Hawaii's Fiscal Crisis
Price of Paradise · Hawaii Public Radio · aired 1995-02-05
Guests: Earl Anzai (State Director of Budget and Finance); Lowell Kalapa (President, Tax Foundation of Hawaii)
Duration: 1:04:51

[00:00:03] Randall Roth: Good morning. This is Randy Roth, host of the Price of Paradise radio show. Our topic today is Hawaii's fiscal crisis. With me in the studio to discuss it are Earl Anzai, Governor Cayetano's Director of Budget and Finance, and Lowell Kalapa, President of the Tax Foundation of Hawaii. This is a live broadcast and calls are welcome. To ask a question or make a comment, just dial 955-8821. Earl, except maybe for the governor, you've got to have the toughest job around right now. In order to budget our, in order to balance our state budget, as required by law, you've got to find $250 million. How's it feel to be the budget director under these circumstances?
[00:00:47] Earl Anzai: Pretty good, except for the fact that you got me down here at 7:30 on Sunday morning. That's the hardest part.
[00:00:53] Randall Roth: You're looking amazingly awake. Lowell, what are your thoughts on this fiscal crisis, as the new governor has referred to our financial circumstances right now?
[00:01:04] Lowell Kalapa: I think it's going to be a challenge, certainly, but it's not one that is not manageable. Certainly, I think we look back 20-some odd years ago, in 1973, when we were faced by a very similar challenge with the $200 million shortfall, if you will, and we managed to get along without increasing taxes.
[00:01:24] Randall Roth: Earl, I don't know about our listeners out there, but as I'm sitting here, my first question is, how in the world did this sneak up on us? I think 6 months or so ago, at about the time that the Public Workers Union strike was being settled, the newspapers at least were indicating that we had something like 250 to 300 million dollars of surplus, and now all of a sudden, seemingly out of the blue, we're told that there's a projected deficit of 250 million dollars. How in the world did this happen?
[00:01:56] Earl Anzai: Before I go on to that, I want to make one comment about what Lowell said. Lowell said this is easily manageable. I didn't say it was easily... it's not that easy.
[00:02:08] Lowell Kalapa: It's not that easy, but I certainly think we can deal with it.
[00:02:14] Earl Anzai: At the end of fiscal 94, the state had a surplus of $291 million. We're currently in fiscal 95, and the way things are going, we'll be spending maybe $168 million more than we're taking in. That's the reason we're going to be in a crisis, and the following year, the deficit is expected to grow even more, the year-to-year deficit.
[00:02:37] Randall Roth: Well, what did you learn or what happened after Governor Cayetano was elected that caused those numbers to change so dramatically?
[00:02:47] Earl Anzai: The first big change was the Council on Revenues in December changed their estimates of revenue. That resulted in a $121 million shortfall over the biennium. When I say by the biennium, I mean to the end of fiscal 97, so we lost 121 million there.
[00:03:04] Randall Roth: Okay, now, let me stop you just for a minute and explain to folks out there that the Tax Foundation, which Lowell is president of, it works with elected officials, community groups and the public at large to help promote a better understanding of state and fiscal government finances. Lowell, could you real quickly tell us what the Council on Revenues is so that listeners can better understand the comment made that $121 million was the result of a change that this particular group made?
[00:03:35] Lowell Kalapa: The Council on Revenues is a 7 member body established by the 1978 Constitutional Convention to be the focus, if you will, of all forecasts or estimates of state both tax and non-tax revenues. And they were created largely because during the 1970s, those of you who were around, remember that each branch of government or even committees within the two money committees within the legislature would come up with their own revenue estimates. So to resolve all of these different revenue estimates, of course, which then supported the proposed spending plan, the council was established by constitutional the Constitutional Convention in '78. And they are the focus and they produce the official revenue estimates for both the executive branch as well as the legislature and you've got to adhere to them.
[00:04:22] Randall Roth: So, so a budget consists of projected revenues and projected expenditures, and Earl is over here, I guess, the primary person projecting those expenditures, and this Council on Revenues is the group that's projecting the revenue.
[00:04:36] Lowell Kalapa: The revenue side only, not the expenditures. The expenditures are entirely up to the executive and the legislature.
[00:04:41] Randall Roth: Lowell, is this group generally thought of as being apolitical, that they're neither Democrats nor Republicans nor some other category of people, that they're really pretty objective about all this?
[00:04:53] Lowell Kalapa: I think the members are appointed on the basis of their expertise in particular field. We've got economists on there, people who deal with for example the real estate market, the visitor industry and so on. These are people who try to keep their fingers on the pulse of the of the state so they can then forecast what the economy is going to look like, which of course affects state tax revenues and non-tax revenues.
[00:05:16] Randall Roth: So people outside of government as well as inside government generally have some respect for the numbers that are coming out of this particular group.
[00:05:23] Lowell Kalapa: Correct.
[00:05:24] Randall Roth: All right Earl, I've I've interrupted you but your first explanation is 121 million dollars because this council on revenue changed its forecast. What else?
[00:05:35] Earl Anzai: That gave you a chance to take, get a little cat nap in there. Then the next big problem was there are a lot of programs, who have who need deficiency appropriations this year, meaning they weren't fully budgeted this year, and of course, they were not fully budgeted for in the next two years.
[00:05:54] Randall Roth: Now, when they're not fully budgeted for, does that mean that a mistake was made a long time ago as to what those needs would be, or does that suggest mismanagement?
[00:06:05] Earl Anzai: Depends on how you term the word mismanagement. But my concern is that it was not budgeted for and these were expected recurring expenditures. These were not one time surprises.
[00:06:21] Randall Roth: Oh, so if if these were expected but not budgeted for, somebody was trying to get away with something, weren't they?
[00:06:30] Earl Anzai: I don't know. I do know that a little over $80 million was not budgeted for.
[00:06:36] Randall Roth: I would think, you know, with the requirement that the the budget be balanced, year-in and year-out, wouldn't you have to put something on the budget in order to to do that activity?
[00:07:07] Earl Anzai: Sure, but what you're trying to suggest is a little more sinister than what I'm saying is what happened.
[00:07:16] Randall Roth: We want to get our listeners, you know, listening more closely here. It's not sinister.
