State fund bridges gaps

The Hawaii Hurricane Relief Fund has long been used by lawmakers as a cash cow.

Over the past two decades, the state has pulled $219.5 million from the fund to balance the budget, end teacher furloughs and for other needs. The fund now stands at $126.6 million.

With Hawaii island still cleaning up from Tropical Storm Iselle, Hurricane Julio a near miss and Tropical Storm Karina looming on the horizon, it raises the question: Is there enough money in the fund?

To answer that question, you first have to understand what the fund is for and what it isn’t.

It isn’t a fund to provide disaster relief. It is not for rebuilding after a storm. It’s not meant to compensate businesses for an interruption in operations.

The fund exists to start a state-run insurance company in the event that a major storm leads to the departure of private insurers, as was the case with Hurricane Iniki in 1992. The state would sell hurricane insurance policies to homeowners and businesses until private insurers return to the market.

Lloyd Lim, acting executive director for the Hurricane Fund, said the current balance is acceptable for that purpose.

"What you’re trying to do is have enough money to restart (insurance coverage) quickly for the public," Lim said. "To restart (coverage) immediately would probably require a reserve of about $100 million."

A common misconception about the Hurricane Relief Fund is that it was designed to provide disaster relief in Hawaii, state Insurance Commissioner Gordon Ito said. But that’s not the case.

"The importance of the fund is if there’s another event where it causes a market disruption, insurers stop writing hurricane policies and there becomes a severe availability problem where people can no longer purchase hurricane coverage, that’s where the Hurricane Fund could potentially be reactivated to act as a hurricane insurer," Ito said. "The need for the Hurricane Fund is it provides startup costs for Hurricane Fund (insurance coverage) and it enables the Hurricane Fund to become operational a little quicker."

The disaster relief role belongs to state civil defense and recovery funds that would be made available by the Federal Emergency Management Agency, better known as FEMA.

In reality, though, the fund has had a second purpose as a de facto budget reserve for the state. Lawmakers have pulled money out on five separate occasions. That’s not to mention the annual interest the Hurricane Fund earns of $300,000 to $6 million, which the state automatically siphons into its general fund.

"The Legislature and the governor can appropriate money from the Hurricane Relief Fund for any number of purposes," said Kalbert Young, director of the state Department of Budget and Finance.

Taking money out of the fund requires authorization by the Legislature and approval of the governor.

"People say, ‘Why doesn’t the government take $20 million from the Hurricane Relief Fund and give it to Puna?’ But the government doesn’t have the authority to do that because it takes approval from the Legislature and the governor," Young said.

While the state has tapped the Hurricane Fund for many purposes, it hasn’t all been a one-way street.

The state has also restored money to the fund. More than half, or $123 million, of the $219.5 million that the state has pulled out since the fund’s inception will have been repaid by the end of next month.

The Hurricane Relief Fund’s balance will increase to $182.1 million during the latter half of September when the state makes a second $55.5 million payment in as many years to restore $111 million that the Abercrombie administration borrowed in 2011 to balance the budget.

In 2010, the Legislature during the Lingle Administration took out $67 million — $12 million of that amount was unused and later returned. The money was used to restore instructional days for the 2010-2011 school year and end the controversial "Furlough Fridays."

In fiscal year 2014, the state made a special $50 million payment to the fund. The payment was unique in that it was the first time the state added money to the Hurricane Fund that wasn’t owed to the fund because of a previous withdrawal.

"In late calendar 2012, I had advised the governor that the state should look to build formal reserves of the state, since fiscal conditions had improved and there were indications of building stronger ending balances to close fiscal year 2013," said budget director Young. "So, for the 2013 Legislature, the administration proposed a bill to recapitalize, meaning appropriating moneys to the only two reserve funds of the state — the Hurricane Relief Fund and the Emergency Budget Reserve Fund (commonly referred to at the Legislature as the ‘Rainy Day Fund’)."

The Hurricane Fund was established in 1993 after Iniki and served its original purpose for nearly a decade. Iniki was a Category 4 hurricane that left six dead and caused $1.8 billion in damage, mostly on Kauai.

After the storm, many private insurers left Hawaii. Property owners often had to pay higher premiums to purchase policies from unregulated insurers. The hurricane fund served as an affordable option.

As of Jan. 1, 1999, the Hurricane Fund provided hurricane coverage for about 155,000 policyholders statewide, according to the state Department of Budget and Finance’s website.

The fund ceased operating as an insurer in 2002 when private insurers returned fully to the market, and no policies have been issued since that time.

Today, there are 36 insurers that offer regular homeowners insurance to Hawaii residents with 21 providing hurricane insurance, according to the state Insurance Division website.

At its peak, the Hurricane Relief Fund’s balance was $222.2 million in 2002, according to Young. Its initial year-end fund balance was $34.6 million and it fell as low as $21 million from fiscal year 2011 through fiscal year 2013.

No matter the amount, homeowners who paid premiums into the fund before it was deactivated in 2002 won’t be getting refunds, Ito said.

"There’s a common misconception from people who paid into the fund that they should get their money back," Ito said. "But the Hurricane Fund was an insurance company and people were buying an insurance policy. They’re not entitled to a refund because of a non-event. It was like an insurance company that billed you for the policy."

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