 This is Think Tech Hawaii, Community Matters here. Okay. It's Wednesday. We're doing Community Matters with Tom Yamachika. He is the president of the Tax Foundation of Hawaii, and he helps us understand so many important things about the way our system works and doesn't work in the square building and about the taxes we pay and about the benefits we get. Welcome back to the show, Tom. Thank you for having me on the show, Jake. You wrote a very interesting article in the Civil Beat a few days ago, and it was about a provision in the existing what state constitution requiring a balanced budget. A lot of people, you know, know about that, but the article was interesting because it revealed that that provision doesn't work so well. Can you talk about it? Sure. We have a provision in our state constitution giving what's called an expenditure sealant. And when we have expenditures that are going to exceed the ceiling that are proposed by the governor in his budget, for example, the governor is supposed to, you know, say, oh, we're going to exceed the ceiling by X million dollars, and here's why. And then the legislature's supposed to sign off on it by passing a bill with two-thirds majorities, you know, with the origin, the reasons for it. So I kind of looked at the governor's budget, the supplemental appropriations budget for fiscal year 19, and there's something in the appendix there that says, yes, we are going to exceed the budget, and the reasons for this excess, I'm quoting now, are the substantial costs of social assistance entitlements, support for public education, fringe benefits, and other critical requirements. In other words, government costs money. We know that. We know government costs money. Yeah. Where's the surprise here? Yeah. Where's the surprise? Is there anything unusual in anything that I just mentioned? So why would that be a justification for, you know, busting the budget ceiling? Well, and another question that flows out of that same quote, so to speak, is, wait a minute. It's against the law. In fact, it's against the Constitution not to have a balanced budget. And isn't he saying that he's not going to be able to follow that, that he will in fact not follow that? No, the balanced budget provision is in a different place, and they always balance the budget. Now, when they give the budget to the legislature, it may be out of balance, and I think the last time they gave it to the legislature, it was $200 million short. So then the poor people at the legislature had to make up the difference somehow by nipping here, tucking there, but they had to make a $200 million, and it was not a pretty process. I do feel for the legislators who are caught in the middle trying to get that done, but they had to pass a balanced budget because that's one of our constitutional requirements. So the budget comes up, say, $200 million in excess of a balance, and it goes back to, I guess, the money shares, the money committees financed in the House and what is it ways and means in the Senate, and probably they have to talk about it among themselves between the two, and they have to slice and dice $200 million off what was proposed to them or was last settled on. Not only slice and dice, but there's also revenue enhancement, right, if they can enact new taxes, then that lessens the amount of slicing they have to do. Okay, and that explains the CONAM amendment, trying to raise money for education, does it? No, I don't think it's related. I don't think it's related because they have to pass it within the context of the current session. Right. Okay, it's a timing issue. Yeah. Okay, so I always wondered about this time, how fine a point can you make on the budget? So $200 million is, you know, that's visible like a neon sign at 10 miles away, but you know, what about $1 million or $5 million or $10 million? I mean, how accurately can the legislature actually balance the budget is a moving target, isn't it? Because you don't know exactly what your revenues are going to be, for that matter you don't know exactly what your check writing is going to be, how close can they get? So what they have to do is, the state constitution also provides for a forecasting mechanism called the Consul on Revenues or COR, and what they do is they come up with official revenue estimates, and those are the numbers the legislature has to use by constitution. So okay, they make an estimate. And then what happens is the legislature has to abide by the estimate. If the estimate is wrong, then the budget isn't balanced, am I right? Right. And as time goes on, if they come up with something that balances and then CR changes their numbers, then there's, you know, renewed turmoil at the legislature because they have to balance to the current numbers. So the balance comes out of the Consul on Revenues, it's really balancing against what the Consul on Revenues is telling them is going to be the revenue to the state. Right. I mean that's a little troublesome to me in the sense that it's not an absolute statement at all. It's a statement, it's a requirement that they try and try, meaning that they follow the Consul on Revenues, which could be mistaken. Yeah, but it's better than mere guesswork. Of course. I mean, I would rather put it in the hands of trained people, you know, even though there are, you know, a lot of them are volunteers, as opposed to the politicians themselves. Just a better guess. And hopefully it's not rife with politics when they make the guess. No, no. And speaking of that, let me tell you about another constitutional privation. And I brought a picture on this one, but let me kind of give you some background first. For a number of years, between 1981 and 2009, we've had a constitutional provision that says, oh, if the state runs up surpluses for a couple of years in a row, then you've got to give some money back to the people. And to accomplish this, we