[00:07:20] Earl Anzai: It's not that it wasn't budgeted for, it wasn't fully budgeted for.
[00:07:26] Lowell Kalapa: I think, you know, I mean I I don't think being sinister is what we're looking at as much as it is being a little less responsible, especially when there's lots of money. You know, and when there's lots of money flowing around the administrative service officers, the budgeters within the various departments get a little sloppy, if you will, and they don't do a good job of forecasting what their needs are.
[00:07:59] Randall Roth: Well what I don't understand, was this intentional or when you say a little sloppy, was this just a mismanagement of some sort, an error in judgment or was this intentional? Did they know that they weren't fully budgeting whatever it was that they were going to be doing?
[00:08:16] Lowell Kalapa: I think in some cases they knew that they were probably going to be short something, but not say to the degree that we've had to face in the last couple of years, especially in the area of welfare. I think this is like the third year of running that we've had to come in for the supplemental emergency appropriation for DHS or the Department of Human Services. Again, it's not so much being sinister or intentionally trying to understate the costs, as much as it is not doing a good job of state forecasting of their needs.
[00:09:14] Randall Roth: I'm curious, Earl, you know, Lowell just mentions DHS, and the state auditor just issued a report talking about a variety of of programs, one of them being DHS's jobs program. And in that report, the state auditor refers to it as inefficient, expensive, wasteful, focuses neither on reducing welfare costs or increasing employability, very critical. As you're evaluating how we got to where we are today in the budget and as you're putting together a budget for the next couple of years, to what extent are you influenced by things like the state auditor's report suggesting that that fiscal management has not been as as as good in the past as what hopefully it it'll be in the future?
[00:10:02] Earl Anzai: Very little, actually. The budgetary problem doesn't lie in the jobs program. The budgetary problem in the Department of Human Services comes from basically the entitlement programs. That's general assistance, which is what we call welfare. Because of the size of the numbers. Yes. Okay. The appropriation deficiencies are in there, as I just mentioned. Welfare, AFDC, which is aid to families with dependent children, and the medical aid to the age, blind and disabled. Okay. That's the three big areas.
[00:10:37] Randall Roth: All right, so we're now trying to figure out how we got to where we are today and where we are today is we have what the governor called a fiscal crisis where we have a projected deficit of 250 million dollars, and 121 million of that can be explained because the council on revenues in December changed its estimate as to what our government revenues in the future are going to be. And then you were saying that some of the programs that we have weren't fully funded and so they they had to be given some additional amounts that hadn't been on the budget. What else?
[00:11:11] Earl Anzai: I want to correct one thing for all the listeners out there and that is, we don't expect a $250 million deficit. We expect a $200 million deficit, but we need to have at least a $50 million cushion or a fund balance. That's why we're shooting for 250 million.
[00:11:31] Randall Roth: And when you say we need to have that, I assume you're thinking about our our bond rating?
[00:11:35] Earl Anzai: Our bond rating is one thing, but it's just simply we need that money as a cushion just to run our day-to-day expenses. We'll have a cash balance problem if we we're down to zero. We can't manage the state budget with with no money in the bank. Kind of like our checkbook, we need to have a little bit of a balance.
[00:12:08] Randall Roth: Okay. Go on. You're explaining this 200 and, well, 200 million dollar deficit but 250 that we've got to find in the way of either new revenues or cut some spending. What else?
[00:12:30] Earl Anzai: The other big thing where there were some mistakes made in calculating early retirement savings. You might recall last year, the legislature passed a a bill allowing state employees to retire early, I.E. two years before they normally would be able to in terms of age. And on top of that, they would get a two year bonus in the retirement. Did a lot of people go for that?
[00:13:09] Earl Anzai: Yeah, there are there are two factors here. It's a little complicated, but basically, UH and DOE employees retiring would cost the state more money, and non-DOE, non-UH employees would save the state more money. That's because the UH and DOE positions would be able to be filled as soon as they retired. Well, two things happened.
[00:13:59] Earl Anzai: Number one, fewer non-UH, non-DOE employees retired, and it looks like more UH, DOE people are going to retire. The reason I say it looks like is because their retirement date is June 30, 1995. That's one factor. The other factor is in calculating this, an error was made in attributing to the General Fund all savings from early retirement. They did not take into account the fact that some of these early retirees would be paid by federal funds or special funds. So to sum it up, that adjustment is almost $35 million.
[00:14:44] Randall Roth: You know, Earl, before you go on, you mentioned special funds, and Lowell, I know you've done a lot of writing and in speaking on special funds, and while you've acknowledged that there there is a role for special funds, you feel there's been, some overuse or even abuse of special funds in the past and that somehow that's related to this surprise that we've gotten in terms of of the budget situation being worse than what we thought a few months ago. Why don't you say a few things about special funds, we'll give Earl a chance to freshen up his coffee and then we'll come back to hear more about how we got 250 million dollars down.
[00:15:22] Lowell Kalapa: Well as you as you noted, Randy, that there's nothing wrong with a special fund as long as it's it's appropriately structured. And then basically what we think is appropriately structured special funds are the transportation funds where you have earmarked revenues paid by the beneficiaries of that particular program. That is, in the case of highways, um the highway user so to speak by paying the fuel tax or paying the weight tax or the registration fee for their vehicles get certain benefits back. That is, hopefully no potholes in the road. Um that type of thing. There's a direct relationship and that's what the state auditor for example outlined as one of the major underpinnings of a good special fund. What I think we focused on was where you took what we now are looking at general funds, that is the general revenues of the state and started to earmark them or put them into special funds and therefore reclassify them from general funds to special funds. And one of the biggest examples of course is my my favorite, which you have write we've all written about in some way or another, is the educational facilities special fund. Wonderful cause, um we need school buildings, certainly, but they took basically 4%, the 4% general excise tax, which is a receipt of the general fund back in 1989 and called out $90 million a year. Um at that point, they wanted to do it for seven years. In actuality, because revenues started to dwindle, they did it only for three years. But they took $90 million out each year and put it into a special fund. And as a result, that took money away from operating budget. In other words, talk about three years that's $270 million, which should have gone into the General Fund, but went into the special fund.
[00:17:09] Randall Roth: But as as you say, at least many people, I think most people would consider that a great cause, what's wrong with taking out money for a great cause and putting it to the side so that it doesn't get spent on something that's not as great a cause?
