 back to Think Tech. I'm Jay Fidel. We're going to talk with Tom Yamajika here. I'm talking packs with Tom about the fiscal condition of the state. They're calling this state financial condition still dismal. And I would add been getting worse. We got an F from truth in accounting, which is nonprofit on the mainland that looks into the relative fiscal positions of various states. And Hawaii got an F. So we're going to talk to Tom today about why that happened, how we could have avoided it, how we can avoid it now, and what happens if we don't avoid it? Wow. It's just six hours. That's all we have for this discussion. Ready, Tom? Well, we can try. We have to kind of get the high points of this. And thank you for having me on the show, Jay. This report comes out from truth, truth in accounting called financial state of the states. It comes out, I think, every year. And what we're talking about is for the fiscal year 2021. And it compared published financial information from all the states for fiscal year 2020. So we got to remember at this point in time, the information was being gathered when we're kind of the thick of the pandemic, because the fiscal year 2020 year end is June 30, 2020. And we got an F that was the grade that happened to be given to the bottom 10 states, which were from numbers 41 through 50 were New York, California, Vermont, Kentucky, Delaware. Notice Hawaii hasn't been mentioned yet. Hawaii, Massachusetts, Illinois, New Jersey, and Connecticut. So Connecticut was on the bottom of the bottom. And we made, I think, 46th. But this is not something that came up in the middle of the pandemic. We've been, this is a trend that's been going on in Hawaii for quite some time, isn't it? Of course. The way the scoring was determined is that the financial accounting, I'm sorry, truth in accounting, looked at the comprehensive annual financial report or CAFR that the state budget and finance department puts out every year. It's audited. And they said, okay, let's first look at the amount of assets that we have. So it's both $30 billion in assets. And they took away capital assets and restricted assets, because those can't really be used to pay bills. So when the capital assets and restricted assets were deducted, we had $6.5 billion left to pay bills. And our total bills, which are not long-term debts, but bills we have to pay in the short and medium term, were $24.5 billion. The shortfall divided by the number of taxpayers we have here yields about $37,000 of shortfall per taxpayer. That include women and children? Sure does. Well, maybe not so much children, but the women definitely. Well, this goes back to a program that ThinkTech did 10, 15 years ago about the same issue. Why weren't we paying our bills? And at the time, the emplosure time and system was something like $12 billion during Abercrombie. $12 billion in the whole and we weren't paying it. And that was only one of a number of things. And the estimates were the total of unsatisfied, both liquidated and unliquid, unsatisfied liabilities was something around $40 billion. I don't know what that number is now, but this report is consistent with it. Let's talk about the nonprofit, though. Is this a credible nonprofit? Is this a nonprofit that is the truth in accounting, nonprofit respected around the country? I don't know. I mean, we've been citing it for a number of years, as has a number of our sister nonprofits, like the Tax Foundation in the mainland and other nonprofits who are concerned about such things. So I don't know how to answer the question that you asked, but what I can say is that these figures have been circulating around now in the press and otherwise for a while. You know what strikes me so ironic about this is that in an election year, you expect a little spending where political officials want to gain popularity and thus vote for the election, right? That's just part of our democracy. But this year, make it the 2022 session, we were really being extravagant. We spent a lot of money. And while we're spending the money, we're going in the hole on fiscal stability. So can you talk about how much we spent this year and whether that was appropriate? Well, whether it's appropriate is kind of a policy decision, but I can give you an idea of how much we spent. As you probably know, we have a tax rebate coming up, or that's been going on since I think August, and they're still waiting for paper to print the checks on, but what's the tax rebate in the state of Hawaii? $300 per exemption for those making this than 100,000 per person. And that's because we have a surplus in the Constitution requires that if we have a surplus, we pay the tax, pay it back to the taxpayers. Not entirely. I mean, that's what the constitutional provision first read, but now they can satisfy that requirement by either giving some back to the taxpayers or making contributions to the rainy day fund, or making contributions to the pension fund. And this bill, which is Senate Bill 514, Act 115, did both. So they provided the tax rebates, which are supposed to cost about $250 million. It put down $500 million to the rainy day fund, and $300 million to the pension accumulated fund to pay down some of these unfunded liabilities. And then as you recall from other discussions we've had in the past, our legislators also appropriated $600 million for the Department of