ed. Good morning, Ed.
[00:51:36] Ed: Uh good morning. Uh my question is um what percent is of the total budget is this projected $350 million uh million dollar uh deficit. Uh second part is who who makes up the Council of Revenues, and how can the public and the legislature judge their ability in the past to make accurate predictions on which to uh uh make our budgets.
[00:52:18] Randall Roth: Okay. Uh Low, can you tell us just percentage wise or are we it's $350 million, 3%, 4%, 5%? Where where are we on this?
[00:52:26] Lowell Kalapa: Well, you're going to have to mix apples and oranges. First of all, the $350 million occurs in the general fund. Mhm. Um, about of which, that's about, um you're talking over the two-year period about 6 to 7 billion Excuse me, billion dollars. Um, and that's the relative size. But if you're talking about the total operating and capital improvement budget, we're talking about 12.2 billion dollars. Um so, again, it could be So somewhere between two and a half and 5% or Two and a half to 5%. Depending on if you're talking general fund only.
[00:53:02] Randall Roth: Okay. And I assume that that implicit in that question is why is it so tough, Calvin, to cut back 2 and a half to 5%? Households do it from time to time, businesses do it from time to time. Why is it so tough for government to do it?
[00:53:15] Calvin Say: Because we've been cutting back for the past 3 years. And with the uh collective bargaining agreements that we had last year, the uh other government-wide programs such as debt service, health fund, retirement, these are all resources that are already committed in our operations. And that's where the public has to realize that we are not growing as much as what people perceive it to be in the position counts. Where we are growing is in the fixed cost to the taxpayers, to the state employees and county employees.
[00:54:21] Randall Roth: Okay. And and we'll come back to that in just a minute, but Ed's other question had to do with the Council on on Revenues and without getting into specific names, Low, it's my understanding that [unintelligible — audio glitch] top economists in the state of Hawaii are are on that board, uh and that they are generally respected by those folks who who know the individuals and know their backgrounds. Is that accurate or or not?
[00:55:11] Lowell Kalapa: And basically, you have um representatives from the two major banks from their uh uh economics research departments. You have uh some people from the University of Hawaii in the Department of Economics. You have people who watch the visitor industries as part of their day-to-day jobs. Um and so therefore you have kind of a broad um based economic background, if you will, uh people with an economic background watching uh the state's economy and therefore coming forward with their forecasts of the economic indicators.
[00:56:44] Ed: Uh the central part of my question really is uh to go to how the public and the legislature can judge the Council of Revenue's ability in the past to make accurate predictions. And in other words, I've lived here 26 years and I've never seen in the newspaper any judgment on the past ability and error record of the Council of Revenues. And how can the public judge whether uh the input side here is uh is being very accurate.
[00:57:09] Randall Roth: I tell you what we'll do, Ed. The next time one of those people uh is here on the show, one of one of the members of the Council, um I'll give them some advanced warning and and we'll address that as as part of that show. And we have um those economists from time to time talking about the economy. Uh I think your question is a real good one.
[00:57:28] Ed: Thank you very much.
[00:57:29] Randall Roth: Thank you. Uh I want to remind listeners that this is the Price of Paradise radio show. Our topic today has to do with the state's $350 million projected shortfall. Presumably, it's going to have to cut spending or raise taxes or both. And our guests here in the studio are Tax Foundation President Lowell Calapa and House Finance Committee Chair Calvin Say. If you're listening on Sunday morning, we'd love to hear from you, to ask a question or make a comment. All you have to do is to call us at 955-8821. We have a caller from Maui. Good morning, Bill.
[00:58:04] Bill: Bill, are you still there? Yes, I am. Uh I was just wondering, who reviews what's transpired, so to know whether it's going to be done better in the future? The Board of Education or someone has put in this Pukalani high school site, they pick the site that's required at least 50 times normal expenditure.
[00:58:26] Randall Roth: Okay. Um Bill, I'll tell you what, you you've called before and raised that particular issue and we're running a little bit short on time and Calvin say has already talked a bit about the relationship between the legislature and the uh Board of Education and the Department of Education. Um so if if you've got a a specific question you'd like to ask, we'd we'd like to hear it, but I I don't have the time right now to get into that particular issue.
[00:58:52] Bill: Yes. Do you have a a question you'd like to ask? Well, who's going to tell us how much money has been wasted on the Pukalani site?
[00:59:00] Lowell Kalapa: Well, let me just say, I think that's the role of the legislature is, and that's why I think the uh department is getting uh roasted over the coals right now, is is that the legislature is now saying, you know, "Be accountable for what you have done uh and be honest with us." And that's all we want and basically that is the role of the legislature to review how well the public moneys have been spent.
[00:59:24] Randall Roth: Okay. Thank you, Bill. We've got several more callers on the line. Before I get to them though, we're running low on time and Calvin, I want to ask you about something that that as a a state employee, I'm, you know, moderately concerned about. I'm not really worried. But the employee retirement system, the ERS, um requires that the state make a contribution each year, and the contribution is based upon various actuarial assumptions. I'm told that one of the things being considered as a way to deal with the $350 million shortfall is to make an adjustment in those assumptions which would somehow reduce by $100 million the contribution that the state makes to that fund this year. And in the context of what I'm told is a $1.6 billion underfunding as it is, um number one, is that something being considered and what do you think about that?
[00:59:59] Calvin Say: Randy, you're absolutely right. Right now, personally on the statutes, there is a 8% earnings. Anything outside of 8% earnings, it goes back into the general fund. The scary part for me right now is the outyear projections reflect that we're not going to get that 8% excess earnings. Whereby state government would have to make up that difference based on the employer's and employee's contributions. Secondly, there is a measure also postponing the excess earnings of a 10% per year as far as returning back to the ERS system.