[00:17:32] Lowell Kalapa: Well, first of all, that particular fund is a capital projects fund. That is, to build, you know, stones and and bricks and build buildings. Um and theoretically, from a public finance point of view, when you start using cash uh for projects that will serve several generations of taxpayers, you end up putting a heavy, heavy burden on the current generation of taxpayers to the benefit of many many other taxpayers to come after them. Uh certainly it also takes cash that can be used for operations, that is, paying the utility bill as opposed to paying for a building. Um, the other type of fund that we or types of money we use for buildings is borrowed money and that is more appropriate. Unfortunately, it doesn't work the other way around. You don't use borrowed money to pay utility bills.
[00:18:11] Randall Roth: Okay. In case you joined us late, you're listening to the Price of Paradise radio show. I'm Randy Roth and my guests are Earl Anzai, the State Director of Budget and Finance and Lowell Kalapa, President of the Tax Foundation of Hawaii. We're talking about the State's fiscal crisis. If you would like to ask a question or make a comment, just call 955-8821. Neighbor islanders are invited to call collect, the number again 955-8821.
[00:18:35] Randall Roth: Earl, you have any thoughts on on special funds um either something that Lowell has just said or anything that the State legislative auditor has written about them or is it just kind of early yet in um in your tenure to be getting into that sort of thing? I know uh probably the first hour you were on the job things were happening because of of this big shift in projections. Any thoughts on special funds?
[00:19:02] Earl Anzai: You have a lot of thoughts, actually. It's one of my pet peeves, but I want to correct one thing Lowell said. We are not using General Fund cash for the educational facilities special fund. We are using GO bonds.
[00:19:15] Lowell Kalapa: Well, the first three years, if I may Earl, uh we put 90 million in cash. 4% general excise monies. That's cash, that's not borrowed money and that's not borrowed money. And I think we still have a little bit of money from that cash collection for the three years still in that fund.
[00:20:00] Randall Roth: So Earl, you're saying it at least from today forward, at least the time that your Director of Budget and Finance, we're doing what Lowell is suggesting should be done, and that is we're financing these school capital projects through borrowed money.
[00:20:13] Earl Anzai: I don't want to take credit for anything I didn't do. That was already in the budget that went down.
[00:20:17] Randall Roth: Okay. Well, we're going to blame you for a lot of stuff you didn't do so you might as well take a little credit for, no.
[00:20:23] Lowell Kalapa: Yeah. Well, yeah, I do admit, you know, after that third year when the money started running dry, then the legislature shifted and what they said is basically if you can't put 90 million in General Excise tax revenues in, then sell $90 million a year of bonds.
[00:20:36] Randall Roth: Okay. Well, that's great. That's good news. That indicates at least that somebody figured out there was a better way to approach that. Okay. Earl, what else?
[00:20:44] Earl Anzai: Well, getting back to my pet peeve with special funds, I believe we have about 99 in the state. And you can bet that very few of them are self sustaining.
[00:21:07] Earl Anzai: In effect, these special funds were initiated so that bureaucrats would have control over this money, and it would not be available for for general use and worse, uh it would not be open to general review by everyone. I think the thing that I've noticed the most about the department heads or not so much the department heads, but the the people that we talk to with respect to the individual departmental budgets is that well, oh, this is special fund money. As if we can't look at it or use it for anything else. The revolving fund.
[00:19:01] Earl Anzai: That's when a state infuses a lot of money into a project or a program and that money can be used to generate more money and all of that is kept within that little group. Uh for example the HFDC. Uh, there are is there a lot of money in state government, held in the hands of bureaucrats, basically outside the reach of
[00:19:27] Lowell Kalapa: My office, that's probably why I don't like it.
[00:19:30] Earl Anzai: And that that's the affordable housing.
[00:19:32] Lowell Kalapa: Well, that's certainly true, you know, Earl and and I think, you know, the last time the legislature, maybe this was about two years ago, attempted to take the auditor's recommendations uh to heart and try and repeal some of those funds. You would not believe the number of department heads and agency heads and what nots that came and supplicated themselves before the legislature crying that we shouldn't or the legislature shouldn't repeal them. So I'm just wondering from the administration's point of view, is the governor or are you going to um somehow exert a little pressure on some of these department heads from trying to end run the administrate the overall administrative direction?
[00:20:09] Earl Anzai: Very definitely. Uh, this all started already this year when all the legislative or the bills from the departments were reviewed by the governor. We noticed and I sat in on that review uh and we noticed many departments coming in with bills to create new special funds. I think basically we put a stop to most of those bills.
[00:20:34] Lowell Kalapa: Now, why you know, you're saying that this gives the bureaucrats more power and so I can understand they're being for having more of them and keeping what they have. Why would the legislature have created so many special funds in the past? I would think the legislature would want to keep it as much power as it could and annually review how the money would be spent. And what I'm hearing is once it goes into the special funds, they give up some of that power to the bureaucrats. Earl?
[00:21:02] Earl Anzai: What you're saying is true. Why it happened, I don't know.
[00:21:05] Lowell Kalapa: Well, I would I would say that uh each when you look at our 51 house members and the 25 in the senate, they all have their own agendas and they all have their pet programs. And in order to assure that those pet programs get funded, nothing like creating a special fund. You know, um nothing like earmarking taxes so that um as we are in this crisis stage now where all the general fund funded programs uh are scurrying around trying to deal with with cutbacks and percentage cutbacks, 5%, whatever, 7%, 3%.
[00:21:38] Lowell Kalapa: These favored or preferential programs can sit there, you know, fat and sassy because they've got their own uh source of gold if you will and they're all treasure.
[00:21:49] Earl Anzai: Well, you know, when you say special fund, I picture not gold but cash or something, someplace. And yet, Earl, when I talk to people about the budget, the first thing that that I find is that no one seems to completely understand it. And when we talk about these special funds, there seems to be confusion over whether there's really something there or there isn't something there. Um is the budget as difficult to understand as I'm led to believe and if so, why?
[00:22:19] Earl Anzai: Well, first you have to understand that it covers $3.2 billion in general funds alone. Almost 6 billion, or little over 6 billion in all funds, spread over 18 agencies, broken down into hundreds of programs.
