Hawaii’s economy is strong enough to absorb the automatic federal spending cuts from sequestration, economists said Friday, but people who depend on nonprofit social-service programs and businesses that rely on civilian defense workers could be exposed.
Sequestration could cost Hawaii $684 million this year, according to Eugene Tian, the state’s economist — $462 million from the direct loss in federal spending and the rest from the ripple effect through the economy. The reduction could take 0.9 percent away from the state’s projected $75.9 billion gross domestic product.
The state’s GDP is expected to grow by 2.4 percent this year, Tian estimates, as the construction and service sectors of the economy follow the tourism sector into expansion. The GDP grew by 1.6 percent last year.
Christopher Grandy, a University of Hawaii-Manoa economist who serves on the state Council on Revenues, said sequestration could translate into a $51 million loss in general fund tax revenue this year. By comparison, he said, state tax revenue grew by nearly 10 times that amount during the past fiscal year.
"The conclusion that I draw from this is that scale matters a lot here," Grandy told the Sequestration Impact Response Team, which was appointed by Gov. Neil Abercrombie to evaluate the impact of sequestration in Hawaii.
Kalbert Young, the state’s budget director, who is leading the response team, said sequestration could be muted by the overall growth in the state’s economy. "My interpretation, at the top macro-level, is that sequester is not going to be as significant as originally feared," he said, adding that "at the micro-level" there could be significant impact on certain individuals, businesses and nonprofits.
The response team is scheduled to make recommendations to Abercrombie by the end of September and to share a report with the state House and Senate before the next session of the Legislature opens in January.
The Budget Control Act of 2011 required automatic, across-the-board federal spending cuts — or sequestration — if the president and Congress fail to achieve deficit-reduction targets.
Sequestration has been widely criticized as poor public policy and might not survive if President Barack Obama and Congress are able to reach a better compromise to reduce the deficit over time.
Some of the federal spending cuts ordered earlier this year because of sequestration have already been revised. The U.S. Department of Defense, for example, announced Tuesday that furloughs for civilian defense workers would be trimmed to six days this year, down from 11 days. Civilian defense workers had initially been told that they could face up to 22 furlough days this year.
Hawaii is considered especially vulnerable to federal spending cuts because of the large military presence. The federal government accounts for 15.3 percent of the state’s economy, Tian estimates, and 13.7 percent of wage and salary jobs.
The federal government spends about $20.8 billion annually in Hawaii. Roughly half of that money — $10.5 billion — is from salary and wages and procurement contracts that count toward the federal share of the state’s GDP. The other half is from direct federal payments to individuals, such as for retirement and disability, or grants and other agreements that are reflected in other state spending categories.
Of the estimated $462 million direct loss in federal spending this year from sequestration, $378 million comes from defense.
A consultant working with the Chamber of Commerce of Hawaii and state and federal defense officials said the civilian defense furloughs mean less state tax revenue and a decrease in disposable income for local goods and services. The loss of federal spending could have a ripple effect on businesses such as banks, auto dealers and restaurants that serve civilian defense workers.
If future federal budget cuts include significant reductions to military headquarters, military personnel or intelligence analysis, Hawaii — the hub for the military in the Pacific — could be at particular risk, according to the consultant. Defense contractors such as BAE Systems and Booz Allen Hamilton could also face potential layoffs in Hawaii if contract awards are reduced.
The impact of sequestration on nonprofit social-service programs is less clear.
The Hawaii Alliance of Nonprofit Organizations estimates that federal spending cuts this year could take about $1.3 million from Head Start and Early Head Start, more than $400,000 from substance abuse services and nearly $250,000 from programs that serve children and seniors.
While that amount is negligible in the context of the state’s $11.8 billion budget for this fiscal year and $75 billion GDP, nonprofit leaders say the cuts will fall on the most needy.
State lawmakers placed $15 million in the budget this fiscal year to help cover sequestration. Young, the budget director, had initially asked for $25 million this year and $25 million next fiscal year.
Many nonprofits have seen an increase in demand for services and worry about the potential financial hit from sequestration. The federal spending cuts identified by nonprofits so far do not look like a large amount, but are felt at the program level.
"From a macroeconomic level it’s not huge. And when you look at it, people don’t get scared," Norm Baker, chief operating officer for Aloha United Way, told the response team. "People are not frightened by the fact that it’s gone down this little bit, and so we’re not getting that sort of reaction from the community that says, ‘Wait a minute, there are services being cut here that have to be saved.’"