had something called the General Income Tax Credit. So what did they actually do? We've had surpluses. We've had surpluses for, let's say, 20 out of the last 29 years. So 20 out of the 29 years, we were eligible to give some money back to the taxpayer. And can you put up a picture that shows what they actually did? Okay. So see, all those years, there are 29 years. There are nine years where nothing came back, and that's because we didn't have surpluses for two years in a row. For 15 out of the 29 years, what they gave back was a dollar, one dollar. So in a couple of years, they tried giving more substantial monies. What's the height of it? What's the high point there? So I think it was $125 in 1989. And that's for every taxpayer in the state? Yes. In 2007, they also had one, which went up to $160, but it was based on how much you made. So you made more, you got less. Okay. I mean, they made some efforts in some years, but can you explain why those years are so high and the rest of them are at a dollar or less? Well, first year out of the gate in 1981, fresh after the Constitution was minted, they said, well, yeah, I guess we're going to follow this. So they gave us $100 bucks. One year after that, it was, eh, this is kind of crimping our style. Maybe we shouldn't give $100 bucks, but they gave us $20, $100 goes down to $25. And the year after that, well, eh, we really don't want to give that much money back. So we'll drop it to a dollar. What's this kind of? So they are technically in compliance with the Constitution. That they gave something back. They gave something back. But it's got to be tweaked, or it wouldn't be $1 like that. That's got to be the result of a tweak. In other words, it must be something more. And they put something in the bread basket there. Can they do that? They put as much in the bread basket for next time around as they want? Technically, yes, because that's the way the Constitutional provision was written. It didn't say they have to rebate all the money back. They just have to rebate some. And they have them. And they did. They can choose a dollar as some. They did. And then in 2009, of course, what happened is we had a provision that went to the voters and it said, oh, instead of rebating this $1, would you allow us to put some more money in the rainy day fund? And then later on, it was a further amendment. So instead of putting the money in the rainy day fund, can we go make provisions for unfunded liabilities or other things like that? And the voters said yes. So no more general income tax credit after that. So 2009 was the last year. I remember in Linda Lingle's time, she was chasing what I think everybody called the special funds. They were sort of mysterious. And there were funds that money stayed in there for years and years. And it was not clear whether it would ever come out. I mean, does the legislature have that power? I mean, should we do something about this? Where the money could be sort of cockroached in the corner somewhere? I mean, we wouldn't even know about it. And only special members of the government would know about it. There's been a big fight in the legislature every year. There are people like Sylvia Luke, for example, who try to ferret these pots of money out and get rid of them so they can be appropriately anything else. We've also advocated for that in the foundation because that increases transparency. You have money that's socked away somewhere outside of the sunlight. That's not good for transparency. That's not good for a good governance. But agencies love them. Agencies love them. They said, oh, we need to have this program and we need to have a dedicated funding source. Otherwise, you can't be sure that this program will continue to exist. So they've gotten a lot of interest groups that are relying on the agency's mission to buy into that, for example. So if you have Department of Land and Natural Resources, they advocate for special funds for land preservation and taking care of the environment and the environmental groups are all in. You've got to do this. You've got to do this. And then they fight with the money committees who don't want them. So an unending battle. Yeah, interesting. And your chart shows that in recent years, it's been a dollar or zero and there hasn't been any significant return of tax money to the taxpayers. At the same time, my information is the same, is that the money builds up in these funds we didn't even know about. And I guess if I'm a legislator and I want to get rid of money, I'm going to get it off the table, put it away somewhere, so I don't have to return it to the taxpayer, there's lots of ways for me to do that through these special funds. Well, I mean, and you don't even need to do that because there are current needs like unfunded liabilities. Okay, we've been talking a lot about those. We have a problem. We have a problem in that we have promised our state employees all kinds of post-employment benefits. Right? Are we going to have the money to pay those off when these people actually retire? The actuaries are now saying that it's going to take, you know, X million dollars. But that's assuming that the current assets in the retirement system and EUTF will bring in 7% every year, which in current economic conditions is like really unrealistic. And could get more unrealistic. The market's been shaky lately. That is true. And if the actual rate of return is lower, like let's knock it out to maybe 3.5%, then your unfunded liabilities are kind of more like, you know, 35, 40 million dollars with a B. As against our annual budget, which is what, 10 or 12 billion? 14. 