[00:22:38] Lowell Kalapa: Well, you've convinced me, it's going to be complicated under the best of circumstances. But Lowell, am I wrong? Isn't there the impression that for whatever reason, the process here in Hawaii is unnecessarily complicated? Well, I think um the evaluation that it's complicated is only because a lot of it a lot of the line items are hidden, not hidden, they're not readily accessible to the public. We have this program um planning programming and budgeting system that was designed 25 years ago, maybe uh to deal with objectives and as a result, you see these huge numbers but the public or even individual legislators don't see the line items. They're uh amassed in this PPB system.
[00:23:25] Earl Anzai: Line items being the specific items that are the money's being allocated for.
[00:23:29] Lowell Kalapa: That's right. That's right.
[00:23:30] Earl Anzai: Okay. Um, Earl, any other thoughts on on special funds? Yeah, I do have one thought and which I put into motion already and that's raiding them for cash for the general fund and I'll get to to that later on.
[00:23:45] Lowell Kalapa: But the money the money is there if there's a special fund for, you know, $33.5 million that it's a matter of of going out and and getting it, putting it back into the general fund.
[00:23:57] Earl Anzai: Basically, that's it. It's not that easy because if there's a purpose for the special fund, some money has to be left there to carry out the purposes for which that special fund was created. But part of the problem is some of these special funds have just amassed a lot of money and haven't used it for years.
[00:24:13] Lowell Kalapa: And I think we look at that accountability. You know, as Earl pointed out, if it's in the special fund and it comes before the legislature, the owners of the fund if you will tell well, you can't touch my money. It's it's supposed to be for this purpose.
[00:24:25] Earl Anzai: And then I guess the focus is on the worthiness of the cause as opposed to whether this is the better way to to approach it. Um, well Earl and in just a minute I'm going to ask you what in the world Governor Cayetano's administration is is going to do about this uh revenue enhancement and that sort of possibility. But first, we have a caller, Marge from Honolulu. Marge, you're on the air.
[00:24:47] Marge: Oh, thank you very much. I'd like to speak to the budget director about the deficit. I understand there's a good deal of money owed to the state income tax department in back taxes. I'd like to know about how much is owed and what the state is going to do about collecting it to help the deficit. Thank you very much.
[00:25:12] Lowell Kalapa: Thank you Marge, that's a great question. Earl, what do you think?
[00:25:15] Earl Anzai: Everything you say is true. I think there is a lot of money there. Uh we believe there's over 100 million uh owed to the state in various taxes. What we're going to do about it? The tax department is one of the few departments that's not going to suffer a cut in the budget, specifically because we're going to give them 10 additional people to go out and collect taxes because every person that's hired for tax collection efforts at this stage anyway, collects about 10 times more than his salary.
[00:25:47] Lowell Kalapa: What about, I've heard somebody suggest that if the department gets real aggressive in in collecting these back taxes, that they're going to put some folks out of business. Is that a concern or or isn't that the nature of the beast that we're talking about?
[00:26:01] Earl Anzai: Should that be a concern? I don't know. Well, I'm I'm asking. Well, I don't think it should be a concern. If you don't pay your taxes and by collecting we put we put you out of business, how would everybody else feel if we we didn't collect your taxes?
[00:26:13] Lowell Kalapa: Why why hasn't the department of taxation been aggressive in the past? I mean, it just seems so logical that if the money's owed, the department ought to go out and and collect it, period. And yet it hasn't seemingly done that. And I'm wondering why?
[00:26:30] Earl Anzai: You're asking the wrong guy. Okay. Okay. Well, we've been talking about this um projected deficit of $200 million and then the $50 million uh that you need to to be able to uh function day to day. And uh the big question I think that people have is uh what are we going to do to address this? Um you know, we can call it revenue enhancement or or just uh temporary elimination of credits or whatever, but it it all translates I think into tax increases as being one possible avenue. Another is to cut some spending. Um which is the first direction that you see the Cayetano administration going?
[00:27:13] Earl Anzai: Well, I don't think there is a first direction. I think that we're doing both. I mean, when you're talking about 200 million, you're looking at it both from cutting expenditures and bringing in more revenue. The way to bring in the most revenue of course is to increase taxes. Uh the governor said he's not going to increase taxes so what we're doing is cutting out tax breaks. So when you say increase taxes, you're talking about increasing the rates because some people I think would say eliminating credits is a way of increasing taxes. I I look at it differently. I say it's taking away a tax break.
[00:27:52] Lowell Kalapa: You know, um I think that's the whole idea of taking away breaks is just you know, been looked at in the aggregate as opposed to individual tax credits, because there are, you know, from a historical standpoint, um for example, the food tax credit, which was enacted in 1987 um together with a slight reduction in income tax rates. Back then, the administration, that administration told us as taxpayers, well we don't know what is going to happen as a result of picking up any of those changes brought about by the 1986 tax reform act.
[00:28:23] Lowell Kalapa: Remember Randy, those are from a tax lawyer's point of view, those that was the that was the crisis day of taking away all our goodies like the sales tax deduction, consumer credit deductions, and things like that. The Feds in Washington lowered their tax rates substantially, dropping them down to 28 percent. And here in Hawaii, what we because we were told we didn't know what the impact was going to be, adjusted our rates only slightly and that administration gave us the food tax credit saying, well, this is temporary, we're going to phase this in, we'll come back in three years and we'll decide how much we're going to adjust in the rates.
[00:28:58] Lowell Kalapa: So the food tax credit, although it's called the food tax credit, was basically placed there instead of lowering tax rates. For example, the top tax rate went from 11 to 10 percent. Still substantially at a substantially low threshold, plus the food tax credit was supposed to make up for that. Um, I would agree that there are some tax breaks that certainly don't deserve to be on the books because they are in no way a measure of the tax burden being alleviated, for example, the solar energy credit or alternate energy credit as it's called.
[00:29:34] Lowell Kalapa: What what relationship is there between tax burden and putting in a solar water heater, for example, same thing with the child passenger restraint credit.