Hawaiian homelands. That was an optional thing. That was a matter of their decision to do that. They were not obligated to do that. They weren't obligated to do any of the above. I mean, when they were faced with the Constitution requirement in the past, they said, okay, $1 per return. And they did that for a number of years. And that's when they had no other choice. So at least this time, the rebates were substantial, and they've committed, you add up the $600 million and the $500 million and the $250 million, and you have, you know, $1 billion and a half. Well, I don't understand why when in 2020 or 2021, we had a shortfall for a taxpayer of $37,000. That's a lot of bread. In 2022, we are so lush that we can afford to spend that kind of money and not pay our debts, not reduce to $37,000 per taxpayer. I don't understand that. I think we did a little bit because most of the shortfall that was identified in the Truth and Accounting Report was from the other post-employment benefits. When state workers come into our system, we promise them stuff. We promise them a pension, and there's a pension plan. It's called the Divine Benefit Plan. That's the ERS, Employee Restirement System. And we also promise them healthcare. And that's sometimes called the EUT for the Employee Union Trust Fund. And in the old days, they promised lifetime healthcare for state retirees. Lifetime. And that's, that could be a long time. Yeah, that's sweet. A lot of people work for the state for that reason. Yeah. And so we've made promises, and it just so happened that the legislature that made the promises isn't the one who's paying off on these liabilities. Sweet, right? I mean, you can be real nice to voters and you don't have to deal with the aftermath. And so what happened? When you add to that that we probably have too many state employees, it becomes even more ironic. Well, I'm not blaming the employees, okay? No, no, no. They need to hire themselves. I'm going to have to hire them, Tom. Yeah. And when the print article that I'm talking about came out, there were some employees who took personal offense. And I had to explain, look, I'm not saying that hardworking state employees in general caused this. It was a matter of the promises that were made and the follow through or lack thereof of our lawmakers. And again, going back to the truth and accounting report, they said that according to the state's audited financial statements, we had 10.4 billion of unfunded pension benefits and 9.4 billion of unfunded health care benefits. That's 20 billion dollars right there out of the 24.5 that we said need to be shielded by taxpayers in the short and medium term, okay? So 20, that accounts for 20 out of the 24.5 billion, which basically is the problem right there. Yeah. And it goes back to that program I told you about where the estimates were higher than that in terms of liquidated and unliquidated unfunded liabilities. Yeah. So when you look at, for example, these estimates of, you know, how well these benefits are funded, which is what they are, their estimates. There are of course some areas that are debatable and most notable of which is you have a stream of liabilities in the future, you know, the health care benefits and pension payments and such. And to get to the present value of what they are, you need a discount rate. And that is, you know, typically an interest rate that you get on the assets that, you know, that you have in the fund that is going to, you know, pay for these things. So for a long time they were using I think an 8% discount rate that was mandated by statute. But the fund assets weren't getting anywhere close to that. So and compounding the problem was when they did get returns on those assets that were, you know, huge. The legislature pounced on them saying, oh, we can find better uses for this money. So we're going to raid them. We're going to raid the fund that provides for those other post-employment benefits and we're going to invest in something else. And that's what they did. So you can't do that if you've got the rate of return that you want. But if you just eat the losses and take away all the benefits because, of course, you know, the market goes up and down, you'll never get to the rate of return. So if you can stop that bad behavior and I think, you know, maybe at least, you know, we were trying in around the 2013 timeframe to have some more fiscal responsibility. Before the show, we were talking about, you know, the Abercrombie administration and Calbert Young, who was the director of finance. One of the initiatives Calbert put through was there was a law in 2013 that basically said, look, if the state can't meet its annual obligations to fund the pension plans or if the counties can't, then they're going to sequester things. What does that mean? For the state, if they didn't appropriate enough money for the pension plans and the health care plans, they would sequester the general excise tax. What does that mean? They would take whatever was needed from the general excise tax before it came in and could fund anything else. That's pretty dramatic. Yeah, but the problem is that this was just a law. Lawmakers could amend the law if they so chose and sometimes they did. Let me throw some more irons into fire here. First of all, it seems to me that we have all these bills that call it depreciation for maintenance