14 billion. So you can see that, you know, that 40 billion dollars is huge on the scale of the way we operate here in Hawaii. Right. And so something has got to give. Don't let anybody tell you that there's an excess of money in the state government right now. There really isn't. Well, then maybe it's understandable that they don't give any money back and they hold it for a rainy day because we all know there's going to be a rainy day. Maybe it's a good idea. Yeah. What's been happening recently is around June 30th, July 1st or something like that. Somebody from the governor's office or budget and finance goes on and says, oh, we have this tremendous surplus of over a billion dollars, right? And of course, the public worker unions go, okay, fine. We know exactly what our marching orders are. And we want some of that. And don't tell me that you don't have money because you just said you have money. And then the very next month, the administration goes to all the unions and says, oh, you know that one billion dollars we were talking about? It's already all gone. Yeah. Yeah, we've already spent it. Yeah. So it's not there anymore. Because the union had a place for it. No, no, no. It went to fund like unfunded liabilities or it went to, you know, this reserve or that or something. You can always find ways to spend money. I know that at home. Oh, yeah. It's Tommy Yamachika, president of the Tax Foundation of Hawaii. We're talking about his article in Civil Bee. We're talking about the legislature. And when we come back, I really like to get into what Kan Kan might have done or might do, might do if there is a Kan Kan in order to ameliorate these problems. Can you wait? You are? Okay, we'll be right back. This is Think Tech Hawaii, raising public awareness. Every Monday afternoon from 5 to 5.30, Hawaii Standard Time for an insightful discussion of Contemporary Asian Affairs. There's so much to discuss and the guests that we have are very, very well informed. Just think we have the upcoming negotiation between President Trump and Kim Jong-un. The possibility of Xi Jinping, the leader of China, remaining in power forever. We'll see you then. We're back with Tommy Yamachika, president of the Tax Foundation of Hawaii. We're talking about balancing the budget, talking about his article in Civil Bee, talking about Kan Kan and what it could do to help ameliorate these problems around our budgeting difficulties. Yeah? Well, what you have to realize is that all of the provisions that I talked to you about, the one about rebating monies to the people about the expenditure ceiling, we also enacted a debt limit and a balanced budget provision. Those all came out of the 78 Kan Kan, all of them. They were trying to restore some semblance of responsible budgeting to the legislature because at the time it was perceived that you've got to do something otherwise the legislature can go out of control. Boy, did they have a point? But the problem, I think, was that the provisions that they enacted, they basically had no teeth. The provisions basically said, well, okay, you need to state your reasons why you're not doing it this way and you need to maybe have a few more votes, easily done. Easily done. It was very easy for the legislature to beat these provisions into submission, especially if we in the electorate weren't watching or didn't raise a fuss and we didn't because that's not the kind of people we are. What could be different this time? One, we could have a Kan Kan and we could enact some fiscal provisions that actually have some teeth in them this time because we know from experience that you put something in there, it's aspirational or if there's a really low hurdle to jump, I'll jump it. That's what experience is taught us. Or we as a people have to be more vigilant and we have to know when these departures from sound fiscal policy surface and we've got to say something to make sure that lawmakers told the line. We can't make it so that they can jump over the line without consequences. There have got to be consequences. The tax foundation is involved in this what every year all the time. We try to make sure that people are informed so they can make good decisions about how to proceed or how to follow what's actually going on in the square building. Let me make you the Kan Kan. Let's assume for this discussion that the vote on the Kan Kan is positive in November two weeks from now and they see these problems and they try to tackle them. What sort of amendments would you want, would you like to see to create a greater fiscal responsibility? Well, I'd like to see an expenditure ceiling with some teeth to it. The provision that was put in in 1978 was expenditure shouldn't be growing faster than the rate of the economy. And if there is some kind of dire emergency then yeah they can break this but it's got to be some kind of dire emergency and it's not something that you break routinely or every year or every two years. Even back in 2001 when we had the fiscal with the Felix consent decree that was creating lots of more costs for the DOE we should have realized that that is now a cost of providing education and we should have figured it into the budget rather than just busting the budget. You're talking about the budget as a mathematical experience but at the end of the day query in the way things work right now can we pay, with this economy, the size of the state, the population of the state, the skill set of the state, can we pay the 40 billion or whatever it is in unfunded liabilities in a timely fashion? And I'm thinking of Puerto Rico and I'd like to raise that with you later but are we able to do this? Some enterprises can't pay the bills. Can we pay the bills the way it's set up right now? If there's the easy way and the hard way. The easy way is we raise taxes, we raise taxes a lot and we beat up everybody. Will there be consequences? That's the issue I put to you. If there are no consequences that's what they'll do. You make a chart, you say up to X there will be serious consequences so we'll raise it up to X but if it goes beyond X and there will be serious consequences then we won't do it because we don't