[00:29:44] Earl Anzai: Okay. So Earl basically you're saying maybe increase revenues and rather than increase the rates, you would be inclined or the Cayetano administration would be inclined to eliminate some some credits, some tax breaks. Yes. Whatever what else? The other thing is as I mentioned previously, we're going to lapse funds that are in special funds and bring them back to the general fund. Okay. Now, the other day in the newspaper article the number $33.5 million appeared. Is that pretty much what we're looking at, or is it possible that we could get more money from that approach? Right now, that's about it. It's about it.
[00:30:20] Earl Anzai: Okay. So that's a significant amount but pretty small by comparison to 250 million which is what you're looking for.
[00:34:30] Lowell Kalapa: Wait. Show. I'm Randy Roth and my guest today are Earl Anzai, the State Director of Budget and Finance, and Lowell Kalapa, the president of the Tax Foundation of Hawaii. We're talking about the state's fiscal crisis. If you'd like to ask a question or make a comment, just call 955-8821. Well, in addition to maybe increasing revenues, Earl, how else might we come up with that $250 million?
[00:34:55] Earl Anzai: Well, the big one, of course, is can we cut state spending? Everybody says we can, but as I'm finding, it's not as easy as as they say. What we did is we looked at the state budget, and of course, I've heard this statement made, and that is it would be so easy to do since all you need to do is cut about 1% from the state budget. Well, 1% of the state budget is a little over $3 billion. So 1% sounds like uh something we could easily do. And when I say the state budget, I'm talking about the general fund budget because that's where the problem is.
[00:35:38] Earl Anzai: The problem with the general fund is there are a lot of things in there that are what we call fixed costs. For example, debt service and in a lesser way, entitlements. When you take all of that out of the state budget, the budget gets General fund budget gets down to less than 2 billion dollars. Then, as the governor said, because education is so-called a sacred cow to him, you take out another $670 million for uh school instruction. Then we're down to little over 1.2 billion. Then it gets a little harder. What what percentage are we talking about now? Is that uh What we're talking about is cutting 6% from the state budget each year.
[00:36:20] Earl Anzai: Each year. Okay. Well, we have some callers on the line. First, we have Steve from Hawaii Kai. Good morning, Steve.
[00:36:27] Steve: Good morning. I'm interested in knowing what the effect of all this is going to be on the ratings for Hawaii's municipal bonds. Thank you. Okay. And and for listeners out there, uh, in case you've not thought about this, the rating that we enjoy is terribly important because as the rating comes down, or if it were to come down, the cost of borrowing money would go up significantly.
[00:36:51] Earl Anzai: Uh, Earl, any thoughts on that? Yes, we currently enjoy a double-A rating. We maintained that double-A rating in our January bond issue. How How is double Is there a triple A? Is there a better rating than what we have? Yes, there is. There's a triple-A. The problem is, in our economy, it'll be almost impossible for us to ever get a triple-A because we're basically a one-horse town. Uh tourism. Tourism. And the bond rating agencies would like to have a more secure base. In other words, if tourism is down, something else would pick it up, but we don't have that benefit here.
[00:37:27] Earl Anzai: How how sure are we of keeping double-A? Is that a problem, hanging onto that? That's definitely a problem. Uh that's why we're taking the steps we're taking now. We're not going to see the deficit this year, our fund balance will be okay in the end of at the end of June.
[00:38:00] Speaker 1: going to try and restructure themselves. It looks like they're going to you know, consolidate. It's going to be a much leaner and stronger company. Um, on the other hand, if you turn around in our case and raise taxes in a in an economy that's already suffering in a economic recession as everybody has acknowledged, um, it's going to send certain signals to Wall Street and bond markets, um, that maybe, you know, this is getting a little tenuous here. They're not, you know, lean and mean and the fact that, um, you know, they're eating into their cash balance. So, there are a lot of things that affect the bond rating.
[00:38:31] Speaker 2: But if they listen to Earl and they say this guy is going to get us lean and mean, this guy is taking the right approach, then you're saying, even though times are real tough right now, they're looking to the future and they're saying something's being done about it.
[00:38:43] Speaker 1: They're watching what we They're going to be watching what we do in the legislature this year, what the administration decides to, which which path they choose, and certainly that will have an effect as well as the fact that we carry a cash balance at the end of the fiscal biennium.
[00:38:56] Speaker 2: Okay. Earl. Any other thoughts on our bond rate? Well, let's go to another caller. Uh, Ruth from Makiki. Good morning, Ruth. You're on the air.
[00:39:03] Ruth: Good morning. Thank you. I just one thing I heard in the news, uh, yesterday, I guess, the state, there's money in the in the proposed budget for another state office tower. It seems to me we just built an office tower. If if they think we need another one, I think we better just cut the number of employees instead.
[00:39:21] Speaker 2: Well, let's let's ask, uh, Earl. And according to the newspaper, in Governor Cayetano's proposed budget, there was $28.5 million for state office buildings. Um, what about that?
[00:39:34] Earl Anzai: Well, I think it makes a lot of sense to do that, mainly because we are currently renting a tremendous amount of space in central downtown I mean, actually, the prime parts of home. Groverner Center, Pacific Tower, all of these high-cost buildings have floors of state employees.
[00:39:53] Speaker 2: So a lot of people would agree. Let's get them out of that prime space and then I guess the issue is, well, do we rent less than prime space from others, or do we build some, um, some offices or office space for them. Is Is that what the choice is now?
[00:40:09] Ruth: Yes, but But did they not just build an office tower? And and isn't there something wrong there then that they have to build another one. Why uh uh something wrong with what they did.
[00:40:18] Speaker 2: Okay. Earl.
[00:40:19] Earl Anzai: Well, the current state office tower is used by the legislature. That will be, uh, vacated, presumably late this year, early next year when they move back to the Capitol. But that building has already been committed to state state agencies that are downtown and we still have a lot more uh, state agencies in high-rise buildings.
[00:40:45] Speaker 2: Okay. And Ruth Ruth and in just a bit we're going to ask Earl to talk a little bit more about, uh, the size of of state government, specifically the number of state workers. But I've got some folks who have been on the line for a bit, so I'm going to move on to that.
[00:40:59] Ruth: Thank you. I think I need investigation. Thank you.
[00:41:01] Speaker 2: Okay. Thank you, Ruth. Earl, do you want to add something?
