Local Economists Say State's Fiscal Situation Deteriorated Under Cayetano

Editor's Note: Five notable Hawaii economists called a news conference prior to the November 3 Hawaii General Election to express their concern and disappointment over comments made by Governor Cayetano about the state's financial condition. The economists are: UH economics professor Lou Rose, David McClain, Jack Suyderhoud, Leroy Laney and Walter Miklius. All were speaking as individuals and not on behalf of any organization.The local media did not report their comments in detail; the Administration said their comments were "political." Here is their statement in full:

Governor Cayetano claims to have turned a deficit at the beginning of his term into a surplus at the end. This is absolute nonsense. He is actually comparing a projected budget deficit in 1995 to a projected positive cash balance in 1999, and that is like comparing apples with oranges.

What's worse, his claim leaves the impression that, thanks to him, the state government's fiscal condition has markedly improved on his watch. But when you examine a larger set of facts, you find the financial situation has actually deteriorated.

Consider your personal checking account. Suppose that over the past four years the checks you wrote totaled more than deposits you made. Then your account balance would have decreased, and you would have worsened your financial situation.

Over the past four years the state has done just that. It has written checks on its general fund and special funds in excess of its tax collections. This is the fundamental reason why our state's financial condition has worsened.

Then, how can it be that the general fund balance has slightly increased from $291 million in fiscal 1995 to a projected balance of $311 million in fiscal 1999?

Suppose that at your bank you had not only a checking account for paying regular bills, but a special fund to which grandparents contribute for your child's future education. Suppose your regular bills kept increasing, and you had to replenish the checking account. By transferring money from your special account, you could make your checking account look good again - at the expense of the grandparents and the child!

Does that seem like a defensible practice to make up for the fact that you have been spending more than you have taken in? Does the higher checking account balance fool you into believing that your financial condition has improved? Hardly!

But that is just what the Governor has done. He has repeatedly propped up the general fund by raiding numerous special funds whose moneys were intended for other uses. This year alone, $148 million has already been transferred from the public employees' health fund, the state homes revolving loan fund, the state highway fund, and other special funds in an attempt to make the highly visible general fund look good. This is bad fiscal practice.

Now suppose that, by an appropriate means like earning more income, you have built up your personal checking balance to a large number. Does that mean that your financial condition is healthy? Not if you anticipate bills in excess of that balance.

Well, the state has several whoppers coming due soon, and they are not included in the Governor's potential surplus. The public worker contracts (already agreed by the Governor) will be in the $61-72 million range. The payment to OHA in settlement of the judgement it won in court several years ago is expected to cost between $200 million and $1.2 billion. In view of these and other obligations, it seems obvious that the state general fund balance will be way too small to pay its bills without borrowing more money.

The reader might think that there are two sides to this argument, and that political considerations motivate both the Governor and the authors of this article in their respective claims about the government's financial situation. If so, then recall that in February Moody's Investor Service-functioning like an independent, apolitical auditor-reviewed our state government's financial situation, didn't like what it saw, and cut our state's bond rating. Auwe! And you can't find a more arms-length, objective review of our state's fiscal health than this!

Apples and oranges can't hide this fact: the state government's fiscal situation has definitely been deteriorating for the past four years, and we're in trouble.

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