State Banking on Economic Recovery To Pay Its Bills
The governor and Legislature agreed on at least one thing this year: The budget needed a quick fix. They put off paying a large chunk of their expenses until July, the start of the next fiscal year. But in the process they put the state in a difficult position. The government will likely be strapped for cash every year around this time — unless the economy recovers immediately.
On the surface, it might have looked like a simple enough solution: Move $335 million worth of state health care reimbursements and state income tax refunds, roughly 7 percent of the governor’s spending plan, into July. The decision balanced the budget and erased the deficit for the fiscal year ending June 30, 2010. It also met the legal requirement of giving refunds within 90 statutory days after April 15.
But economists and lawmakers say delaying the tax refunds and Med-QUEST health care payments was a strategy that has left the state vulnerable. Without a strong and immediate economic recovery, the state will be on the hook every year to make up for the $335 million in delayed payments — on top of all of its other expenses in a given year.
“We definitely have concerns because this has never been done before,” said Rep. Marcus Oshiro, who chairs the House Finance Committee.
Hawaii Department of Budget and Finance Director Georgina Kawamura, whose office, in concert with the Hawaii Department of Taxation, made the recommendations to defer payments, agreed.
“The entire state government is relying on economic recovery,” she said. “What we all hope for is that the economy improves such that the state can make the payments earlier and not wait the statutory 90 days. But, for now, that situation doesn’t allow us to do that.”
Oshiro says one immediate concern is whether the state will be able to keep the lights on in July. In any given month, it costs roughly $429 million in program costs, salaries, benefits, to keep the government running. Add in the $335 million in deferred health care costs and tax refunds from last fiscal year and that means that in July, the state will have to summon about $774 million. That’s more than double the roughly $360 million in monthly revenues the Hawaii Council of Revenues, which forecasts state revenues, estimates the state will pull in.
Kawamura says the state will rely on tax revenue between now and July to make the planned payments by summer time.
“We have high hopes, obviously, that this plan will work,” she said. “We can’t, by law, have a negative fund balance. We monitor every month what we are doing to avoid or prevent that from happening.”
Kawamura cautions, however, about the unpredictability of the economy.
“Can I tell you what happens July 1?” she said. “I cannot. I would challenge anyone else who would say what happens July 1. These are our plans that we put in place today, and we are hopeful that things between now and July 1st will go well for our state.”
In addition to a rebounding economy, lawmakers are also depending on funds from the federal American Recovery and Reinvestment Act to help cover the deferred health care reimbursements. Congress this year boosted the Medicaid reimbursement rate they pay back to states to 67 percent. The rate, however, will drop down to as low as 50 percent unless pending legislation extends the 67 percent rate for another six months. If that bill does not pass, the Hawaii State Legislature will face a Medicaid shortfall in January 2011.
Historically, Hawaii has had a low reimbursement rate compared to other states, says House Finance Chair Oshiro, and local legislators believe Congress will reward Hawaii by giving additional federal dollars.
Hawaii was one of at least 46 states this year with a budget deficit. Deferring expenses to the next fiscal year is a common strategy to balance state budgets, national economists say.
“States are concerned with getting through the end of this fiscal year, trying to balance the budget for this year,” said Brian Sigritz, Director of State Fiscal Studies at the National Association of State Budget Officers. “A number of states have an understanding that they will have a long-term structural deficit.”
The deferral of tax payments, however, presents potential problems for the state in the future, some economists say. Deferrals can affect consumer confidence and erode trust in the government. Delaying payments can also lead to more tax evasion.
Philip J. Romero, Dean of the College of Business and Economics at California State University, Los Angeles, called deferring taxes a “pure gimmick.”
“I think most gimmicks, besides just being wrong on their face, have indirect costs that far exceed whatever short term gain,” said Romero, who served as chief economist to former Gov. Pete Wilson of California in the 1990s.
The state could recover from its decision to push off expenses into July could work if the Hawaii Council on Revenues‘s for future state revenues hold true. The Council on Revenues, a group of economists tasked with state revenue projections, put forward a positive outlook for the state. The economy is slowly growing and should be back to pre-recession levels in 2012 at the earliest, according to its latest quarterly report. The strength of economic growth will be important because next year’s state revenue will need to shoulder both taxes from the fiscal year ending June 2010 and the fiscal year ending June 2011.
With Gov. Linda Lingle in her last six months in office, it’s clear that paying off the debt will be the next governor’s job.
“Let’s hope that by the end of this calendar year there has been improvement,” said Kawamura, of the state budget and finance office. “We won’t be there for that decision, so the next governor will have to deal with it.”