[00:41:03] Earl Anzai: I wanted to add one other thing, uh. The other reason for the office building is to move them from downtown for traffic congestion problems. Mhm. Okay.
[00:41:15] Speaker 2: Uh, Bob from uh Kahuku. Good morning, Bob. You're on the air.
[00:41:19] Bob: Well, good morning. Thank you. I had a question about the Council of Revenue, I believe it's called, and I was wondering how often they come up with their estimates since a number of the economists are improving, uh suggesting a slightly slowly improving economy. I wonder if we go through all this budget cutting if in a number of months or so we'll suddenly hear that the situation is better.
[00:42:45] Speaker 2: Well, let's ask Lolo to respond to that one. Actually, um, their reports are set by statute. There are actually six reports, four of them, uh, deal directly with, um, the projection or forecast of tax and non-tax revenue. The other two reports are, uh, dealing with what we call total state personal income, and that's to help us compute the general fund expenditure ceiling. Um, the report dates are designed to fit, uh, the way the budget is, first of all, put together and second of all, implemented. So there are dates in, um, September, September 10th, uh, January 10th, um, there's one in March and there's one in June. And again, um, the September date, for example, uh, helps the administration put their budget together so that they know how much money will be coming in. The January and the March dates help the legislature while they're formulating their budgets, their version of the budgets, and the June date helps Earl allocate money for the next fiscal year because it's a little bit finer tuned, uh, estimate of how much money is coming in.
[00:43:06] Speaker 2: Okay. Bob, does that answer your question?
[00:43:22] Bob: Yes, it does. Uh, could I ask one more? You bet. I'm wondering about what this uh situation will do for the the public worker contracts that are coming up for renewal this year. Uh, Governor Cayetano made some promises or or pledges to workers, uh, teachers in particular, that he was aware of their need for for better pay, and now of course, we're hearing of the terrible fiscal state, so I'm just wondering if either person has any comments on that.
[00:44:22] Speaker 2: Okay. Bob, are you a teacher?
[00:44:23] Bob: Yes, I am.
[00:44:23] Speaker 2: I am too. So let's let you and I listen closely as Earl tells us, uh, what we're looking at.
[00:44:31] Earl Anzai: I don't know if any decision has been made in in policy terms, but I can tell you from my view of of actually looking at the numbers, it would be very, very difficult, if not impossible.
[00:44:41] Speaker 2: Earl, some people have suggested that, uh, the governor's state of the State address talk emphasizing the fiscal crisis and the $250 million that we've got to find and that doesn't include any money for for the negotiations coming up. Some people have suggested that partly that was an attempt to establish very low expectations for the Cayetano administration. Um, and partly it was to position the Cayetano administration to be able to, uh, bargain more effectively this year.
[00:45:10] Speaker 1: Well, let me let me interject right there and and say Earl a little bit, give him a little breathing space there. I think, um, it is amazing to me that the public workers have enjoyed such salary increases. And I know yes, I know you are on the public payroll, Randy. But, um, in the last few years and certainly if you open the window and look out there at our state economy, we're not doing too well. A lot of people in the private sector have not had pay increases in two to three years. A lot of them are getting laid off. Um, you notice the blip in our unemployment rate in the last six months and it's gone up and down, up and down. Um, I think we're just being realistic in saying that that the problem that that the Cayetano administration has to deal with is a direct reflection of how well or how poorly in this case our economy is doing. And I think we all just have to tighten our belts.
[00:46:02] Speaker 2: Well, you've convinced me. I don't know about Bob and Kahuku, but you've convinced me. Uh, Earl, why don't you respond to the question and then uh we'll move on. Go ahead.
[00:46:10] Earl Anzai: It's simply a matter of dollars. There is no strategy, no bargaining position, it's just being frank and honest with the people. We're in a fiscal crisis.
[00:46:20] Speaker 1: Mhm. And I think I think we saw it. I mean, you know, a lot we were kind of the lone voice in the wilderness four or five years ago saying, hey guys, you know, things are slowing down, you better start pulling your your claws back in and and quit going for the the road of, you know, spending all that money, and I think that started to uh turn right about the time of the Persian Gulf situation.
[00:47:05] Speaker 2: Okay. Well, Bob, that doesn't sound too good for us. Okay, thanks a lot for your call. We have another caller, Bill from Palolo. Bill, you're on the air.
[00:47:48] Bill: Oh, hi. I think I could uh pinpoint the place that we could save a tremendous amount of money. Um, I wanted to know if Law has figures or anyone there on uh how many public relations people, uh, PR people are working for the state in a dollar value. That this would be total.
[00:48:10] Speaker 2: Lolo, do you have uh any
[00:48:11] Speaker 1: I don't have my fingers on it. I know there's an awful lot of um, contracts out there. I think one of the interesting things is the report that was made about consultant contracts. Uh, and this includes engineers, architects, [unintelligible — audio glitch], including public relations. Some $54 million was spent between December of '93 and December of '94. Um, I think the Cayetano administration has already come out saying that that's got to stop and they are putting a a freeze on that.
[00:49:23] Bill: Well, I wasn't speaking exactly Of course, the contractors, boy, that is a big source. Uh I know that one. Um, I'm talking about the um state employees who are hired uh to to uh sit in the public relations office. Uh just a dollar figure on that and then what they spend uh to hire advertising agencies and all of that, and then mainly um, well the whole thing fits in with all of the radio, TV, and print advertising.
[00:50:12] Speaker 2: Well, Bill, I I think you certainly have made your point and Lolo doesn't have those statistics and I know Governor Cayetano has pledged that his administration is going to, quote, tell it like it is and and Earl seems to be doing that this morning. Earl, do you have any response to to Bill's comment before we move on?
[00:50:31] Earl Anzai: No, I share his same gut feeling that we might have too many, uh public information officers, but obviously I don't run the entire state government.
[00:50:41] Speaker 1: Let me finish my point very very quickly. Um, I think it's uh, it's, it's next to one of the worst things that the state could be doing is to use uh public tax dollars to try to brainwash people uh on television, on radio and on uh in the in the newspapers.
[00:51:10] Speaker 2: I think there are a lot of people that agree with you, Bill. And if we could get a solid figure uh on how much we spend for advertising agencies, for PR people, this would be information people they're in the bills, they've got it they've got it named like education. That would be that translates down into to to a PR campaign. Well, we'll we'll challenge uh our guest Lolo Calapa to find uh some staff time to to take a look at that. My hunch is that that would be quite a chore. Thank you, Bill. Appreciate it.