[00:57:00] Speaker 1: A greater concern to us, and I think to Representative Say, also shares it, is the public employees health fund. Um, not very many people are aware that when someone retires from public service, their health coverage is basically 100% funded, as opposed to when they're on the workforce itself.
[00:57:18] Speaker 2: So you mean for the rest of their lives, even if they only worked for the government for 10 years, their health is completely taken care of. Their healthcare.
[00:57:25] Speaker 1: healthcare coverage is completely taken care of. And the other thing, I think, and even some public employees don't recognize this until they get into the retirement before, so if you will, is that even the Medicare portion, the insurance premium that Social Security takes out of your Social Security check once you're 65 for Medicare, is reimbursed by the public employee's health fund, so that you're made whole as a retiree. No other system in this state, or in the nation, I that I know of, reimburses their employees for the Medicare insurance premium taken by Social Security.
[00:58:01] Speaker 2: That's called Medicare Plan B, and it's $46.10.
[00:58:06] Speaker 1: And so you get a little, you know what happens is that Social Security in Washington, DC, takes 46 bucks out of your Social Security check, but the state, for its retirees, sends them a check equal to $46.
[00:58:17] Speaker 2: And the main message that I'm hearing is that as a state employee, I've got it much better than what most people realize, and perhaps better than what I realize. That's right. Okay. Well, we have three callers on the line and only 4 minutes to go, so we're going to have to move quickly. First, Jerry, in, I believe it's Kaimukī. Good morning, Jerry.
[00:58:35] Jerry: Good morning. I have a question when we're talking about how to look at saving. I think it was Representative Say who said, we've been cutting back. Why is it then we haven't managed to cut back on this retirement benefit that the legislatures get to get get when they go out of office and then go to work for a state agency? It seems to me, that's a lovely place to look back.
[00:58:57] Speaker 2: Okay, and we don't have time to get into that in detail, but it's the so-called high three, and and I and a number of other people have expressed concern that the legislature didn't look at that this year. Uh, any quick thoughts on that, Calvin?
[00:59:11] Calvin Say: Personally, I I you know, I disagree with the the public at large, that the high three is based on one's qualifications. That's it. I I don't think I'll get the opportunity, and uh if they're qualified, so be it. If you're the governor and you feel that local is qualified to be the director of a particular department, and you can't penalize him for being in office.
[00:59:34] Speaker 2: Okay. Uh Jerry, thank you for your call. We're going to have to move on to Lee in Waikīkī. Good morning, Lee.
[00:59:40] Lee: Good morning. I uh I raise a point, and the time is so short, you can respond to it in the next couple of because it's not going to happen this year. But in taxes, talking about the uh transit accommodation tax, I never hear anyone raise the point that when you talk about adding to it, you're adding to the load of renters, people in who live less than six months in one place, and a lot of people in furnished units do that, or the small landlord who has to pay the additional six or whatever percent it goes to, and many, many of those don't pay it. I do, but many don't. And it's a real burden. It those are not transients. Those are people that live here.
[01:00:20] Speaker 2: Well, by by definition, they're transients, but we know exactly what you mean, Calvin, uh how do you factor in folks like that that really are residents of the state of Hawaii, but technically fall within the definition of a a transient for purposes of that extra tax?
[01:00:33] Calvin Say: Well, that will be dependent upon the interpretation of the Department of Taxation.
[01:00:37] Lee: Well, the six months is the interpretation as I understand it, but it could easily be stated in the law that uh hotels of course, are or transit, but the 30 day limit makes a lot more sense.
[01:00:47] Speaker 2: Well, that could be addressed. Lee, and I hope, you know, you could get your elected official from the Waikīkī area to propose it, and we'll have a lively discussion with the tax office. Okay. Thank you, Lee. Uh one we have time for one more caller. John from Maui. Good morning, John.
[01:01:01] John: Good morning. Um I just wanted to make a statement and and a question. We hear and read about all these uh empty office spaces being leased by the state, and it it seems like there's a lot of waste in areas like that, and top heavy administration in the Department of Education, and I'm sure in other areas of state government. Seems like we should look at that, those areas of savings instead of cutting funding to some of the areas that really impact the community.
[01:01:30] Speaker 2: Okay, and your question?
[01:01:32] John: Um, so, has that been looked at? Has it um like the empty office spaces that are being leased for millions of dollars and Okay. Thank you, John. And and Calvin, we have just one minute, actually less than a minute. Could you talk a little bit about John's uh specific concern and then just the notion of cutting spending?
[01:02:00] Calvin Say: Yes. Last year we did put in a budget proviso, which the Department of Accounting and General Services, who is in charge of state office leasing, has to reduce it by 10% per year. So we are looking at the office leasing issue. How painful is it that the the spending cuts, and and even if taxes are raised, they're going to have to be some spending cuts. How painful is it going to be? You've got 10 seconds to give us a clue as to what we in the public are going to be feeling over the next couple of years. You're going to see that a lot of services will probably be curtailed or services will be much slower for the general public in large.
[01:02:21] Speaker 2: Okay. Well, thank you, gentlemen. We've we've run out of time and I want to thank Calvin Say and Lo Calapa for being here this morning, this Easter morning to talk to us about the budget situation. Our producer is Susie Roth, our technical director is Jeff Alardi. You've been listening to the Price of Paradise Radio Show. I'm Randy Roth. Aloha.