and repair of infrastructure around the state. I think everybody will agree that at least in Oahu, the roads need work and they haven't been getting that work. This is a long time they haven't been getting that work and I'm sure to a moral certainty that there are other infrastructure facilities that are in similar circumstances. So while we're spending money like we did at a rapid rate in 2022, we're really not fixing the infrastructure. And then we throw another iron on top of that. Joe Biden has pushed his infrastructure bill through. A lot of people are sitting waiting. A lot of organizations and government itself sitting and waiting for that money, they're going to spend this money. And at least theoretically, it's a lot of money. Of course, that could change dramatically if Congress changes its configuration in a few weeks. Yeah, well, let's start with the roads and bridges. By and large, the roads and bridges are funded separately from state government. We have something called the Highway Fund and we have that there as a federal requirement. So the feds can kick in federal transportation money and help us build, maintain or whatever the roads, bridges and stuff that's out there. Does that work? Because what we heard from Joe Biden not too long ago, and you and I must have heard from other sources, is that the federal infrastructure support hasn't worked. And in fact, there's infrastructure all over the country, which is decayed and deteriorated and it hasn't been maintained and repaired. There's bridges falling into rivers. Why isn't the same process happening right here in Hawaii? Well, of course it is. I mean, the fact that we have money doesn't necessarily mean we're spending it. And that is a problem that we've had for a long time. In the 2010 timeframe, I remember that when Jill Takuda was ways and means chair, she's running for congressional office now. When she was ways and means chair, she had some hearings during the summertime. I think around the 2010 timeframe, and she took the Department of Transportation to task for not spending the money that the feds were giving them. Why would you not spend the money the feds were giving you? It could be one of several reasons you could have permitting delays. You could have just ineptness. Okay. We know about permitting delays. Yes, we do. We have a kind of virus about permitting delays. And I guess in a general sense, they're really not justified, but they continue to happen despite all the pressure to expedite permitting process. Yeah. And then we have a kind of a clunky procurement system that we have to comply with in order to spend state money to get stuff done, especially in the big contracts. So that has to kind of be dealt with. And it takes time to go through all the steps. So that's stuff that was cited by the department. How much is true, I don't really know. But and I think since that time, the Department of Transportation has caught up a bit in spending these federal monies as well as the state appropriated dollars as well. And like I said, it comes from a kind of a separate fund. We have the gas tax. That's the primary driver of the fund. And the gas tax has had its own problems because with the transition to hybrid and electric vehicles, people aren't buying so much gas anymore. Okay. Well, that really takes us back to the fact that we have a and have had a huge fiscal problem in terms of balancing the budget. And although the Constitution says we're supposed to have a balanced budget, that's imperfect. And but worse, we have bills, we haven't paid, we have liabilities, we have not paid. And I hear it from you, Tom. And you're a very nice person and good for the tax foundation of Hawaii. And for that matter, good for truth in accounting. But I don't hear it as a platform point. We just got through a season of campaigning. I don't hear it as a platform point. Why is it not a platform point? There are, I think, several possible reasons for that. My speculation, and that's what that's all it is, is that it's a really, really difficult issue to crack. Several governors in the past have been confronted with this. We've made a little progress, maybe, but not much. It's a big problem. And it's kind of exacerbated not only by some of the other issues that we've talked about, like the procurement system and civil service in general, the civil service system in general. But there's also kind of the usual clunkiness that comes with a large bureaucracy of it. That comes with a large bureaucracy, which is what we have. Nobody wants to step up and fix it. And if it wasn't a platform point in the campaigns, especially gubernatorial campaigns this year, it's not likely to be a high attention point in the administrations to follow. Well, unless the people, the constituents start telling them that this is a problem. Well, if you said it's complex, and the average person, the average voter, the average constituent, she doesn't really understand how serious this is, or even how we got here. A word goes from here, and this is very arcane stuff. So they're not likely to bang into anybody's door about it. They have other fish to fry. Other genders, other points of interest to work on. When the legislature opens in the middle of January, people are not going to be pounding on doors and walking the halls to argue about fiscal policy that affects everybody. They're