[00:52:30] Speaker 1: I like Bill's, uh, comment. I agree with him, they're an awful, but it isn't, uh, necessarily restricted to public information officers. There's a whole bunch of uh, civil service-exempt, appointed positions that we could take a look at. Um, it amazes me that we had uh, I kind don't know about this administration because the the session is just getting underway, but in the past administration for directors and deputy directors come to the legislature to testify on various subject matter bills, and along with them would come what I call the ladies and gentlemen in waiting. I mean, entire staffs would show up and you would say, well then who's running the department? Um, it makes you wonder, you know, whether or not, uh, these directors actually know what's going on in their departments. Um, and why do we need all this backup staff to help the director, uh, explain to the legislature how a proposal will affect their department.
[00:53:24] Earl Anzai: Let me defend some of the directors. I'm not I'm not saying anything about these directors, but I hope that they would familiarize themselves that they can stand on their own two feet instead of having 10 staffers behind them.
[00:53:36] Speaker 2: Well, when you run a department like the Department of Health or Department of Human Services, I don't think any human being can understand all the programs in time for the legislative session, especially the people that we just brought on. They've been on the job four weeks. It's impossible for them for them to understand all of their programs.
[00:54:15] Speaker 1: I can see it for the first year, but we're talking about balance, right? We're talking balance. We're talking balance. We're talking about people who were around five, six years, and they still had, you know, tons of staff come to the legislature to help them out.
[00:55:06] Speaker 2: Okay. We have a caller from Maui. Dr. Milton, good morning.
[00:55:10] Dr. Milton: Good morning. I have, uh, for Director Anzai a partial solution to the fiscal crisis. He's got his pencil out. He He's going to write this down. Go ahead.
[00:56:21] Dr. Milton: Yes. I'm not seeking publicity, so I'll not disclose my identity unless you prefer that I do, then I'd be glad to. A company that I founded developed and, uh, that I founded, developed it and sold it later, enjoyed a sales volume of in excess of $150 million. And that company employed 2,000 people and caused the peripheral employment for 6,000 others. And, uh, notwithstanding the very unfavorable workmen's compensation expenses that are currently imposed on all Hawaii's employees, I know that we can encourage the introduction of several thousand new businesses into the state both through our own entrepreneurial citizens and those affluent foreigners who would like very much now to avail themselves of the green card and citizen privileges that's available through the 1990 amended immigration laws by investing a million dollars or more and employing 10 or more persons.
[00:57:37] Speaker 2: Dr. Milton, let's let's get Earl's reaction to that.
[00:57:40] Dr. Milton: Uh, that that was my, uh, hypothesis that leads to two quick questions.
[00:57:44] Speaker 2: Got to be quick.
[00:57:45] Dr. Milton: Okay. The first question is, if what I said was is a fact that was true, um, would uh the director believe that these new businesses and the resultant employment would create a very healthy new tax base? And if he so believes that, would he like to introduce me or our group to the governor for decisive action?
[00:58:13] Speaker 2: Okay. Well, let's just ask the general question. Earl, should we be aggressively finding folks who would like to immigrate to the United States in general and Hawaii in particular and have a whole bunch of money in their pockets, um, that they're going to invest in our economy with?
[00:58:29] Earl Anzai: I think that is a good idea, but the problem is right now, we don't have the right kinds of investment opportunities for these people.
[00:58:36] Speaker 1: Well, I beg to differ, sir. I do believe we do. Our yes at this moment
[00:58:42] Speaker 2: Dr. Milton, tell you what, leave leave your phone number, uh, with our our producer and and we'll have Earl get back to you later, but we're not going to be able to get into the specifics of of of your program.
[00:58:53] Dr. Milton: All right.
[00:58:55] Speaker 2: Thank you very much. We have another caller, this one is Steve from Waikiki. Good morning, Steve.
[00:59:00] Steve: Good morning. Um, I've, uh, spoken on the, to a couple of other of your guests over the year, about the idea that, including I've spoken to Ben Cayetano, about the idea that University of Hawaii, uh, can be considered an economic resource for generating income, if the state, uh, would encourage the university to increase for tuition enrollment from, uh, people from places like the Far East where there's an enormous excess of demand for higher education, and also a great respect for American higher education. We haven't actively recruited in this area and we haven't seen to it that the fees for people from this area are such that they would help the fiscal crisis, but I think that that can be done. Steve, we're getting down toward the end of our hour and so I I want to get Earl's thoughts on on your suggestions.
[00:59:58] Speaker 1: Well, I just mentioned this Kansai guy died. There's a number of institutions sitting here making money and then sending the money back to Tokyo. Right. We ought to be doing that.
[01:00:05] Speaker 2: Let's see what what Earl about that. Thank you very much, Steve.
[01:00:09] Earl Anzai: I think the governor is fully in favor of what he just said.
[01:00:13] Speaker 2: Okay. So I guess, uh, we're talking about increasing tuition for out of state students, right?
[01:00:20] Earl Anzai: Yes, to that also, but the key point is that until the governor has his regions on board, maybe his policies won't be, uh, listened to.
[01:00:33] Speaker 2: Okay, and that'll be, uh, when?
[01:00:35] Earl Anzai: I believe that on June 30th, I think he has about five.
[01:00:40] Speaker 2: Okay. About a half hour or so ago, Ruth called and she was specifically asking about money in the budget for new office buildings, but one of the comments she made was we've got too many workers. And in fact, in the last couple days, Governor Cayetano has been quoted as saying the so-called warm body policy, it is um, perhaps one of the major causes of where we are today so far as this fiscal crisis is concerned. What do you think as we try to figure out where to get $250 million, um, should we be actually laying off some state workers?
[01:01:15] Earl Anzai: I don't think it's a matter of, should, it's a matter of will we have to. Will we? Uh, I I believe that in the short term, we may not have to but in the long term, unless we control the growth, we will have to. And I say that because there's something that has been left unsaid today and which I should say, and that is all of the budget projections, all of the fiscal projections, do not take into account what's happening in Washington, DC. And by that I mean that we expect big cuts in federal funding. When that happens, all bets are off.
