This is the second time a consultant was hired by the state and relayed a pointed conclusion no government official wants to hear: There’s not enough revenue coming in and, almost certainly, too much going out.
This go-around, it would be wise for state officials to implement more of what the consultants suggest.
The state Tax Review Commission hired the consultant, The PFM Group, to conduct a tax analysis. The conclusion is largely the same as PFM’s 2012 report, when it forecast “structural budget deficits based on the current revenue structure and levels of service.”
A primary concern then was the Hawaii Employer-Union Health Benefits Trust Fund (EUTF) that supports medical coverage for state workers and retirees. These were costs that had become an enormous unfunded liability for the state.
In 2013, lawmakers enacted Act 268, which enforced a schedule of escalating payments into EUTF. To this point, state officials have carried out the payments, even exceeding them during flush years.
The next payment in 2019 will be $811,313,000, rising to just over
$2 billion at its peak, in 2044, when payments will start falling sharply.
Under the law, paying the full “annual required contribution” (ARC) each year becomes mandatory starting a year from now. Regardless of the sticker shock, it is worthwhile to meet or exceed the payment requirements, in order to reduce the state indebtedness and curb financing costs.
Now PFM is still forecasting fiscal troubles ahead, when competing demands will put increasing strain on the public purse.
“The current revenue structure is likely inadequate by itself to fund this additional obligation from existing revenue on a year-to-year basis,” wrote PFM Director Randall Bauer.
The responsible reaction to the consultant’s assessment, as the experts recommend, is first to stay the course on the “annual required contribution” schedule.
Further, Hawaii officials must find areas for spending reduction and evaluate ways to raise more revenue. This latter strategy should involve completion of tax efficiency improvements and development of better information technology to help collect taxes already owed. The goal of making the tax structure less regressive is a worthy one, with the recent adoption of the earned income tax credit a good step in that direction.
But heeding some advice on how to pare spending should be the first order of business. Five years ago, the state Tax Review Commission proposed the appointment of a panel with a mission akin to that of the federal Simpson-Bowles Commission, which made suggestions on spending cuts as well as tax increases.
That never happened. But it remains an excellent idea now, as it was then.
The administration of Gov. David Ige, which has expressed support for the consultant’s conclusions, also has developed a six-year financial plan to cover state expenses without tax increases. But it assumes collections will grow by 4-4.5 percent annually through 2023.
To count on that scenario playing out, without further adjustments, would be unwise —
especially in an economic landscape in which core-services costs such as health care are rising fast.
Officials acknowledge that tax revenues over the past decade have not kept pace with state budgetary needs.
The state must pay attention to its funding liabilities. As tempting as some lawmakers might find it to legislate their way out of the ARC mandate in the future to meet more immediate public needs, that would be penny-wise and pound-foolish. These are bills that don’t go away but come back even larger.
Lawmakers must make heading off this fiscal threat a priority, seeking the best advice on how to make ends meet — while there’s still time for such a rescue plan to succeed.