going to be walking the halls about their own points of self-interest. Am I right? For a large, to a large extent, that's right. We do tell them, and other people tell them, that you got to worry about this. Sometimes they listen, sometimes they don't. Sometimes they understand, sometimes they don't. But that's why people like you and me are here to try to help the public gain understanding, to help the legislators gain understanding of the humongous problems that we are facing. Yeah. I mean, talk about homelessness, for example. That's an unliquidated liability. We know we're going to have to spend a lot of money on it. We know that. We don't know how much. And so that's just going to grow. And it's going to become another hole in the boat. It's a great concern. At the same time, our state's economy, on the other side of the ledger, our state's economy is not doing all that well. There's a lot of businesses who have folded in COVID, and there's not a lot of businesses that have been generated entrepreneurial activity during COVID. So it's not like we can look forward to an enormous prosperity in the state of Hawaii. What's more is, while we have these unfunded liabilities, or while we have the prospect of recession, and it was in the paper yesterday, again, about that prospect of national recession, and of course we're affected by real estate and mortgage rates have gone up, as you know, and that affects the real estate market. All of that considered, we're not doing much to actually encourage and incentivize the development expansion of our economy. And when you do that, what happens is people leave town because they can't get jobs they like, they can't buy houses they like, and so forth. We talked about that last session. So there's no incentives going on for technology, agriculture, and other sectors that might improve the state's economy, thus the gross income for the state, thus the availability of a tax base. And so my question to you is out of Charles Dickens. I don't think, I don't think we talked about Charles Dickens last time, Tom. If we did, tell me now. Charles Dickens wrote, you know, The Christmas Carol, right? And he talked about Ebenezer Scrooge, and he talked about Jacob Marley, and he talked about Bob Cratchit, remember those guys? Of course. And one of the elements of The Christmas Carol is the ghost of Christmas future. When Ebenezer Scrooge is forced to look into the future, he sees enough there to make him change his attitude about what's happening right now. And I wanted to ask you about the ghost of Christmas future. If we do not incentivize our economy, if a fair number of our graduates leave town, if our businesses don't do well and fail, then if we don't pay our liabilities here, and we, you know, we continue from 37,000 negative per taxpayer to some higher number, and we spend the money in the wrong place, and we bank on federal assistance that may or may not come in the change of administrations and the change of the, you know, configuration of Congress, what then? What happens to Hawaii if all these things, you know, are part of the ghost of our Christmas future? Well, I think that the main problem that we have now is that the one thing that Scrooge did is he believed the ghost of Christmas future, and that caused him to, you know, modify his outlook on the present. We can, you know, paint these visions for lawmakers, but the question is whether they'll believe them. And if they don't, you know, we can kind of count on more of the same and more of the same and more of the same. But we're trying to tell them, look, you know, the ghost of Christmas future isn't lying to you. We can see the population leaving. We can see economic indicators like, you know, those that are referenced in this report going, you know, going down. And lawmakers can't be expected to fix the problem by saying, ah, well, just raise taxes some more, which is what they've done in the past. I think there's a limit. And we're reaching that limit. And the reason I say we're reaching that limit is because you can see people getting on those planes and getting the heck out. That's been documented by, you know, ourselves and others to a great degree. It's in our census data. It's been happening a long time. But I think, you know, it can be accelerated. I think it is being accelerated by these very factors we're talking about. And, you know, when you do the switch out on population, you say, well, let's see, we'll have a lot of people who buy three, four million dollar condos near the water. But we'll have a lot of people in the middle class who leave town. You have a different Hawaii at the end of the day. The ones who are, you know, buying the expensive condos, they may not live here. They may not work here. It's just a different demographic. It's a different fiscal character, so to speak. And if you take out the young kids who might start businesses and be entrepreneurs and build up, you know, sort of develop the state's economy to a more robust condition, what happens then? You have all these real estate building condos, but you don't have the businesses that support the actual economy. I'm not sure how that works. Maybe you have a better handle on it than I do. But if I look into the ghost of Christmas future and I see through the keyhole what life will be like, well, what will it be like? Do you have a vision