[01:01:58] Speaker 2: Mhm. And then And then we're talking about cuts in the order of maybe 300 million a year. Which could make our our current crisis seem like, uh, pretty easy situation by comparison.
[01:02:09] Speaker 1: Yeah, a fond memory. And I, and I think, you know, we have to pay attention to ourselves. I mean, it's like Pogo saying, you know, we met the enemy and the enemy is us. On one hand, we decry the high rate of federal taxes, on the other hand, we scream for more federal funding and more grants in aid from the federal government to the state of Hawaii. We need to find out where we want to be, and I think generally the mood of the rest of the mood of the country, I don't know if it's reached here yet, is an understanding that we can only expect government to do so much. And yes, it's going to happen at the federal level, Hawaii's going to have to react to that. Um, but the people of Hawaii also have to come to some understanding too. They cannot have, you know, all government programs, state programs, county programs, and also ask for tax reductions. If they want tax reductions, we're going to have to do with something else.
[00:57:00] Speaker 1: is something less, we're going to have to do maybe without a service. And the lawmakers especially which are so politically sensitive because as I say the day after the general election, their mission is to get reelected. They're going to have to be able to say no as well. It's not only the Governor, legislators who pass on the budget have to form those lips in saying no. And that's a very important word and I think in this session is that we're going to have to turn down a lot of requests.
[00:57:31] Speaker 2: Earl, do you think the legislature this year is is up to that task?
[00:57:36] Earl Anzai: Yes, I do. I think they understand the fiscal crisis better than most people.
[00:57:41] Speaker 2: So, they know it's real, they know that they not only can't be spending money like they have in the past, they're going to have to make some real tough choices and maybe maybe actually cut down the size of of state government?
[00:57:55] Earl Anzai: I think so.
[00:57:57] Speaker 2: Low in the past, you've been real critical of the size of state government, the impression that I've gotten is that you think in the past it was too big. So, presumably under today's circumstances you would say it's it's too big. Um, what are your thoughts on uh warm body policy or the size of state government or anything like that in the last few minutes here?
[00:58:17] Earl Anzai: Well, you know, I think um it's too bad that um in a sense, the public employee union representatives did not step forward in those years that we were raising questions about the size, a number of employees, size and growth of government and so on. Um, because they have as much at stake because now they're faced with a crisis. They may have had more members added to their union rolls, but now those members are in jeopardy of losing their jobs.
[00:58:46] Earl Anzai: I think they should have been just as concerned as we were uh about the growth and the size of government because holding back that growth actually gives them more potential for coming in and asking for decent salary increases if you will, um to allow to sit back and allow and condone the size of of the growth of government rather, um, I think just jeopardized their own members.
[00:59:09] Speaker 2: Okay. Earl is there anything else that needs to be said that that hasn't been? We've gone over some very complicated matters quickly and in summary fashion. Um, anything with respect to this fiscal crisis that folks out there really need to hear or understand or think about?
[00:59:31] Earl Anzai: No, I think basically we have a problem and it's a long-term problem. I think that's what they should understand. We can fix it for next couple years. Um, uh, for example, eliminating certain certain tax breaks. But the long and short of it is we have to control government spending. I mean the government has gotten big and very expensive. And the easiest thing in the world to do is to add to government programs. What I'm learning very quickly, the hardest thing to do is to trim down the size of government and get people off the train.
[01:00:14] Speaker 2: But you think the legislature is up to it, you say they understand the current situation better than the rest of us out in the public.
[01:00:21] Earl Anzai: Yes, I believe that.
[01:00:22] Speaker 2: Okay. Low, anything else? We got a few minutes left, if there's something that we really ought to be talking about that we haven't yet or um.
[01:00:30] Earl Anzai: Well, I think, you know, it's not only the state, it's also the counties, and I kind of have to wince when I see them come to the state legislature begging for money because the counties also have been somewhat irresponsible to the extent that they've allowed their spending to get out of hand, they've allowed to they allowed themselves to get into areas that we never intended them to be in, uh things like housing, childcare. Um, these are responsibilities, they are responsibilities of the state, um and unless we change the structural difference, we got a lot of duplicative efforts.
[01:01:02] Earl Anzai: I mean we need to take a look at all government here in Hawaii and right-size it. Um, the counties cannot come and blame the legislature or the state for not sharing its wealth with them when they have expanded beyond their own means.
[01:01:16] Speaker 2: Mhm. It sounds to me like and and I get this impression uh it seems as though almost every week that it kind of boils down to um to citizens out there being more aware of what the the consequences of short-term actions might be and and and all right I think what you're saying is that we've got to have a long-term uh view of all of this and and if we take a long-term view then we're going to approach um government spending and perhaps other aspects of the budget differently than we have in the past.
[01:01:47] Earl Anzai: I think it's not only long-term, it's big picture. Everybody's for cutting government but the moment I looked at certain programs, some of these people were screaming. The commission on the status of women uh, to me it's a duplicative function, there is one at the county level but the women are screaming. I I looked at the um program to help to elderly, not that we're going to cut it, but just looked at it. And I got scathing letters from people as if uh I had no right to even look at it. That's the problem with with uh um dealing with a fiscal crisis.
[01:02:26] Earl Anzai: Everybody wants the cuts to come from the program that they're not interested in.
[01:02:30] Speaker 2: I was going to say uh I'm outraged that you would suggest such deep cuts at the University of Hawaii. I think that that makes no sense whatsoever, but then of course that's because uh I'm there and and uh most directly affected by and and aware of the consequences of those cuts. So, it's tough. Uh, I guess all of us have to take a few giant steps backward and look at the big picture and um and go with the flow. Well, gentlemen, thank you very much. Um, our guests this week were Low Calapa, who is the president of the Tax Foundation of Hawaii, and Earl Anzai, who is Governor Cayetano's Director of Budget and Finance.
[01:03:06] Speaker 2: We really appreciate you taking the time to join us this morning. Today's show was produced by Suzy Roth with technical support from Jeff Lardy. We hope you'll tune in next week when again, my guests and I will be talking about an issue of critical importance to the future of Hawaii. You've been listening to the Price of Paradise Radio Show. I'm Randy Roth. Aloha.