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When Gov. Josh Green unveils his proposed state supplemental budget later this month he will set the stage for what may be a lackluster election year session of the Legislature. There appears to be little money to spare for ambitious new initiatives by Green or state lawmakers.

Just 13 months ago the state was so flush with tax revenue and federal pandemic funding that outgoing Gov. David Ige’s administration projected the general fund would have a of more than $3.9 billion when this fiscal year ends on June 30.

But new late last month shows that situation has dramatically changed.

The Green administration is projecting a much smaller surplus of less than $607 million on June 30. The disclosure also indicates the surplus will decline even further in the following year, to less than $385 million by June 30, 2025.

Green came into office last fall promising to make an impact on big-ticket Hawaii problems like affordable housing and homelessness. The updated financial plan shows he has a lot less money to work with than anyone expected last fall.

But Green said in an interview Thursday he is not backing off from the ambitious plans he presented to lawmakers last year.

The reduced state revenue “won’t interfere with our agenda,” Green said. “We had a very large surplus before some of the economic downturn and the Maui wildfire, so our new budget will continue to fund all of our priorities such as housing, homelessness, health care, so the fiscal picture is OK.”

Green said he will again press lawmakers for a proposed “green fee” that would be levied on tourists to raise additional money, and said he also wants to push ahead with his proposal for a child care tax credit.

The governor made an unsuccessful pitch for the green fee during the legislative session this year, and Green said he may advocate next session for an increase in the state hotel room tax. He sees both of those ideas as strategies to raise money the state can use to mitigate the impacts of climate change.

Green is expected to officially present his proposed supplemental budget to the public and state lawmakers by Dec. 18, and will submit his package of proposed legislation for this year when he makes his second state of the state address on Jan. 22.

Expected Revenue Fell Short

The new state financial data was made public on Nov. 22 as part of a presentation by the Green administration in support of its plan to issue $750 million in bonds later this month for construction projects around the state. It offers a preview of the fiscal situation that Green must address.

The data shows part of the dramatic shift in state finances happened because an anticipated surge in state tax collections never materialized.

The Ige administration assumed last fall — based on projections by the — that tax collections would go gangbusters, growing by 6.5% last year and 4% this fiscal year. The council is a panel of experts tasked with projecting how much the state will collect in taxes each year.

The disappointing reality was tax collections declined by 1.7% last fiscal year, and tax revenue is expected to grow by a modest 1.3% this fiscal year.

That means the state is on track to receive about $1.2 billion less in tax revenue during those two fiscal years than the Ige administration had expected.

And while total state revenue has been stuck at about $10.2 billion per year for three years including this year, state spending surged both last year and this year.

According to a new state financial plan distributed to bond investors, spending increased from $8.8 billion two years ago to $10.6 billion last year, and is expected to climb to $11.76 billion this fiscal year following the deadly Maui wildfire.

That means the state is on track to spend about $2.1 billion more than the Ige administration anticipated when it made its rosy financial forecast last fall. In fact, the state is on its way to spending about $1.57 billion more this year alone than it will collect in taxes and other revenue, according to the new data.

All of this is unwelcome news for Green, who had big plans for the budget surplus. At a meeting with the Civil Beat Editorial Board on March 2, he described his ideas for committing state funds to solve the housing shortage, homelessness and other perennial problems.

“I think that we have opportunities looking forward,” Green said at the time. “The surplus doesn’t just stop after two years. It trends to almost $10 billion over six years. That’s why we should spend money on housing, and we should definitely spend money on ALICE families.”

“ALICE” is an acronym for struggling working families: “asset-limited, income-constrained, employed.”

But Hawaii’s roller-coaster economy then made a sudden, sharp turn. Days after Green made those remarks, the Council on Revenues scaled backed its overly optimistic tax collection projections. And in May, the council .

As Green ruefully put it in an interview last week, “It’s a surplus on paper until revenues come in.”

Efforts To Rein In Spending

Green responded in June by to curtail a remarkable spending spree of the anticipated surplus cash that was authorized by the Legislature in May.

In all Green vetoed more than $1 billion in appropriations for this fiscal year and next, including $500 million that lawmakers had planned to deposit into the “rainy day” budget reserve fund next year.

In his latest effort to prepare state government for leaner times ahead, Green circulated a memo to state departments in late October explaining to redirect money from more than two dozen cash appropriations the Legislature made last year to finance various construction projects.

That move would free up more than $172 million that Green plans to commit to the Maui wildfire recovery effort.

Green said that so far the administration has earmarked $286 million for the Maui recovery effort, including $150 million for debris removal, and $30 million to develop “non-congregate housing.”

The administration also plans to add $65 million to the state’s Major Disaster Fund to bring the balance in the fund to $100 million. That fund is a pool of cash to be used for “general preparedness,” according to the governor’s office.

Green said he plans to further tweak the proposed budget to reduce spending, “but we’re not cutting any core programs. We’re keeping all the positions in place.”

He also said his proposed budget will preserve $104 million in tax breaks that lawmakers approved for ALICE families earlier this year. The Legislature approved a bill last session to make the state earned income tax credit, food excise tax credit and the child and dependent care tax credits considerably more generous.

In fact, Green said he wants to press ahead with new tax relief for working families. He plans to include $37.5 million in his proposed budget for a new child care tax credit, an idea that did not win the approval of the Legislature last year.

And Green said he will ensure the general fund surplus never drops below $500 million. He anticipates the cash balance at the end of this year will be about $800 million, and the surplus for next year will be about $500 million.

At least some of the construction projects that the Legislature wanted to fund with cash last session can instead be financed via the $750 million in bonds that Green is planning for early December.

“We have enough money to meet our needs including Maui and our ongoing priorities. There are enough resources in the budget,” he said.

‘We’re OK’

Green said he does not plan to tap into the state’s emergency budget reserve fund — better known as the “rainy day fund” — which will have a record balance of more than $1.5 billion at the end of this fiscal year.

House Finance Committee Chairman Kyle Yamashita said the reversal in state tax collections was not unexpected given that tax collections for the most part had climbed steadily over the past decade.

“We knew it was coming,” Yamashita said. “Other than the pandemic, prior to last year we had 10 good years only going in one direction, and so this is an adjustment that, to me, is more normal. We just have to adjust to it.”

“We should be able to manage,” he said. “The governor made the adjustments that had to be done. We’re not in great shape, but we’re OK.”

Green also said he wants lawmakers to approve a “green fee” that would be imposed on tourists to cope with the impact of climate change in Hawaii, including wildfire risk and sea level rise.

He described that as “just good policy,” although some have questioned whether a fee imposed only on tourists would be legal.

If a separate fee on tourists cannot be imposed, Green said he would support an increase in the state hotel room tax — officially known as the transient accommodations tax, or TAT — as a way to raise money to deal with climate change.

That idea drew a lukewarm response from House Speaker Scott Saiki, a fellow Democrat.

“We just increased the TAT a couple of years ago,” and authorized the counties to levy their own hotel room taxes, Saiki said. “I’m not sure how sustainable it is to keep increasing the TAT. I’m not sure what the breaking point is.”

Sen. Donovan Dela Cruz, chairman of the Senate Ways and Means Committee, did not respond to a request for comment on the budget data.