want those consequences. One consequence would be said legislators who vote for this taxing provision get tossed over their ear in the next election. That's one consequence and other consequence is people start leaving the state by the drugs which has already started happening. There has been a net out migration of people from the state and some legislators don't know this or they're in denial but this is actually happening. This is very bad for the economy and the ability of the state to raise money. The fewer people we've got the more of us have to shoulder the burden. The fewer of us are left to shoulder the burden so more falls upon each of us. You have to be careful if you raise taxes but would you raise taxes a little bit in order to deal with these unfunded liabilities? The other way is you go into these departments, you come in with a sharp pencil or a sharp knife and see what kind of fat is in there. With these really big departments you're probably going to find something because I think there have been studies done and you have big organizations, you have more waste than abuse. It's easier to hide stuff. When Maria hit, Puerto Rico was in bad shape anyway. They had suffered a default on their state bonds. They were something like 80 billion dollars in the hole for a population of something in the order of 3 million which is a little more than twice of what we have. We can't go there. We can't let that happen to us. That's a disaster. We're almost there now. What worries me is that we could have a storm just like they had and of course FEMA will help you hopefully. The White House will help you hopefully but you really would like to have a rainy day fund literally in order to rebuild the state and build it better which is more costly than simply rebuilding it and taking all those steps to deal with sea level rise and climate change and the homeless, all the unfunded liabilities. We need something really remarkable, something dramatic to get us out of this kind of mindset of everything will be fine. What is that? How do we do that? How would you do it if you were running this concan? Would you, can you, would you take existing state liabilities such as the one you mentioned to the retirement system, the ERS and say, we know that you've been counting on X benefits but you know, we don't have the money, we're going to have to reduce those benefits. I'm guessing here that I think a concan could do that and that might save us several billion dollars. That's a possibility. I mean the existing protection for the retirees and stuff is contained in the concan. Constitution now, so it would need some kind of constitutional action to change that. I mean, you know, right now you have a disaster, you need money for emergency services, you know, police fire and you have these liabilities that were promised. You can't touch the monies for the liabilities that were promised to the retirees. Under the constitution you can't touch them. Even though there's an emergency and you need money for emergency services. And then there's OHA, you know, I mean a lot of people have, connect OHA with concan either on the side of OHA, it costs too much, it's a waste, it's inefficient, it's corrupt. So we should knock it off and save that money and I think there's a lot of money that goes right off the top into OHA. Or other people are afraid that OHA will come in there and try to ask for more money, not less. And so there's a sphere on both sides and I think it plays in this concan in whether to do a concan. Do you agree that OHA is a principal object in the conversation about whether we should do a concan, what would happen at a concan? I'm not so sure the principal object is OHA, I would focus more on DHHL. Because DHHL under our current constitution has a requirement that they be adequately funded. And there was a legal dispute that was going on between the branches of government, you know, I forget the name of the case but it was a big case regarding the alleged underfunding of DHHL for the last several years. Now one problem is that DHHL hasn't been able to spend their money. It hasn't. It hasn't. They were getting money from I think some federal programs as well, they weren't spending the money and the feds were saying, okay, well, if you're not going to use it, we won't give it to you. So that's fair. Yeah. But tell that to the 20 or 30,000 people who are on the waiting list for Hawaiian homestead. You've got a failure of the agency as well. Well, that calls for leadership, it calls for the GADFLY, calls for the tax foundation and similar organizations. Go out there and find out whether our tax money is fair and whether it's being used fairly. And I think one of the problems is that you say the word tax, people fall asleep all around the room and nobody really wants to roll up his shoulders, nobody but you, and figure out what's going on and make it right. And as a result, there's a certain amount of uncaring complacency in the legislature and in the public arena about something. Yeah. Now, one, I think good thing about OHA that you mentioned, OHA, is that we, the general electorate, get to elect the trustees. And I think there have been more trustees who are, especially the newer ones that are coming in, who are worried about the future of OHA and how it's been expending the resources that it has been, and they want to shake things up. And they just need the votes to do that. Yeah. But I think it's a large part, it's educating them, it's educating the legislature, it's educating the agencies, it's getting everybody in the same boat, you know, with the sort of altruistic greater good view of things and certainly educating the people so they don't blow this off. And so you're doing very important work. We try to. Tommy Omicica, President of the Tax Foundation. Thank you, Jake. Thank you for having me on the show. We'll have you back soon. Thanks.