INTRODUCTION

THE ONLY GOOD NEWS in this steaming pile of bad news is the realization that everyone else is in the same sorry condition as we are.

As much as that might come as cold comfort to lawmakers trying to find $1.3 billion to close a two-year budget deficit, state Rep. Marcus Oshiro will take comfort where he finds it. The chairman of the House Finance Committee, Oshiro found that silver lining in the dark cloud hovering over a recent presentation by the National Conference of State Legislatures.

“For me, it was to give ourselves a good sense that what we’re going through is no more, no less than other states,” said Oshiro, who represents Wahiawa constituents when he’s not fighting fiscal battles. “In some cases, we may be doing better.”

Oshiro and many of his colleagues from the committee and House leadership had just heard two experts on fiscal issues — Ron Snell on pension reform and Corina Eckl on state budget and tax policy — describe the mainland landscape, littered with various proposals for erasing red ink from state ledgers.

A number of states already have a head start in changing their public-employee retirement plans, said Snell, listing about a dozen that last year boosted employee contributions and reducing benefits.

The take-away from Eckl’s lecture? The recession may be over, but hard times for state budget offices is going to persist for a few more years. And if lawmakers became accustomed to help from the federal government, there doesn’t seem to be much more of that coming down the pike.

Across the country, lawmakers and policy experts are looking afield to see what approaches are being tried elsewhere. But ultimately they have to rely on their own resolve to cut expenses and find ways to raise revenue with the least degree of political and economic pain. And, said local tax-policy advocate Lowell Kalapa, that includes axing special funds and programs that have been around long enough to seem like entitlements.

“Part of this problem is us,” Kalapa said. “We didn’t pay attention to all the programs the Legislature proliferated all these years.”
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CORINA ECKL started her presentation, chock-full of data about states where the budgetary cupboard is bare, with what may have been the most sobering observation of all.

“I think it’s been interesting to note — and this sort of surprised me when I was looking at the information — we’ve actually been out of the recession longer than we were in it,” Eckl told a room packed with gloomy faces. “And it certainly doesn’t feel that way, if you think about what’s going on with state budgets around the country. A lot of challenges out there, no immediate expectation that this is going to turn around anytime soon.”

Eckl is a specialist in budget and tax policy for the National Conference on State Legislatures. She and colleague Ron Snell, an expert on pension programs, stopped March 14 in Honolulu while making the rounds of state capitols to deliver uniformly bad news to members of the House Finance Committee in a public briefing.

The worst news for lawmakers here may be that Hawaii is out of step with most other states, where the focus has been on shrinking budgets, with only modest revenue boosts. Until the Japan tsunami put a dent in Hawaii’s tourism expectations from the Japanese market, the administration of Gov. Neil Abercrombie sought to restore some previous budget cuts, but there may be a course change in the coming weeks.

The state Council on Revenues, which sets the official projections for budget officials, is widely expected to revise its revenue projections further downward in a special meeting Tuesday. Last Thursday, the administration already assumed the worst, revising its own forecast of the biennial budget deficit at $1.3 billion, up by about a third.

Eckl, who was visiting only a few days after the tsunami hit, said the time for treading water on state budgets seems to have run out, not only here but across the country.

“One of my favorite quotes comes out of the state of Maryland,” she added, “where the fiscal director said, ‘This is the year the bullet must be bitten.’

“We still have half the states in 2012 facing budget gaps in excess of 10 percent,” Eckl said. “That’s why we’re seeing such a receding of the size of state budgets, and while there have been tax increases, states overwhelmingly have turned to budget cuts to close the budget gaps, as well as using one of these one-time monies.

“We’ve been asking states about the fiscal year ’12 budgets, the budgets that you all are in the process of enacting at this time. And without exception, we have heard that fiscal year 2012 is going to be the hardest budget year yet,” she said. “And that’s very disconcerting, considering all the years that we’ve had behind us with all these serious budget problems.”

Snell took the microphone and began scrolling through several maps of the U.S., showing states in which major changes have been made to pension plans; some of them have been at this since 2005.

Hawaii’s actions so far sit on the less aggressive side of the spectrum, he said.

Last session the Legislature changed the conditions under which people collecting a public pension can return to government employment, he said. By comparison, other states already have made more fundamental changes:

>> Colorado has required employees to contribute more into pension plans, even for current employees.

>> Pennsylvania has given employees a choice between a plan with the same contribution rate but a lower benefit package, and one with more employee contributions but benefits equal to those collected by current retirees.

>> Illinois has lengthened to eight years the period used to calculate the final average salary to figure the compensation in the pension plan.

But surprisingly, Snell said, very few states are following the private-sector model of abandoning traditional “defined benefit” pensions to convert to “defined contribution” plans such as a 401(k). Michigan was one of the few even to offer a hybrid — offering a less-generous pension, with optional enrollment in a 401(k) to supplement retirement income.

Surveying current legislative proposals, Snell said increasing employee contributions into pensions seems to be a popular step. Kansas is among the  states that are even trying to overcome past constitutional provisions or judicial rulings to get this done, he said.

“Current employees in Kansas could be asked to make higher contributions to their retirement plan, which is something that the state has always regarded as impossible for it to enact, prohibited by its Constitution, prohibited by practice,” he said.

Marcus Oshiro, state House Finance chairman, said there seems to be some broad realization that pension reform here can’t be postponed any further.

“This year may be Hawaii’s year to make these significant changes going forward to our ERS (Employees’ Retirement System),” he said. “So we’re looking at extending the period of years to vest (from five to 10 years), changing the rate of contribution by the employee.

“We’re also looking at changing the period of time for average final compensation,” Oshiro added. “Right now it’s three years — they call it the ‘high three.’ It would go from three years to five years.”

Medicare Part B reimbursement would end for new hires, he said.

Overall, cost reduction for the next biennium is estimated at $75 million, with far greater savings going forward, Oshiro said.

Further, he said, retirement age may be pushed outward for future hires, mirroring what’s happened in many other states. If the changes go through, most of the job categories now allowing retirement at 55 would have to wait another five years, and those with retirement age set at 62 would stay on the job until 65.

“You know what I find encouraging?” he added. “I haven’t received much blowback from public-sector labor. Because, you know why? I think in their heart of hearts they realize we gotta make changes.”

On the revenue side, Oshiro’s counterpart in the upper chamber, state Sen. David Ige, said several tax proposals are still alive; there is no measure on the table to raise the general excise tax. The surviving measures include bills to tax pension income, cap the transient accommodations tax revenues that go to the counties and enable the state to start collecting tax on some online retail sales to Hawaii shoppers.

Ige said if the state enacts this latter measure, Senate Bill 1355, Hawaii could realize up to $15 million a year, and far more if Congress acts to mandate state sales tax collections for all online retailers.

But even such out-of-the-box thinking about revenues won’t change the basic calculation, he said: There have to be more cuts this year.

“The tragedy in Japan has changed the financial landscape,” Ige said. “We anticipate that there will be a drop in revenues; we are focused on identifying more cuts.

“I think the biggest challenge is government is counter-cyclical: Just when the economy suffers, the demand for government service skyrockets.”

Oshiro added his frustration with working in such miserly government circumstances. But he remains hopeful, for the long term.

“When I first became Finance chair in 2007, we had a $700 million surplus. I was Santa Claus,” he said with a laugh. “But the suit, I’m going to put it in my closet and take care of it. Hopefully I can bust it out again.”