of that, Tom? Well, I don't, you know, I don't, the ghost never came to me, but I really do hope it visits the, you know, those who will be leading our state. Yeah, well, what would you tell them in terms of, you know, there's a lot of issues here. And if you said, well, let's let's do a bill in the legislature in 2023 on every single issue we've talked about, boy, you'd be busy. That's not going to happen. But if there was one or two bills that were most important to deal with this, you know, shortfall, to deal with our grade of F on the national, the national survey, what would you tell them? What's the say one or two things that they should be doing to address this? Sure. I mean, we should be, you know, very disciplined when it comes to our fiscal situation. I mean, we talked about Calvert Young before in the in the 2013 legislation that was signed into law by Abercrombie to achieve just that. We have to take that seriously. You know, we can't be legislating deviations from that all the time. We have to be serious. We have to pay down our debts. We have to come into a situation where, you know, like, like most of us have mortgages. We live in our houses and we have mortgages and we don't, you know, worry about the, you know, the 300,000 or 400,000 dollars we owe at the moment because we're making our payments on time. So that may be kind of like the attitude that our lawmakers are thinking about, but we do need to impress on them some consciousness of what the big picture actually is. I notice you didn't mention anything about incentivizing entrepreneurship. Does that fit at the top of the list also? Well, I don't know because there are those who will argue that incentivizing anything is detrimental to the economy because it inhibits free market, which and they argue that that's what we really need to get us out of this mess. So and when you start on the incentives track, then you kind of get into things like, you know, incentivizing tarot, incentivizing cesspools or cesspool removal, incentivizing, you know, this, that, and the other thing. It just gets into so much complexity. It's unbelievable. Well, these things are problems that can be solved with good policy. Cesspool removal, to me, is not, it's not an investment in the future. Cesspool removal is not an investment in our economy or our youth or, you know, long-term prospects for expanding the tax base. So you make a decision about what you want to incentivize and you incentivize industries and activities that, that your experts, and there must be some out there somewhere, if they're not here in Hawaii, maybe, maybe they're in Cincinnati, they must be somewhere who can tell us what activities will give us the greatest bang for our buck. We're investing in ourselves. And so, I mean, to the extent that people say, I don't want to give any money to those young kids, you know, they're spoiled anyway, let them go make a buck themselves, let them enjoy the free market and suffer. I say to them that, you know, we have to manage our economy and in an island state, a free market may not be the solution. In an island state where the lobbyists walking the halls every January doing self-interest, but not doing fiscal policy that actually helps the whole state and incentive policy that actually holds, we have run into this problem year after year and decade after decade, where we have not done proper incentives for industries that could be a valid and useful investment. Certainly what we have to do is to figure what we're good at as a state and with the population that we now have and work toward making it better. Have we done that? I don't think so. No, I don't think so either. So would you add that? Don't tell me we need to do a report because reports go nowhere. But would you add that to the list of critical things the legislature ought to be considering and the administration hoping we get the kind of leadership we need here? Because as you and I have discussed on a number of occasions. I think one of the critical things of any company, any nonprofit, any organization is you figure what you're good at and get the most mileage out of it that you possibly can. With companies, it's like what's your product? What's your service? And that becomes your core competency. And what you then do, the rest of your company should be built around that core competency and making a living around it. And I think we ought to be doing the same thing. Yeah, but I don't think it's limited to what you're good at or core competency is limited to what's good for the state in general, the economy in general, the youth of the state in general, the quality of life of our people. So it's more complicated than a profit corporation deciding what's good in the marketplace because we have to also consider the people who we are serving in government. To me, that's the whole population. Anyway, I hope somebody listens to this, Tom. Make them listen, will you? We'll try. That's why we're here. That's why we're here. Tom Yamachika, president at the Tax Foundation of Hawaii, helping us understand fiscal policy in Hawaii. Thank you so much, Tom. Thanks for having me on the show, Jane. Aloha. Thank you so much for watching Think Tech Hawaii. If you like what we do, please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram, Twitter, and LinkedIn, and donate to us at thinktechhawaii.com. Mahalo.